A summary of evidence prepared for the Philippines Department of Finance Illicit trade and tobacco taxation 6 August 2012 Geneva, Switzerland Prepared by Mark Goodchild Tobacco Control Economics Tobacco Free Initiative
Although the extent of the problem varies by country and region, illicit trade activities exist in almost all countries throughout the world.
Price of most sold brand, excise per pack and illicit trade by WHO region, 2010-11 Source: WHO report on the global tobacco epidemic, WHO TaXSiM model for the Philippines, and Euromonitor data on illicit trade.
Price of most sold brand, excise per pack and illicit trade in Asia and the Pacific, 2010-11 Source: WHO report on the global tobacco epidemic, WHO TaXSiM model for the Philippines, and Euromonitor data on illicit trade.
Although differences in cigarette taxes and prices can be an incentive for illicit trade, other factors can be of equal or greater importance.
Price of most sold brand and illicit trade by country, 2010-11 No cross-country evidence of a direct link between high cigarette prices and the amount of illicit trade Sample size of 76 countries. Source: WHO report on the global tobacco epidemic, WHO TaXSiM model for the Philippines, and Euromonitor data on illicit trade.
Excise per pack of most sold brand and illicit trade by country, 2010-11 No cross-country evidence of a direct link between high levels of cigarette tax and the amount of illicit trade Sample size of 76 countries. Source: WHO report on the global tobacco epidemic, WHO TaXSiM model for the Philippines, and Euromonitor data on illicit trade.
Other contributory factors Weak governance and lack of high-level commitment to tackle the problem. Ineffective customs and tax administration. Existence of informal distribution channels. Porous borders (ease of entry into country). Trade barriers/restrictions (e.g. smuggling into closed markets).
Illicit trade increases with corruption, 2009 Smuggling (as % of legal sales) and WB corruption index in 2009 Smuggling as a % share of legal consumption 50% 40% 30% 20% 10% 0% y = -0.0146x + 0.2179 R 2 = 0.05 UAE BOL LVA LAO EST UZB LBN SGP AZE GRC BEL FIN RUS DNK 2 3 4 5 6 7 8 9 10 (most corruption) Corruption Index (least corruption) Sources: World Bank corruption index, Euromonitor and ERC databases.
Organized smuggling routes from re-exporting and transiting countries, 1999 Source: Yurekli and Sayginsoy 2008 in print Applied Economics.
Many countries are increasing tax rates on cigarettes and earning higher tax revenues, despite the presence and/or threat of illicit trade..and an increasing number are protecting their tax revenues by introducing measures to control illicit activities and monitor production.
Stamp-applied tracking system has helped Turkey raise taxes without higher illicit trade (Stamp-applied tracking system introduced in 2007)
Illicit trade falls in the UK despite price growth Sources: UK Customs and Excise 2010 and Euromonitor 2011.
Italy and Spain have been successful at reducing smuggling activities Illicit trade was as much as 15% of the market in both Italy and Spain during the early 1990s. Both countries intensified their efforts to address the smuggling problem including through: I. Scaling-up country cooperation (e.g. joint customs activity and intelligence gathering). II. Introducing anti-smuggling legislation. III. Imposing higher penalties on smugglers. Illicit market share has been reduced to just 2% in Italy and 6% in Spain.
Illicit trade falls in Italy despite higher taxes and prices on cigarettes Sources: Euromonitor and ERC databases.
Other examples of monitoring and enforcement from around the world Bangladesh 2011: Finance Minister establishes a "Tobacco Tax Cell" within the Ministry to monitor domestic producers. Brazil 2007: introduces system for monitoring cigarette production leading to reduction in tax evasion of US$ 100 million in 2008. Turkey 2007: Introduces its electronic stamp-applied tracking system on tobacco and alcohol products. EC 2004: EC takes several tobacco companies to court over smuggling and PMI agrees to pay the EC $1 billion over 12-years and to control smuggling of its brands. China 2002: Ministry of Public Security and STMA jointly launch a crackdown on counterfeiting (2,476 operations closed and 4.97 billion counterfeit cigarettes seized).