Tax avoidance The largest tobacco manufacturers send billions through the Netherlands every year to avoid tax. Research by The Investigative Desk for NRC shows how an entire industry uses the Netherlands as a conduit country.
A pack of Marlboro in Mexico City. A pack of Camel in Budapest. A pack of Davidoff in Sydney. A pack of Lucky Strike in Kinshasa. Buyers of all these cigarettes have something in common besides their preference for smoking: the money they pay for their products ends up partly in the Netherlands.
The four largest tobacco multinationals in the world – Philip Morris, British American Tobacco, Japan Tobacco and Imperial Brands – make full use of Dutch companies. By channeling at least 7.5 billion euros in dividends, royalties and interest payments through the Netherlands each year, they avoid taxes in other countries.
This is evident from research by the journalist collective The Investigative Desk for NRC into the financial trade and activity of tobacco manufacturers and their subsidiaries worldwide, in the period 2010-2019. This research is based on annual reports that the manufacturers filed with Chambers of Commerce in various countries, and for the first time makes clear in detail how an entire industry uses the Netherlands as a conduit country.
According to data agency Statista , the four manufacturers control 68 percent of the international tobacco market – with the exception of China, where only the state sells tobacco.
In 2015, the Organization for Economic Co-operation and Development (OECD) introduced a package of measures to end creative shifting of income by multinationals. According to the OECD, tax administrations lost $ 100 billion to $ 240 billion annually through the tax shortcuts of large corporations. 135 countries have now signed the measures.
The Netherlands adopted the guidelines in 2017. With tighter legislation, then State Secretary of Finance Menno Snel (D66) wanted to “prevent the Netherlands from being used for promotion activities to tax havens”, he wrote to the Lower House .
For example, from 1 January 2021 there will be a tax on interest payments and royalties that companies send to a tax haven via the Netherlands. A tax on dividends will follow from 2024 that will pass through the Netherlands. According to the Central Planning Bureau (CPB), 200 billion euros in dividends, royalties and interest flows through the Netherlands every year.
TOBACCO GIANTS FOUR MAJOR PLAYERS
British American Tobacco , London
Lucky Strike, Pall Mall, Dunhill
Revenue: € 30.5 billion;
Profit: € 6.9 billion (2019)
Philip Morris International , New York
Marlboro, Chesterfield, L&M
Revenue: € 26.5 billion;
Profit: € 6.4 billion (2019)
Japan Tobacco , Tokyo / Geneva
Camel, Winston, Benson & Hedges
Revenue: € 17.8 billion;
Profit: € 3.0 billion (2019)
Imperial Brands , Bristol
Gauloises, Davidoff, Drum, Van Nelle
Revenue: € 9.4 billion;
Profit: € 1.3 billion (2019)
The largest tobacco companies publish a tax strategy on their website or in their annual report, in which they make a number of promises. For example , Philip Morris (owner of brands such as Marlboro and Chesterfield) promises never to make decisions ‘for tax reasons only’, not to engage in ‘aggressive tax planning’ and not to use letterbox companies. Japan Tobacco (Camel, Winston) says it never uses companies ‘for tax purposes only’.
British American Tobacco (Lucky Strike, Pall Mall) pledges an ‘open and transparent’ relationship with tax authorities around the world and strongly endorses the new OECD guidelines. Only Imperial Brands (Gauloises, Van Nelle) admits that it sometimes does ‘tax planning’, even though the British group also says it adheres to OECD rules.
In reality, the American Philip Morris turns out to be more than 1 billion euros in dividend every year through two Dutch holdings without employees. Japan Tobacco annually sends more than one hundred million euros in royalties via the Netherlands to the international headquarters in Geneva. British American Tobacco (BAT) uses at least 25 Dutch companies through which dividends, royalties and interest payments flow. Imperial Brands, with the help of the Amsterdam trust office TMF, sends many hundreds of millions per year through a Dutch holding.
Since the introduction of the new OECD guidelines , tobacco companies have lifted a number of tax arrangements, according to their annual reports. However, many of the structures have remained intact up to now and the tax burden of multinationals has not yet visibly increased. “These companies use every trick from the tax box. It is extremely sour that governments try to discourage smoking in all kinds of ways, but that tobacco manufacturers are still encouraged by all kinds of tax concessions, ”said MEP Paul Tang (PvdA), chairman of a committee against tax avoidance in the European Parliament.
