BAT channelled millions of euros to the Netherlands, now Brazil wants its share of the pie

The Brazilian government is demanding 350 million euros from tobacco giant British American Tobacco for tax avoidance, research by The Investigative Desk shows. This money was channelled through the Netherlands, which Brazil considers as having a “preferential tax regime”.

By 2020, Souza Cruz is an essential part of multinational British American Tobacco (BAT), the largest tobacco company in the world in terms of turnover. Souza Cruz is the group’s largest supplier of tobacco and has an annual turnover of more than 2 billion euros. But the BAT subsidiary also has a problem. The Brazilian tax authorities suspect it of illegally avoiding tax on its profits between 2004 and 2012. 

The legal claim amounts to the equivalent of 350 million euros, according to BAT in its 2019  annual report. In recent years, the Brazilian government has taken BAT to court in a series of hearings, and the case is now before the Supreme Court in the capital Brasília.

A Dutch subsidiary played a key role in channelling the Brazilian profits abroad. Yolanda Netherlands BV had no employees and no real activities. Nevertheless, the company was profitable right from the start in 1998. In 2009 and 2010, for example, Yolanda Netherlands posted net profits of 73 million euros and 123 million euros, respectively.

These revenues originated in Brazil and consisted primarily of interest. Yolanda Netherlands lent money to its sister company Souza Cruz in Rio de Janeiro. By the end of 2010, the equivalent of 526 million euros in loans was on the books. From 2007 to 2012, between 21 and 30 million euros in interest flowed into the Netherlands each year.  

The Brazilian government believes that BAT wrongfully avoided paying tax on its profits with this arrangement. Souza Cruz considered the interest charges a heavy burden on its profits.

Madeira route

According to court documents, BAT also sent Brazilian profits in the form of dividends to the Netherlands. This was done via an indirect route. Souza Cruz recorded part of its income in sister company Souza Cruz Overseas S.A. on the Portuguese island of Madeira, instead of in Brazil. This island is known for its favourable tax rate on profits: companies do not pay 25 per cent tax on profits (as in the Netherlands) or 34 per cent (as in Brazil), but only 5 per cent.

Madeira-based Souza Cruz Overseas was in turn a subsidiary of Yolanda Netherlands in Amstelveen, the Netherlands. The profits recorded in Madeira were distributed as dividends to the Dutch parent company. Between 2006 and 2012, the total amount involved was at least 290 million euros, according to the annual reports. 

The Brazilian government believes that its National Treasury has also been adversely affected by this flow of money. Tax Justice Network, a group of advocates for fair taxation, published the Madeira route in a 2019 report and concluded that the Brazilian Treasury missed out on 28 million euros a year as a result.

Starting in 2011, BAT gradually put an end to the tax arrangement. Brazilian Souza Cruz was placed under the British branch of the BAT Group, the Amstelveen subsidiary Yolanda Netherlands was closed down in 2015.

Grey list 

BAT may have done so because the Netherlands had been placed on a “grey list” of favourable tax regimes by the Brazilian government in 2010. As a result, as of 4 June 2010, Brazilian companies were no longer allowed to deduct flows of money to the Netherlands from their profits, unless the Dutch company was engaged in “substantial economic activities”. According to the Brazilian tax authorities, this was not the case with Yolanda Netherlands. And yet, in 2011 and 2012, at least 87 million euros in interest and dividends flowed from Brazil to the Netherlands.

However, according to court documents, BAT uses the opposite reasoning in the court case. Since the Netherlands was not on the grey list until 4 June 2010, all tax routes before that time were not punishable anyway. In the most recent provisional judgment, from March 2020, the court went along with this reasoning. However, the claim of 350 million euros was upheld for the time being. 

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Response by Brazilian Public Prosecutor

It is not yet known when the Supreme Court will reach a final verdict. “We cannot comment on this tax issue,” a spokesperson for the Brazilian Public Prosecutor’s Office emailed The Investigative Desk. 

Response by BAT

 The BAT spokesperson did not respond to questions about the Brazil case: “We cannot comment on specific issues that are the subject of ongoing court cases.” He stressed that BAT paid over 2.1 billion pounds in tax on profits globally in 2019, which would put the group’s effective tax rate at 26 per cent. “That is well above the statutory rate of 19 per cent in the UK.” The Investigative Desk revealed last autumn that BAT pays virtually no tax in the UK itself.

Read the full article in NRC (in Dutch).