Date
This article is authored by Njenga Gacheru, Policy Associate at Tax Justice Network Africa.
A recent investigation into British American Tobacco Kenya (BAT Kenya) sent shockwaves through corporate and government circles across Africa. The report, titled Missing Millions: A Cross Examination of British American Tobacco Kenya's Tax Bill, revealed a staggering 9.6 billion KES ($93 million) discrepancy in the company's revenue statements for 2017-2018, which could indicate potential tax avoidance or evasion of up to $28 million in profit tax.
The analysis revealed inconsistencies in the company’s statements, with a discrepancy in millions of cigarettes between production and reported sales, leading to substantially lower revenue than expected. These findings triggered a chain reaction of consequences, exposing the broader issue of illicit financial flows (IFFs) and corporate tax avoidance practices that plague African economies. This blog explores how tobacco giants use these tactics to minimize taxes in Africa, depriving governments of crucial revenue while maximizing corporate profits.
The Fallout: Resignations, investigations, and regional scrutiny
The immediate fallout was significant. Two senior BAT executives resigned in the wake of the report's publication, in what many observers believe was a direct consequence of the damaging revelations. The Kenya Revenue Authority (KRA) issued a public statement confirming it was launching a thorough investigation into the matter. Civil society organizations in Kenya seized on the findings, demanding a full forensic audit of BAT Kenya's financial records.
Perhaps most importantly, the report sparked regional scrutiny, with calls for similar investigations into BAT's operations in Zambia, South Africa, and the Democratic Republic of Congo. This case represents far more than just questions about one company's accounting practices. It exposes a systemic problem that costs African nations billions annually.
The Role of multinationals and complex ownership structures
As African countries move towards increased reliance on domestic resource mobilisation, there is a mounting need for multinationals to pay their fair share of the tax burden. Multinational enterprises (MNEs) operate through intricate networks of affiliates across multiple countries, often leveraging complex ownership structures to optimize their tax liabilities. While these networks drive global trade and production, they also enable aggressive tax avoidance strategies, particularly in Africa, where regulatory oversight may be weaker.
Big tobacco companies, like other MNEs, exploit these structures to shift profits from high-tax to low-tax jurisdictions, using mechanisms such as transfer pricing, debt shifting, and tax havens. Research shows that complex ownership arrangements, often involving offshore financial centers, facilitate profit shifting and reduce transparency, making it harder for tax authorities to track liabilities. The tobacco industry has been among the most profitable sectors over the past 100 years, making billions in revenue while paying relatively little in corporate taxes.
Correlating the report's analysis and findings with IFFs, an estimated 65% of Africa's illicit financial flows stem from exactly this kind of corporate tax avoidance and evasion by multinational corporations. The BAT Kenya case study reveals several alarming patterns: millions more cigarettes produced than reported sold, unexplained gaps in revenue reporting, and potential use of complex corporate structures to shift profits offshore.
According to the World Bank, tax evasion can undermine health tax revenues; countries with weak tax administration are particularly vulnerable to tax avoidance and evasion on high-risk products, and tax rate increases may not increase revenue as much as expected. There are many forms of tax evasion, varying by product. Tobacco is at relatively higher risk of tax evasion due to its relatively higher value-to-volume and weight ratio, and often has higher tax rates (WCO, 2021).
While it is argued that tax rate increases may increase the incentives for tax evasion, it is notable that countries with higher tax rates often tend to have lower rates of tax evasion. While this may not seem intuitive, countries with more significant governance and corruption challenges tend to have lower tax rates, and countries with higher tax rates have a greater incentive to invest in improving tax administration and compliance (Joossens et al., 2010).
Tax justice experts point to several methods multinationals use to avoid taxes in Africa: One particularly important method is trade mis-invoicing, where companies deliberately misstate prices or quantities in trade documents. Additionally, profit shifting through transfer pricing schemes also allows companies to artificially move earnings to low-tax jurisdictions, and opaque corporate structures with complex webs of subsidiaries make it nearly impossible for African tax authorities to track where real profits are being earned. The response to this crisis must be equally systemic.
The future
There is an urgent need for immediate reforms, including mandatory public country-by-country reporting for all multinationals operating in Africa, stronger transfer pricing regulations, and automatic exchange of tax information between African nations. The KRA's investigation into BAT Kenya could set an important precedent if conducted transparently and thoroughly.
In a statement to the media, TJNA highlighted that “As we commemorate the 10th Anniversary of the Report of the High-level Panel on Illicit Financial Flows out of Africa (The Mbeki Report), the discrepancies underpin the prevalence of commercial-related illicit financial flows (IFFs). The findings of our report reflect the pervasiveness of tax avoidance and evasion by multinational corporations operating in Africa, which contributes to an annual loss of an estimated at over $ 89 billion. These practices deprive African nations of much-needed revenue to fund critical public services such as healthcare, education, and social protection. “
The BAT Kenya case has shown that when armed with solid research and data, African citizens and governments can challenge even the most powerful corporate interests. The goal is clear: creating a fair tax system where multinational corporations pay their rightful share, allowing African nations to fund their own development priorities and build more equitable societies.
As echoed in our Agenda 2063, “Africa commits to strengthening domestic resource mobilisation, building continental capital markets and financial institutions, and reverse the illicit flows of capital from the continent, to eliminate all forms of illicit flows.”
Conclusion
As we move forward, the key questions remain: Will African governments follow through with concrete policy changes? Can regional cooperation create stronger safeguards against corporate tax abuse? Will this investigation begin a new era of corporate accountability in Africa? The answers to these questions will determine whether this report becomes another exposé or the catalyst for real change.