How exactly do these tax structures work via the Netherlands? Five routes used by the tobacco giants.
Route 1: Dividend
First of all, there is the dividend route: subsidiaries pay corporate tax on their profits in their own country, after which they send the net profit in the form of dividend to a parent company in the Netherlands. This Dutch company sends the money on to its parent company abroad. The goal: to avoid dividend tax. According to the European Commission, this route could indicate ‘aggressive tax planning’ by companies.
All four tobacco giants use this route: they have one or more Dutch holding companies, including dozens of foreign subsidiaries. To give you an idea: the Dutch company Philip Morris Investments BV is the parent company of the activities in Russia, Turkey, Indonesia, Morocco, Greece, Jordan, Poland, South Africa and Norway, among others.
In the past decade, tobacco manufacturers sent an average of 7 billion euros in dividend per year through the Netherlands. At Philip Morris, the annual dividend is 1.8 billion euros, which is sent to Switzerland via the Netherlands. Japan Tobacco amounts to 1.7 billion euros per year; after receipt in the Netherlands, the money goes to the parent company in Japan. The British groups BAT and Imperial Brands sent EUR 2.5 billion and 1 billion respectively per year to their parent companies in the United Kingdom.
“The aim of such structures is usually to keep the tax burden on the dividend stream as low as possible,” explains Jan Vleggeert, professor of tax law at Leiden University.
In the vast majority of countries, dividends paid to parties abroad are subject to so-called withholding tax: the company paying the dividend must first pay tax on it. The rates range from 5 to 25 percent. But some countries have agreed in tax treaties that dividends that companies move from one country to another will be taxed lower, if not at all. The Netherlands has such treaties with about a hundred countries. “The Netherlands has been at the forefront in this area for years,” says Vleggeert. “For multinationals it is advantageous to look for the tax treaties that lead to the lowest possible tax burden. We call that treaty shopping . ”
Usually, when using this construction, the dividend is not taxed in any country. The Dutch holding company does not pay profit tax thanks to the so-called participation exemption – the foreign subsidiary has already paid profit tax on the income. If the money is then forwarded to another EU country, or to a country with a favorable tax treaty, the dividend tax will also expire in the Netherlands (normally this is 15 percent).
The annual reports show that tobacco companies do indeed pay virtually no tax on the dividend billions that flow through the Netherlands. The recipient countries Switzerland, Japan and the United Kingdom also do not tax the dividend, thanks to the tax treaties with the Netherlands.
Developing countries are missing out on income
In 2019, the CPB wrote in a report on tax routes that it is difficult to determine exactly how much tax companies avoid using them: these are complex routes, in which the Netherlands is ‘only one link in the chain’. What is certain is that the dividend distributed without tax treaties would have been taxed by hundreds of millions of euros per year.
According to the OECD, developing countries in particular miss out on important income. “This money flow is at the expense of the country where the income originally comes from,” says Arjan Lejour, professor of taxation and public finances at Tilburg University. “In practice, it is indeed often about developing countries.”
An example is the subsidiary of British American Tobacco in Kenya, a tobacco country par excellence. Whoever travels through the East African country will see thousands and thousands of hectares of agricultural land full of large green tobacco leaves. More than five thousand farmers grow tobacco on behalf of BAT, Kenya is the most important producer for all of Africa. With a market share of almost 80 percent, BAT is a practically monopolist in the country itself. BAT brands such as Embassy and Rothmans are extremely popular there.
The local branch of BAT is quite profitable: 2019 was a relatively bad year, but BAT Kenya made a profit of almost 30 million euros. This profit is fully distributed to the shareholders each year. The majority of the shares in BAT Kenya (60 percent) are held by Molensteegh Invest BV, located in Amstelveen. In 2019, the Kenyan subsidiary paid out more than 17.2 million euros to Molensteegh Invest. Since that company is fully part of the BAT group, the money then flowed to the parent company in London.
Thanks to the 2015 tax treaty between the Netherlands and Kenya, BAT Kenya did not have to pay dividend tax on the distribution. Without a treaty, that tax would have been 10 percent in Kenya. BAT thus saved itself 1.7 million euros in tax by sending the money through the Netherlands. The route via Molensteegh Invest has existed for years, BAT uses a similar construction in dozens of countries.
