The Investigative Desk has discovered that until 2015 a remarkable amount of money from cigarette manufacturers flowed to Switzerland via the Netherlands. After that year, the money flow is no longer traceable due to Dutch regulations.
By Gidi Pols and Jochem van Staalduine
This article was published in the Dutch newspaper NRC.
If you search Dutch annual reports of tobacco manufacturers for traces of tax evasion, you will see one country come up remarkably often: Switzerland. That country is the destination of billions of euros that cigarette manufacturers worldwide earn from the sale of tobacco products. A substantial part of that money is channelled to Switzerland via the Netherlands.
Why Switzerland? Is it just its favourable tax climate, or does it welcome tobacco manufacturers in more ways than one? Why do three out of the four major tobacco manufacturers produce cigarettes in a country with relatively high wages? And where do the billions of euros leaving the Netherlands come from?
US company Philip Morris International (PMI) in particular has an intricately entwined web of Dutch and Swiss subsidiaries, according to research by The Investigative Desk for the NRC newspaper.
From 2010 up to and including 2015, a Swiss subsidiary of the Marlboro maker received 9 billion euros in dividends from Dutch Philip Morris Holland Holdings BV. The Swiss also received 1.4 billion euros in interest paid by Dutch subsidiaries in those years. Furthermore, a Swiss account received 154 million euros in royalties in the same period. All in all, in six years Philip Morris shifted an amount equal to 29 per cent of its worldwide net profits in that period from the Netherlands to Switzerland, all untaxed.
The billions that Philip Morris moved to Switzerland were not earned in the Netherlands. Subsidiaries from countries including the Czech Republic, Turkey, Indonesia, Ecuador and Russia sent billions of euros, lira and roubles to the Dutch branch of the tobacco manufacturer until the end of 2015. Such a route is not unusual: many multinationals use the Netherlands as a cheap intermediate station on the route towards a tax advantaged final destination.
It is highly likely that Philip Morris continued to move billions of euros to Switzerland via the Netherlands after 2015. However, it is no longer possible for outsiders to follow the trail: the annual reports that the tobacco giant submitted to the Chamber of Commerce from 2016 are extremely concise. Despite the billions that flowed through Dutch Philip Morris Holland Holdings, the company now goes through life as a micro company – a category that has to submit the least comprehensive annual reports. An almost empty balance sheet without an auditor’s report or management report will suffice. A profit and loss account that provides insight into the cash flows and taxes paid is not required.
It is an unintended consequence of a change in the law intended to reduce the administrative burden for small entrepreneurs. Small businesses are now required to submit their annual reports digitally using a standardised template. Sending in more information than the mandatory minimum is no longer possible.
Switzerland tobacco country
That Philip Morris’ Dutch subsidiary falls into the category of small businesses is due to curious choices in the law. One of the conditions for qualifying as a small or micro company is a small number of employees. Financial holding companies such as Philip Morris Holland Holdings always meet this requirement since nobody works there. A second requirement for micro businesses is a net turnover of less than 700,000 euros. Crucially, income from interest and dividends does not count as net turnover for financial holdings, whereas these are their usual sources of income. The rules adopted make the Netherlands ideal for multinationals that do not need anyone looking over their shoulders at their tax structures.
That same change in the law also makes it impossible to determine the role of another Dutch subsidiary of Philip Morris, which has occupied a central position in the tobacco manufacturer’s company tree since 2017. Philip Morris International Holdings is above the Swiss branch in the pecking order and falls directly under the US branch of the tobacco manufacturer. Is money held in Switzerland flowing back to the Netherlands and then across the ocean to the US headquarters? It is impossible to tell because the annual reports do not contain any information. Possible clue: one of the directors of the subsidiary is ‘Manager Tax Projects’ Piet Huijben.
There are also not tax-related reasons for the existence of the new Dutch branch, qualifies Jan van Koningsveld, founder of the Offshore Knowledge Centre, which researches tax structures of companies. ‘For example, as an EU country, the Netherlands has better access to European institutions and investments than Switzerland.’
It is not surprising that tobacco manufacturers shift a lot of money from the Netherlands to Switzerland. Switzerland is popular among tobacco manufacturers. Three of the four global players in the tobacco industry have a physical presence in Switzerland. Philip Morris International has an operational headquarters in Lausanne and a research centre in Neuchâtel. Geneva is home to one of the two headquarters of competitor Japan Tobacco International (JTI). Both tobacco giants produce cigarettes on a large scale in Swiss factories, as does British American Tobacco (BAT).
The explanation for the large-scale presence of tobacco manufacturers in Switzerland is partly tax-related, as Philip Morris’ CEO Geoff Bible already admitted in 1998. Why did his employer establish itself in Lausanne? ‘The fiscal climate, the political stability and the warm welcome from the authorities met the initial criteria,’ he replied. The University of California stores a transcript of the interview in the Industry Documents Library, a collection of millions of legal documents.
