Malawi: Tobacco producer commits tax evasion

An investigative investigation highlights how Alliance One, the second largest tobacco leaf producer in Malawi, paid no tax in 2020 and a paltry sum in 2021, despite comfortable profits. The practices of reselling at a lower cost and paying profits to foreign subsidiaries are said to be the tools of this tax optimization practice.

Alliance One Tobacco (Malawi) Limited is one of the 53 subsidiaries of Pyxus International Group, one of the leading players in the global tobacco leaf market. In Malawi, Alliance One accounts for 40,% of local tobacco leaf production and is the second largest tobacco producer in the country.

Alliance One’s tobacco exports from Malawi amounted to 27,000 tonnes in 2020, worth US$173.6 million (€159.7 million). However, Alliance One paid no tax that year, while the corporate income tax rate is 30 %[1]In 2021, this company exported at least 151 million US dollars (138.9 million euros) and paid only 41,000 US dollars (37,700 euros) in corporate tax.

Profit extraction and preferential resale

Neither Alliance One nor the Malawi Revenue Authority would respond to questions from ZAM and the Malawi Platform for Investigative Journalism to explain the situation. However, customs records seen by the journalists show that Alliance One paid $843,000 (€775,000) in “withholding tax” over the two years in question. This tax deducts 20,% from payments made by a local company to a foreign company, suggesting that Alliance One transferred $4.2 million (€3.6 million) of profits through this method to Pyxus International subsidiaries. These payments are often made in the form of royalties or interest on loans taken out between subsidiaries, thereby avoiding tax on profits.

Another method involves reselling tobacco leaves to a subsidiary of the group, at a lower rate ($5.31/kg, or €4.88/kg) than that reserved for an external company ($5.39/kg, or €4.95/kg). This practice, called internal cessation pricing, also makes it possible to circumvent taxation in countries where tobacco taxation is higher, and thus reduce the tax base. It would have allowed Alliance One to reduce its revenue by $980,000 (€900,000) over 2020 and 2021, by reselling approximately 20,% of its volume of tobacco leaves to Pyxus subsidiaries.

Tobacco cultivation hinders Malawi's economic development

These tax optimization practices – or tax avoidance – combine with other methods already denounced in Malawi. Alliance One has thus entered into exclusive contracts with hundreds of small farmers, and traps them by acting as guarantor for bank loans to buy fertilizers and inputs. The interest on these loans barely leaves enough for farmers to live on, forced to make their families work and their children to survive. All of these practices show that the economic benefits of tobacco growing mainly benefit multinationals and very little to the country itself.

Despite the accumulation of these arguments, Malawi has long been seen as a country whose leaders are sympathetic to the tobacco industry and meet regularly with its representatives.[2]. It was only recently, on August 18, 2023, that Malawi ratified the Framework Convention on Tobacco Control (FCTC) of the World Health Organization (WHO). This framework convention prohibits any interference by the tobacco industry in public policies and recommends not granting financial advantages to this industry. It also encourages parties to convert their tobacco cultivation to economically more profitable alternative crops that require less natural resources.

To learn more about the situation in Malawi, see our case.

Keywords: Malawi, Alliance One, Pyrus International, tax evasion, tobacco leaves.

©Generation Without Tobacco

MF

[1] Nazaruk Z, Chinele J, Smokes and mirrors: How Big Tobacco may have avoided Malawi's taxman, The Continent, n°153, published on March 2, 2024, consulted on March 19, 2024.

[2] Malawi Country Profile, Tobacco Tactics, updated March 8, 2024, accessed March 19, 2024.