Joel Gitali, chairman of the Nairobi anti-tobacco lobby group KETCA, denounces this tax trick. “In our view, BAT is abusing the legal possibilities that exist to send profits elsewhere,” he says on the phone. “Our land has been exploited this way for years, while our government desperately needs the money.”
Route 2: Interest payments
A rolling tobacco factory has been located on the edge of the Frisian village of Joure since 1913. Until the late 1990s, the red brick building on the Slachtedyk was part of the coffee and tobacco group Douwe Egberts Van Nelle, after which the factory was taken over by the British concern Imperial Brands. Today, more than three hundred people work on the production of rolling tobacco brands such as Drum, Van Nelle and Brandaris. Every year, more than 300 million packages of rolling tobacco roll off the assembly line in Joure.
The Frisian factory is profitable: in 2018 the company recorded a profit of 15.6 million euros. Yet owner Imperial Brands did not pay a penny in tax on this. The parent company under which the factory falls on paper, Imperial Tobacco Overseas Holdings, also based in Joure, borrowed nearly 1 billion euros from a sister company in the United Kingdom that year. The interest charges on this loan amounted to a total of 43.5 million euros, so that no taxable profit remained in the Netherlands. Imperial Brands therefore did not have to pay any profit tax here.
In the years before, Imperial Brands used similar constructions, then with loans from the UK and Ireland. Each time with the same result: thanks to the interest charges, the Dutch activities became loss-making and the company paid no profit tax here.
The other tobacco multinationals also use these types of constructions with internal interest payments to reduce the profits of foreign subsidiaries. For example, the company Philip Morris Holland Holdings in Bergen op Zoom had a loan of 9.5 billion euros in the books from 2010 to November 2017. That money was lent by the Swiss sister company Philip Morris International Management SA. The interest charges for the Dutch holding were around 270 million euros annually. Again, hardly any taxable profit remained.
Competitor British American Tobacco lent a total of 983 million euros from the Amstelveen company Rothmans Far East in 2013 and 2015 to subsidiary Bentoel Internasional in Indonesia, at interest rates of 9 and 11.75 percent. Rothmans Far East had again borrowed money from a sister company in the tax haven of Jersey, as proved last year a study by Tax Justice Network, an international group advocates of fair taxation. Via this construction, BAT channeled around 150 million euros from Indonesia to the Netherlands in three years time, in the form of interest charges. The construction was discontinued in 2016.
“Such internal loans can be used by companies for real investments, but in practice the loans are sometimes also used to skim off foreign profits,” says Professor Vleggeert. Interest payments from Dutch companies have so far been untaxed, but with the new legislation against tax avoidance this will partly change from 1 January. From then on, a 25 percent withholding tax will apply on interest paid to affiliated companies in blacklisted tax havens.
Route 3: Royalties
A gigantic glass building sparkles in the middle of Geneva, Switzerland. There is a park on both sides of the triangular building, there is a train station around the corner, the view over the nearby Lake Geneva is phenomenal. Inside, too, the building is fully equipped – it even has a childcare facility that can accommodate over a hundred little ones every day.
Every morning more than a thousand employees of Japan Tobacco walk in here. The building is the tobacco giant’s international headquarters (the original headquarters is still in Tokyo). The employees in Switzerland are involved in, among other things, managing all subsidiaries in Europe and the United States.
But not only that: they also guard the rights to cigarette brands sold worldwide such as Winston, Camel and Benson & Hedges. All trademark rights of Japan Tobacco are in fact housed in the Swiss company JT International SA, according to data from the international trademark register WIPO.
The result: a substantial amount of royalties for the use of those brands flows from the Netherlands to Switzerland every year. The Dutch holding, based in Amstelveen, owns dozens of subsidiaries in Canada, Spain, Iran, Nigeria and the United Kingdom, among others. Japan Tobacco cigarette brands are sold in all these countries. The royalties paid by these subsidiaries flow to Geneva via Amstelveen. Until 2014, this amounted to an average of 250 million euros per year. After some changes in the tax structure, this amounted to an average of 130 million euros in the following years.
