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Government and Policy

BAT accused of Tax Fraud in three African Countries including Kenya

BY Soko Directory Team · June 3, 2019 10:06 am

By Sharon Chweya

In 2015 and 2016, the Kenya revenue authority may have received US$2.7 million less in revenue per year, due to BAT’s routing of dividend payments via the Netherlands.

In a report published on the heels of BAT’s annual shareholder meeting in London, the Tax Justice Network (TJN) has revealed a range of mechanisms used by the tobacco company in 2016 to shift income equivalent to over 12 percent ($941 million) of its pre-tax profits to BAT Holdings Ltd, a UK-based subsidiary where BAT paid almost no corporate income tax.

BAT is accused of tax fraud by charging itself royalties, rerouting loans through tax havens and paying interests fees on loans made between regional offices, as company shrunk its tax contributions in low and middle-income countries where public funding is high in need and short in availability.

The profits shifting practices fly in the face of tobacco companies’ claims to be essential tax providers to low and middle-income countries where 80 percent of the 1.1 billion smokers worldwide live.

The fraud study majored on BAT’s operations in Bangladesh, Brazil, Indonesia, Trinidad and Tobago, Kenya, Uganda, and Zambia.

In Kenya, the economic cost of smoking is estimated at 2.9 billion shillings where the TJN reports show that BAT shifted 2.65 billion shillings of dividends to the Netherlands in 2015 and 2016, denying Kenya tax worth 270 million shillings.

BAT Kenya is 60 percent owned by a Dutch subsidiary of the BAT group called Molensteegh Invest BV.152. In the two years, 2015 and 2016, US$53 million – 60 percent of BAT Kenya’s dividends – would have been paid to the Dutch company, an average of US$26.5 million a year.

Since BAT is a UK company it would be expected that the dividends would be paid to the UK. The corporate tax would have also been paid before the dividends left Kenya.

Since 2015 there has been a Netherlands-Kenya tax treaty which reduces withholding tax on dividends to zero. The withholding tax due according to the decades-old UK-Kenya treaty is not clear, as the rate applies only if dividends are taxed in the UK, which foreign dividends no longer are.

The Kenyan domestic rate of withholding tax on dividends is 10 percent for non-residents outside the East Africa Community and this rate is as well mentioned in the BAT Kenya 2016 annual report.

The report dubbed “Ashes to Ashes – how British American Tobacco avoid taxes in low and middle – income countries” further indicates that the 10 percent withholding tax had not been paid. The Kenya-Netherlands treaty reduces this to zero, so the tax loss to Kenya would be estimated at US$2.7 million a year. However, BAT says, according to its sources, the treaty does not yet apply. The arrangement cannot be originally motivated by this tax saving, because Molensteegh Invest BV has held BAT’s shares in Kenya since at least 2005 – before the treaty was signed – and before 2015, when the dividend payments to the Dutch Company were presumably subject to the 10 percent withholding tax.

It is possible to speculate that the dividends may originally have been paid via the Netherlands, where they are not taxed, in order to avoid paying them to the UK which up until 2009 did tax foreign dividends. It is forecasted that the tax fraud will see five African countries including Kenya lose $718 million in tax revenue by 2030.

BAT is currently being investigated for tax avoidance in Brazil, South Korea, South Africa, and the Netherlands as well as being investigated for corruption in the UK, Romania, and Kenya.

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system. Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

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