Until the beginning of last year, Swiss states, known as cantons, offered tax exemptions to companies whose income depended largely on investments or dividends from abroad. At the insistence of the OECD, the organisation of rich industrial nations, this arrangement, which is advantageous to multinationals, has now been abolished. As compensation, the cantons reduced their already low tax rates even further in 2020, according to a report by accountancy firm KPMG. New tax advantages for royalties and product innovation have also been introduced.
A legal paradise
The choice for Switzerland offers Philip Morris another advantage. The cigarette manufacturer had a new legal start in Switzerland. In the 1990s, 46 attorneys general in the United States set their sights on the tobacco industry. At the same time, the US Department of Justice started an investigation, according to Pascal Diethelm of interest group OxySuisse, which is committed to a Switzerland without tobacco.
As a result of the prosecution, several tobacco giants decided to separate their activities inside and outside the United States, explains the former World Health Organisation employee. That cuts down on the number of cases that US opponents can file, and the amount of evidence that prosecutors can collect. ‘Switzerland is a closed country. There is no risk of a judge requesting internal documents here. You can call it a legal paradise,’ says Diethelm.
As an example of Swiss legal flexibility, Diethelm mentions a lawsuit against a Swiss subsidiary of Philip Morris that he recently brought together with a French interest group. The lawsuit about advertisements published in France stalled when the company transferred all its assets and liabilities to another Swiss subsidiary. ‘The legal liability was not transferred and disappeared with the dissolution of the old subsidiary,’ says the activist. French lawyer Hugo Lévy confirms this state of affairs.
It is remarkable that liability can dissolve into nothingness. Swiss courts have not yet fully decided whether this is allowed, according to case-law. What is clear is that it is very difficult to prosecute a company in Switzerland for violations committed by a company that has been absorbed. The reasoning here is that an heir does not have to go to prison for tax evasion by a deceased person either.
A spokesperson for Philip Morris stated that all assets and liabilities were legally transferred automatically. He also said that the choice for Switzerland as the location of the operational headquarters was entirely unrelated to legal matters in the United States.
More nicotine and tar
Switzerland proves to be a ‘home’ for tobacco manufacturers in more ways than one. It has the fewest advertising restrictions of any European country, according to the Tobacco Control Scale, published by organisations fighting cancer. Advertising is allowed outdoors, in the cinema and in print media. Advertising is also permitted at events for adults.
Tobacco manufacturers in Switzerland are also allowed to produce cigarettes with more addictive nicotine and taste-affecting tar than is allowed in the European Union. ‘In Switzerland it is not legal to sell those cigarettes, but exporting them is allowed,’ says Luciano Ruggia, director of the Association suisse pour la prévention du tabagisme. Additional advantage: ‘Made in Switzerland’ sounds good internationally.
The factories of JTI, PMI and BAT therefore produce cigarettes on a large scale in Switzerland for countries in the Middle East and North Africa, where smokers are allowed to smoke extra dirty cigarettes without any problem. In 2019, Japan was the largest consumer of Swiss cigarettes, followed by South Africa, Morocco, Bahrain and Saudi Arabia. The ‘land of clean skies’ exported 528 million Swiss francs (489 million euros) worth of tobacco products in 2019. By comparison, Swiss cheese exports accounted for 668 million Swiss francs that year, with chocolate sales to foreign countries bringing in just over a billion francs.
Furthermore, administrators of Swiss cantons are well-disposed towards tobacco manufacturers. In 2018, for example, 5 of the 26 cantons sent a letter to the members of the parliamentary committee investigating advertising restrictions. In it, they defended the free economy and the interests of 8,000 workers in the tobacco industry, Swiss television programme Temps présent revealed. In Switzerland, the majority of taxes are levied by these cantons, which also reach agreements in the form of rulings on the payment of taxes by companies.
The preferential treatment of cigarette manufacturers also has an impact on federal policy. In late 2016, the Swiss parliament denied the federal government the possibility of increasing the excise duty on cigarettes.
The tobacco giants also have innocent reasons to settle in Switzerland, says Chief Economist Martin Eichler of Swiss independent research institute BAK Economics AG. Switzerland has a well-educated workforce, high productivity, a relatively free labour market and a large European market. It is not difficult to convince expats to settle in the multilingual country.
Philip Morris states in an e-mail that it pays taxes in accordance with the rules of the countries in which it does business ‘where possible in consultation with the relevant tax authorities’. The company did not respond to more detailed questions from The Investigative Desk.
This article was published in the Dutch newspaper NRC.
25 March 2021