The royalties paid reduce the profits of the foreign subsidiaries. In the Netherlands, forwarded royalties are not taxed until January 1, 2021. In Switzerland, the multinational pays a limited percentage of profit tax on it, or sends the amounts tax-free to another tax haven. According to the CPB, the majority of the royalties that flow through the Netherlands eventually land in Bermuda.
“In itself, paying royalties within a group is legal,” says professor Arjan Lejour. “This is a well-known route within many multinationals. The payments for the use of trademark rights should be in line with the market, but in practice it is very difficult for tax authorities to assess whether this is the case. ”
Tax haven Delaware
Other tobacco companies also use this route. Philip Morris has transferred the rights to trademarks such as Marlboro, L&M and Chesterfield to two companies in Neuchâtel, Switzerland, according to data from the European Trademark Register. The Dutch subsidiary Philip Morris Holland, responsible for the sale of tobacco products in the Netherlands, pays 24 million to 27 million euros annually in royalties for the use of the brands. It is not clear from the annual reports how many foreign royalties flow to Switzerland through Dutch holdings.
Philip Morris declined to say how many royalties are sent to Switzerland from international subsidiaries each year.
Competitor British American Tobacco paid royalties over the past ten years from the Netherlands to the American British American Tobacco Brands Inc, where all BAT trademark rights are housed. The company BAT Western Europe Region BV paid EUR 29 million to EUR 71 million per year in royalties, sister company Rothmans Far East recorded EUR 20 million to EUR 35 million annually in royalty costs.
The American company that monitors worldwide rights to brands such as Lucky Strike and Pall Mall is based in the state of Delaware. This is no coincidence: Delaware is known as a small tax haven, partly because royalty income is not taxed there. In the US, this route to avoid tax is nicknamed the Delaware loophole .
The royalties paid in the rest of the world count as costs and thus reduce profits, while the revenues on the US east coast remain untaxed. Delaware’s favorable tax regime is so popular that the number of residents (nearly 1 million) is far outstripped by the number of established businesses (over 1.5 million).
Route 4: Transfer pricing
In June 2019, the party will take place at the British American Tobacco factory in Sacheon, a small town in the south of South Korea. The nearly 1,000 factory employees celebrate an important milestone: the three hundred billionth cigarette has just been rolled off the production line. In 2002, BAT was the first foreign tobacco manufacturer to establish itself on the Korean peninsula, now the Kent, Dunhill and Rothmans packets have become indispensable.
“The success of this factory is the pride of this city and its inhabitants,” Sacheon-based MP Yeo Sang-Gyu jubilates during the festivities, according to local media . The local BAT director praises his company’s “significant contribution” “to the local economy and Korean society”.
What is not mentioned during the festivities is that a large part of the factory profit ends up in the Netherlands every year. Every cigarette produced in Sacheon is first sold on paper to the Dutch sister company Rothmans Far East BV, according to the annual reports. Rothmans Far East then sells the cigarette back to a second BAT company in South Korea: BAT Korea Limited. This company then sells the cigarettes on the Korean market.
This phenomenon is called transfer pricing: affiliated companies that resell products to each other within one group. The annual reports of Rothmans Far East show what the tax advantage is: the purchase price that Rothmans Far East pays for the cigarettes is considerably lower than the selling price. The price difference has averaged 98 million euros per year over the past ten years. That part of the Korean profit was shifted to the Netherlands. As a result, BAT in South Korea bypassed 24.5 million euros in tax per year (corporate tax is 25 percent).
In the Netherlands, South Korean income is hardly taxed, according to the books. Rothmans Far East sends the bulk of the money back to foreign sister companies, in the form of royalties and ‘administrative costs’. Due to these costs, the company hardly makes a profit in most years – since 2015 Rothmans Far East has even been loss-making and the income tax paid is therefore nil.
To Antwerp and back
Philip Morris was also involved in transfer pricing, at least until 2014. All cigarettes produced by the factory in Bergen op Zoom were first sold on paper to the Belgian holding Philip Morris Benelux BVBA in Antwerp, and then immediately bought back. “The company is a licensee for the Dutch market, therefore tobacco products […] are sold to PM Benelux BVBA and bought back to sell to Dutch customers,” wrote Philip Morris Holland’s management in the annual report.
