North Holland Courts have largely ruled in favor of the Tax Authorities in several cases involving British American Tobacco (BAT). The profit was more than 1.8 billion euros higher than what the tobacco manufacturer announced to tax authorities. Tax will still have to be paid on the profits and BAT will also receive a fine of almost 107 million euros.
Adjustment of transfer prices and transfer profits
For the manufacture and distribution of BAT products, many transactions take place within the group between companies in the Netherlands and abroad. Both companies have agreed to each other’s transfer prices for this transaction. The Tax Authority argued that some of the transfer prices were not in accordance with the agreement and therefore the Dutch company paid too much for the transaction. As a result, the Dutch company subtracted too much costs from its profits. As a result, according to the Tax Authority, too little tax has been paid in the Netherlands for several years.
In addition, activities in the Netherlands were discontinued in 2016. The Tax Authority believes that business activities have been transferred to a group of companies in the UK and profits of 2.75 billion euros should be accounted for in the Netherlands. The tax authority also imposed fines on BAT related to transfer pricing adjustments and undeclared transfer profits. Tobacco manufacturers disagree with the Tax Authority. The Group believes that all compensation is business in nature and therefore fully deductible and no transfer gain needs to be taken into account. According to BAT, the fine imposed was inappropriate.
court decision
The court largely ruled in favor of the Tax Authorities. In some transactions, it is not proven that the agreed fees were also agreed between independent parties. Furthermore, the court decided that there had been a diversion of business activities in the field of exporting tobacco products. This means that total profits must be increased by more than 1.8 billion euros. BAT still has to pay taxes on this.
However, tax authorities erroneously denied deductions for interest and losses on bond loans and reorganization expenses.
The court reduced part of the fine and set the total amount at almost 107 million euros. Most of these fines were imposed due to false statements regarding the transfer of business activities to the UK.
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