The Investigative Desk analysed six years of BATK’s annual reports and cross-examined them with production data supplied to KRA, cigarette consumption figures, market data, and cigarette prices reported by the World Health Organisation, the Kenyan government, the World Bank, and BATK itself. The analysis suggests the company may have earned millions of dollars more in domestic revenue than it reported
A recent analysis report published by the University of Bath’s Tobacco Control Research Group (TCRG), in collaboration with Tax Justice Network Africa, reveals that British American Tobacco Kenya (BATK) ‘s financial statements are riddled with contradictions and discrepancies, with the company claiming it sells fewer cigarettes each year.
The Investigative Desk analysed six years of BATK’s annual reports and cross-examined them with production data supplied to KRA, cigarette consumption figures, market data, and cigarette prices reported by the World Health Organisation, the Kenyan government, the World Bank, and BATK itself. The analysis suggests the company may have earned millions of dollars more in domestic revenue than it reported.
The report further questions what exactly happened to these millions of cigarette packs, with experts calling on BATK to explain the inconsistency and urging authorities to investigate. The analysis identifies a KSh 9.6 billion (US$93 million) discrepancy in revenue reported by BAT Kenya (BATK) for 2017 and 2018, with no plausible explanation provided by the corporation. This gap raises concerns over potential tax avoidance or evasion, prompting urgent questions about BATK’s financial practices in the region.
The company has, however, denied any wrongdoing, while the Kenya Revenue Authority (KRA) did not respond to an inquiry for comment. BATK attributes a 10% decline in cigarette sales in Kenya in 2019 to porous borders, a growing black market, a struggling economy, and an “unreasonable” increase in excise duty. The COVID-19 pandemic also reportedly caused a sharp decline of nearly a quarter in sales volume in 2020.
“The past years were a disaster, according to BATK’s executives. Between 2017 and 2021, domestic sales declined by almost 40%. However, internal documents from the Kenya Revenue Authority (KRA), obtained by The Investigative Desk, raise fundamental doubts about this supposed dramatic decline in cigarette sales,” the report states.
It adds that the company produced far more cigarettes for the domestic market than its reported declining sales volumes would suggest. Additionally, there is a discrepancy between the estimated value of the cigarettes produced and the revenue the company reported from their sale in its annual accounts.
The Investigative Desk analysed six years of BATK’s annual reports and cross-examined them with production data supplied to KRA, cigarette consumption figures, market data, and cigarette prices reported by the World Health Organisation, the Kenyan government, the World Bank, and BATK itself. The analysis suggests the company may have earned millions of dollars more in domestic revenue than it reported.
In 2017, BATK stated in its annual report that it sold 7% fewer cigarettes. However, production data shows it actually manufactured 2.3% more cigarettes. Their estimated retail value amounts to KSh 13 billion (approximately US$126 million at the then-current exchange rate), which is 37% more than the KSh 9.5 billion in revenue the company reported in its annual accounts. In the following year, BATK reported around KSh 11 billion (approximately US$108 million) in revenue from domestic sales. However, based on the number of cigarettes produced and the revenue that could have been generated per pack, the total should have been as high as KSh 16.8 billion (US$166 million at the time).
According to the report, there is no clear explanation for what happened to these cigarettes. The excise duties for domestic sales were paid by the company and match the amounts in the annual accounts.
“Excise rules state they could not have been lawfully exported. Doing so anyway would not make much sense, as excise duties in neighbouring countries are lower than in Kenya. Records show they were not kept in inventories either. It seems unlikely that the highly profitable cigarette giant produced billions of cigarettes without selling them,” the report adds.
“The claims BATK makes in its annual reports contradict each other. The company claimed that higher excise duties caused consumers to ‘flock’ to the illicit market, which expanded to almost a quarter of the overall tobacco market in 2020. However, such an increase in illicit trade would not fully account for the nearly 40% decline in sales BATK reported in 2021 compared to five years earlier. The decline is also not attributable to a competitor seizing market share.”
The report further notes that Mastermind, Kenya’s second-largest tobacco manufacturer, has not increased its market share in years. Additionally, market data from Euromonitor, the World Health Organisation, and the Kenyan government does not reflect such a steep decline in cigarette consumption among Kenyans.
“The WHO notes a decline in the percentage of smokers from 11% to 10% between 2015 and 2020, with another one-percentage-point decline expected between 2020 and 2025. Tobacco sales typically do not decline as rapidly as BATK claims. Cigarettes are considered an ‘inelastic product’, as consumers are addicted,” the report states.
Despite the reported rapid decline in sales, BATK’s domestic revenues remained relatively stable and even increased between 2016 and 2021 (adjusted for inflation). BATK claims to have mitigated the impact of high excise duties by increasing prices whenever the government raised taxes on cigarettes. These price increases more than offset the dramatic decline in sales (adjusted for inflation).
“In 2019, the company proudly announced that it had managed to push its domestic revenue up by 22%, despite a significant drop in cigarette sales. Combined with rising export income, shareholders were pleased: dividends grew by 65% while BATK claimed its domestic sales had dropped by 40% between 2017 and 2020. However, shareholders could have been even happier, as if BATK sold as many cigarettes as it reported and increased prices as much as independent sources observed, its revenue should have been millions of dollars higher than it declared.”
