Bangladesh lost $5.8m for BATB’s profit-shifting
Bangladesh lost $5.8 million in tax in 2016 owing to British American Tobacco’s Bangladesh operations shifting some of its profits to its associate company in the UK where it paid almost no tax, said a recent report.
The country is the second largest market of BAT in the world, said the report ‘Ashes to Ashes’ by the UK-based Tax Justice Network (TJN).
Between 2014 and 2016, BAT Bangladesh declared $21 million a year in obligations owed to BAT’s UK subsidiaries in royalties, technical and advisory fees and IT charge, which was equivalent to 15 percent of BAT’s pre-tax profits for the period.
The payments allowed the BATB to avoid paying corporate tax on the sum, costing Bangladesh $5.8 million in lost tax in 2016 -- enough to cover the government’s per capita health expenditure for over 170,000 citizens for a year.
The annual economic cost of smoking in Bangladesh, where 40 percent of men over the age of 15 smokes daily and over one-quarter of the deaths among men is caused by tobacco, is $1.8 billion.
For every dollar the BAT paid in tax in the countries it operates in, it shifted more than half a dollar that would have been taxed locally to a UK subsidiary, said the report that also focused on the tobacco manufacturer’s operations in Indonesia, Kenya, Guyana, Brazil and Trinidad and Tobago.
The countries together stand to lose a total of nearly $700 million in tax revenue by 2030 from the “financial manoeuvring” of just one tobacco company if business continues as usual.
The report found 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.
“By charging itself royalties, rerouting loans through tax havens and paying interests fees on loans made between regional offices, BAT shrunk its tax contributions in low- and middle-income countries where public funding is high in need and short in availability.”
However, the TJN said the picture remains incomplete: BAT has over one hundred offshore subsidiaries spread across 19 tax havens and books hundreds of millions of dollars each year to “other operating charges” without further explanation.
The profit 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 TJN said.
In Bangladesh, tobacco companies face corporate tax rates of 45 percent, which the BATB found “arbitrary” and “unjustified from the shareholders’ point of view”, as per its annual report for 2016.
After paying excise duty, value-added tax and corporate income tax, the BATB’s net profit margin in 2016 was 17.3 percent.
The TJN also included the BAT’s response in its report.
As a listed company, BAT Bangladesh is also regulated by the Bangladesh Securities and Exchange Commission. The local board of directors is required to approve all royalties and T&A fees before they can be remitted.
Post board approval, invoices and detailed calculations are provided to the central bank for review and approval and on top of this, before remittance an application is made to Bangladesh Investment Development Authority (BIDA) for approval, the BAT said.
The TJN said it shared the report with the BAT and asked for its response.
In its response, the BAT said “the group does not accept that there is any avoidance or loss of tax to the countries concerned in the manner contended by the report”.
The BAT said the group fully complies with all applicable tax legislation where it does business, and is a significant tax contributor to governments worldwide; and that all the transactions highlighted within the report fully comply with relevant tax legislation and have been transacted on an arm’s length basis.
The TJN report said BAT denies that their intra-group UK transactions were “opaque”.