Tobacco giants channel billions of euros through the Netherlands

Four tobacco companies channel about 40 per cent of their annual profits through the Netherlands to avoid taxes. Despite international measures, this has not yet decreased.

The Investigative Desk

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Each year, the world’s largest tobacco companies channel at least 7.5 billion euros in dividends, interest and royalties through the Netherlands to reduce their tax burden. New international guidelines against tax avoidance have had little effect so far.

The four multinationals use, without exception, Dutch holding companies to transfer part of their foreign income. Each year, they channel an average of 7 billion euros in dividends through the Netherlands. That is approximately 40 per cent of their combined net profit (17.5 billion euros). Most of these holding companies have no employees and no activities; they are only used as a transit port for revenue.

This is apparent from research by journalists’ collective ‘The Investigative Desk’ into the financial transactions of the four largest tobacco manufacturers in the period 2010-2019. British American Tobacco (BAT), Philip Morris, Japan Tobacco and Imperial Brands together control two-thirds of the global tobacco market.

The tobacco manufacturers also use the Dutch holding companies to transfer royalties and interest. Their subsidiaries around the world pay royalties for the use of the well-known cigarette brands. Philip Morris (among others owner of Marlboro) and Japan Tobacco (Camel) have transferred the trademark rights in Switzerland. The BAT (Lucky Strike) trademarks are registered in Delaware in the USA. At least 150 million euros in royalties flow via the Netherlands to these countries every year.

In recent years, the Dutch branch of Imperial Brands has borrowed large sums of money from sister companies in Ireland and the United Kingdom, on which interest had to be paid. For 2018, it amounted to 43 million euro in interest. As a result of these interest payments, the Dutch profit fell to zero, which meant that the company did not have to pay profit tax in the Netherlands. Similarly, the Dutch branch of Philip Morris over many years paid 270 million euros in interest on a loan from Switzerland.

The OECD (Organisation for Economic Co-operation and Development) introduced a set of guidelines to combat tax avoidance by multinationals in 2015. These guidelines state that income must be taxed in the country where the business activities take place. The OECD stated that transferring revenue to reduce the tax burden in certain countries had to stop. The guidelines are supported by 135 countries.

Profit shifting
The Netherlands also adopted the measures. In early 2018, for example, the government announced an end to transfer pricing, whereby multinationals sell their products at unrealistic prices within their own group to shift profits. Royalties, interest payments and dividends flowing to tax havens will from now on be taxed in the Netherlands. In the case of royalties and interest, this measure will enter into force on 1 January 2021. As of 2024, there will be a tax on dividends heading towards tax havens.

Tobacco companies have stopped using several tax structures in recent years, but many of the routes remain intact. At least until the end of 2018, BAT first sold on paper cigarettes manufactured in South Korea to a Dutch company, which immediately sold the products back to South Korea for a higher price. An average of 98 million euros of profit is thus shifted annually from South Korea to the Netherlands.

The number of tax evasion lawsuits has increased in recent years. In at least ten countries, legal proceedings are now in progress in which tobacco manufacturers are defending themselves against retroactive levies. The largest case is taking place in the Netherlands: the tax authorities demand 1.2 billion euros from BAT. The company allegedly channelled 4 billion euros of interest through the Netherlands without paying any tax.

MEP Paul Tang (PvdA), chairman of a committee against tax avoidance in the European Parliament, welcomes the growing number of court cases. ‘I would like the Dutch tax authorities to take these manufacturers to court and challenge any tax structure where possible. Do not give them any legal security. Why does the Netherlands have to be a safe haven for these manufacturers?’

The tobacco manufacturers did not want to respond to questions about the structures used, but stated they comply with the laws and regulations in force in each country.

By Stefan Vermeulen and Manon Dillen

November 17, 2020