Rob Branston and Andy Rowell discuss their major new study into the international tax abuse practices of the big tobacco companies. The report was conducted with The Investigative Desk, and is available to download here. This piece was previously published on the Tax Justice Network blog.
There are often stories in the media about large tech companies not paying much corporation tax despite their business generating massive earnings. Companies such as Facebook and Google are often cited as examples of companies who use clever corporate structures to avoid paying tax at the levels their revenues might imply. It is therefore very welcome that HM Revenue & Customs, the UK tax and customs authority, has recently moved to crackdown on such schemes. As part of this push to hold companies account, they would do well to start by looking at the tobacco industry.
It is widely known that tobacco companies are immensely profitable, but a lot less is known about how the industry structures their commercial activities to pay far less tax than they should on these profits. The Investigative Desk, working with the University of Bath, have been starting to figure out what they are doing.
The analysis of group annual reports and accounts for the period 2010-2019, including of a number of crucial subsidiaries, shows that all of ‘Tobacco’s Big Four’ transnational companies – British American Tobacco, Imperial Brands, Japan Tobacco, and Philip Morris International – have ‘aggressive tax planning’ strategies, in spite of their own codes of conduct suggesting otherwise.
It is clear that all four make extensive use of the entire range of common corporate tax abuse methods. This includes shifting dividends through low tax countries, utilising notional interest payments on inter-subsidiary loans, making royalty payments to other subsidiaries, and offsetting profits in one subsidiary against losses elsewhere, all of which reduce profits on paper and hence their tax bills.
Six European countries play a key role in the elaborate corporate tax abuse strategies of Tobacco’s Big Four because of the tax rules in each of the countries: Belgium, Ireland, Luxemburg, the Netherlands, the UK, and Switzerland. For instance, on average, Tobacco’s Big Four shift around €7.5 billion of worldwide profits through the Netherlands annually. While in the UK, the local subsidiaries of Imperial Brands (IB) and British American Tobacco (BAT) – groups based and headquartered in the UK – were able to lower their UK corporate tax burden by £2.5 billion between 2010 and 2019. As a result, BAT paid close to zero corporation tax over this period. IB’s annual reports are so untransparent that their actual UK tax burden is virtually impossible to determine.
One telling illustration of the lengths the industry goes to avoid paying tax on their profits is from BAT’s operations in South Korea. All BAT cigarettes produced by local subsidiary BAT Korea Manufacturing Ltd (South Korea) are sold – on paper – to Rothmans Far East BV, a BAT subsidiary in the Netherlands. They are then immediately re-sold to a different BAT subsidiary back in Korea, BAT Korea Ltd, at a much higher price. This way, on average each year, €98 million in Korean profits are shifted to the Netherlands where the tax regime is more favourable.
All countries, most especially the six mentioned above, need to crack down on these corporate tax abuse measures. A number of countries are already trying to do just that, with the industry engaged in tax disputes in at least 11 countries over the last ten years, with claims ranging from €45 million to €1.2 billion. So far, in the majority of cases, the courts’ decisions have been in favour of the companies. This shows that changes to tax laws are desperately needed so that tobacco companies can’t circumvent their tax obligations with the use of complex loopholes.
Since the tobacco industry profits enormously from a product that kills at least half of its long-term users, tobacco companies need to pay their fair share in line with the spirit, as well as the letter, of the law. With many governments facing huge COVID-19 related expenses, the time has never been better to hold the industry to account in this way.
The University of Bath’s Tobacco Control Research Group is supported by Bloomberg Philanthropies, which had no influence on the research for the report, or blog.