British American Tobacco: Is Tax Avoidance Always Wrong?
In July 2019, the renowned Tax Justice Network (“TJN”) released a report titled Ashes to Ashes - How British American Tobacco Avoids Tax in Low and Middle Income Countries. The report accused British American Tobacco (“BAT”) of potentially avoiding up to $700 million in taxes by 2030. In this article, we take a different perspective and attempt to defend this tobacco giant.
I. The Blind Criticism of MNE's Tax Avoidance
Western countries have many anti-tax avoidance organizations that consistently accuse multinational enterprises (“MNEs”) of tax avoidance, claiming them deprives governments of revenue and harms their citizens. From a political and moral standpoint, this criticism is understandable. But are such accusations always reasonable? Many people judge whether a company is avoiding tax simply by looking at whether it pays "enough" taxes under local laws. However, in the context of cross-border trade and investment, determining whether taxes are "enough" is far from straightforward.
Imagine a company operates between Country A and Country B. Country A has a corporate tax rate of 40%, while Country B’s rate is 20%. How should the company allocate its taxes to avoid being accused of tax avoidance? If we assume the company should pay taxes where the rate is highest, does that mean it should allocate all its profits to Country A?
- If the answer is "yes," what happens if Country B raises its tax rate to 50%? Should the company then pay all its taxes in Country B?
- If the answer is again "yes," does this imply that companies should always pay taxes in the jurisdiction with the highest rate?
- If so, should all countries raise their tax rates to 100% to ensure companies pay "enough"?
If the answer to any of these questions is "no," it demonstrates that paying less tax does not inherently equate to tax avoidance. Some anti-tax avoidance organizations accuse companies of tax avoidance or even tax evasion simply because their effective tax rate is lower than the statutory rate. Such accusations are crude and reckless.
In our view, as long as a company’s tax arrangements do not involve deliberate concealment or malicious fraud, they should not be considered "tax avoidance." In previous tax avoidance cases, we analyzed how MNEs technically reduce their tax burdens. Some arrangements are based on legitimate business practices and cannot be classified as tax avoidance. Moreover, those familiar with international taxation understand that tax avoidance by MNEs often results from systemic issues. Many countries, including those labeled as "victims" of tax avoidance (e.g., the U.S.), share responsibility for enabling these practices.
Could MNEs voluntarily pay more taxes? While companies have a social responsibility, their primary obligations are to maximize returns for shareholders and ensure their competitiveness. Taxes are a major cost for businesses, and successfully reducing tax liabilities provides a tangible competitive advantage. For instance, if one company faces a tax rate of 30% while another pays only 10%, the higher-taxed company will inevitably lose its competitive edge over time. While we can criticize companies for breaking the law to avoid taxes, if they comply with the law and do not engage in deliberate concealment or fraud, isn’t tax planning just a normal part of doing business in a free market?
To be clear, we do not intend to discredit all anti-tax avoidance organizations. On the contrary, we respect their mission to promote tax fairness. However, their arguments and accusations are sometimes flawed or overstated. We must respect legitimate business practices, including tax planning.
TJN’s report highlights several instances of alleged tax avoidance by BAT, which we will address one by one.