Massive tax evasion by the tobacco industry in Europe

According to a study conducted by Investigative Desk[1], a cooperative of investigative journalists, and the University of Bath, the world's four largest listed tobacco companies are using tax avoidance methods.

British American Tobacco (BAT), Imperial Brands, Japan Tobacco and Philip Morris International had sales of over €80 billion in 2019. However, all four companies have implemented methods that allow them to significantly reduce their tax burden.

Six European countries involved in tax evasion

According to the report, six European countries play a key role in developing tax evasion strategies for the tobacco industry: Belgium, Ireland, Luxembourg, the Netherlands, the United Kingdom and Switzerland. The role of these last three countries is highlighted by the report, in particular that of Switzerland with Philip Morris. However, the Confederation's banking secrecy makes this assertion difficult to confirm.

At the heart of tax evasion: the Netherlands

Every year, the four tobacco giants transfer an average of €7.5 billion of global profits to the Netherlands. BAT and Imperial Brands transfer these profits to holding companies in the UK, and Philip Morris International to a holding company in Switzerland. Japan Tobacco International appears to send them directly to the headquarters in Japan via the Netherlands.

According to the report, the Big Four tobacco companies use five main methods to pay the least possible corporate taxes.

• Transfer of dividends

The industry transfers part of its dividends to low-tax countries. British American Tobacco transferred one billion euros in dividends to Belgium, where the corporate tax is less than 1%.

• Group relief

The tobacco industry uses group relief (particularly through internal loans between branches) as a means of reducing the corporate tax burden. For example, BAT paid almost zero corporation tax in the UK.

• Deduction of notional (fictitious) interest

This method refers to a tax system “ allowing all companies subject to Belgian corporate tax to deduct from their taxable income a fictitious interest calculated on their equity[2] "Thus, BAT deposited around 3.5 billion euros in Belgium in three different holding companies, allowing it to benefit from tax deductions of several million each year between 2010 and 2017.

• Transfer of profits through intra-company transactions

This involves, for example, the purchase of stocks of products from a South Korean subsidiary of BAT by another subsidiary based in Amsterdam. This stock is immediately resold to the South Korean subsidiary at a much higher price. The profits thus made in the Netherlands are taxed more lightly.

• Payment of royalties

According to the report, royalty payments are a tax avoidance tool used by the industry. Philip Morris Holland pays between 25 and 29 million euros each year to a foreign entity. These amounts, considered as costs, escape corporate tax in this way.

These techniques, although not considered illegal, undermine the credibility of the industry's social responsibility discourse. While the activity of cigarette manufacturers is a considerable economic burden for communities, these tax evasion strategies are all the more questionable, given the industry's stated desire to appear as a reliable and legitimate partner in the eyes of public decision-makers.