Part of the Dutch profit thus shifted to Belgium, but did not stay there. The Antwerp Philip Morris Benelux has an annual turnover of approximately 3 billion euros, but also has high costs, which means that it makes little profit.
Tax Justice Network concluded after an investigation last year that the Belgian holding is likely to make large payments to its sister company in Switzerland, in order to move the profit.
Route 5: Loss settlement
Finally, the British multinationals BAT and Imperial Brands make use of a favorable tax rule in their own country: compensating losses of subsidiaries. Each year, some of the global subsidiaries make a loss, mainly due to paid interest charges on internal loans, the books show. The groups may offset these losses against the taxable profit of the parent company. BAT recorded 870 million euros in losses in this way in the past ten years, at Imperial Brands it was 2.2 billion euros. As a result, the tax burden fell dramatically for both groups domestically.
In the Netherlands, this construction is not unknown: for example, Shell did not pay profit tax here for years by settling losses of subsidiaries. This is also a legal construction in the United Kingdom, although the British government has introduced various initiatives since 2013 to prevent abuse of this rule. For example, the associated loans must be used for real investments.
Major lawsuit in Haarlem
The fact that tobacco companies push the boundaries for tax purposes is not always without consequences. In recent years, the number of lawsuits for tax avoidance has increased: at least fourteen countries imposed additional tax on tobacco companies. By far the largest case is now at the court in Haarlem: the Dutch tax authorities demand 1.2 billion euros from British American Tobacco, because the group funneled 4 billion euros in interest through the Netherlands without paying tax on it.
This case turns out to be the tip of the iceberg: legal proceedings are currently underway in at least ten countries. Philip Morris clashed with tax authorities in Belgium, Thailand, South Korea and Russia. Imperial Brands with those in Russia and France. Japan Tobacco is fighting an additional tax in the United Kingdom. British American Tobacco opposes tax claims in Brazil and South Korea, except in the Netherlands. The European Commission is investigating whether BAT and Imperial Brands enjoyed illegal state aid in their own country due to favorable tax rules.
As far as governments are concerned, the fight against tax avoidance is only just starting: the OECD tightened international guidelines at the beginning of this year, the European Parliament installed a special committee last month to tackle tax avoidance. State Secretary Hans Vijlbrief (Finance, D66) sent a letter to the House of Representatives on Budget Day containing possible options for further tackling avoidance via the Netherlands.
“I have no illusion that all tax advisers will now give up,” said Paul Tang of the tax committee in the European Parliament. “They will come up with new tricks. A structural solution is mandatory transparency for companies about where and how much tax they pay. When new routes of avoidance quickly become apparent, political pressure arises to shut them down. Tax avoidance cannot tolerate daylight. ”
The Investigative Desk submitted a series of detailed questions to the four tobacco companies involved. Japan Tobacco said it did not want to answer any questions.
British American Tobacco (BAT) did not answer specific questions, but stated in a general response that it ‘complies with all applicable laws and regulations in each of the 200 markets where it operates’. “All internal transactions comply with the international standard of the arm’s length principle, that is, they are executed at rates that would also apply to external parties,” said a spokesman.
BAT states that it paid more than 16.6 billion euros in profit tax in the period 2010-2019, bringing the tax burden ‘excluding associates and adjusted items’ to 29.6 percent. BAT says it only uses local subsidiaries worldwide for commercial activities, such as the production and sale of tobacco products.
Also Philip Morris responded with a general statement: “Philip Morris International (PMI) is the leading international tobacco company. Our products are sold in more than 180 markets worldwide. PMI pays taxes that are consistent with the activities conducted in a particular country and we are open and transparent with the tax authorities in countries where we do business. ”
A spokesman points out that Philip Morris paid more than 2.1 billion euros in profit tax in 2019, bringing the tax burden around 23 percent. “That is in line with the average OECD rate.” Philip Morris says he complies with all laws and regulations in all countries, including the Netherlands. All internal transactions are conducted through the arm’s length principle, the spokesman said.
Imperial Brands responded with the following statement: “Imperial Brands can use tax planning to structure its operations and financing in a tax efficient manner for the benefit of its various stakeholders. In doing so, it fully recognizes its obligations to comply with the tax laws of the countries in which it operates. ”