How to prevent the illicit trade in tobacco products

Pete Collings

Oxford Economics

“Customs and Business: International and Regional Cooperation Aspects”, Moscow

20/10/2011

Illicit trade in tobacco products is a serious problem

• A global phenomenon, covering all continents,

high and low income countries alike

• Approximately 11% of the world cigarette

market is illicit, representing over 600 billion

cigarettes a year and resulting in annual

government revenue losses of over US$40

billion (source: Framework Convention Alliance 2008).

The economic and social impact

• Lost government revenue

• National security and organized crime growth

• Diminishes respect for the rule of law

• Financial loss to the legitimate industry, trade and employment

• Easy access to cheap and uncontrolled product

Economic drivers of illicit trade in tobacco

• Consumer desire to save money usually caused by

a sharp decline in cigarette affordability

We measure affordability as the percentage of daily

disposable income required to purchase one pack (20

sticks).

• Criminals desire to make money by tax avoidance

Today in Russia one smuggled container/truck load of 10

million cigarettes represents on average $200,000 in

tobacco taxation evasion.

Russia: potential sources of illicit trade

• External

China – the leading source of counterfeit cigarettes in the world shares a 3,605 km border with Russia.

CIS neighbors/Customs Union partners – smuggling and cross-border shopping if prices differences are high

• Internal

Estimated dormant manufacturing facilities of at least 80 billion cigarettes per annum following the closure of 119 tobacco factories in the past 10 years (source: Association of Tobacco Products Manufacturers Tabakprom)

How to prevent the illicit trade in tobacco products?

• Key elements of comprehensive strategy:

Fiscal measures: balanced tobacco taxation policy

Legislative measures: strong laws, penalties and effective

courts

Enforcement: good border and supply chain controls

Regional customs and industry cooperation – intelligence

sharing etc.

Balanced tobacco taxation policy

• There's no one-size-fits-all approach in fiscal policy - recognition

needs to be made for differences in level of economic development

and living standards.

• Particular attention should be paid to:

Managing the overall tax level and avoiding tax shocks by planned gradual tax increases

Monitoring consumer affordability development, in particular for lower income segments of population.

Avoiding large tax discrepancies with neighboring countries (learn from EU experience)

Balanced tobacco taxation policy: Russia

Particular elements for Russia to consider:

- Personal Disposable Income Growth - we forecast Russia will not quite

reach the level of G8 countries in the next 20 years, with other main CIS

countries remaining far behind.

- Russia’s large share of low-priced cigarettes consumption >40% of total

sales, is very different from other G8 countries where the premium

segment is dominant.

Chart 1: Forecast of Personal Disposable Income in G8, Kazakhstan and Ukraine in USD per capita at 2005 prices

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2005 2009 2013 2017 2021 2025

G8RussiaKazakhstanUkraine

US$ (2005 prices)

Source : Oxford Economics

Conclusion

• Cigarettes are the highest taxed consumer good and the

level of taxation remains the key driver of the emergence

of illicit trade

• Policy makers must take into account the key elements

outlined when developing future tobacco tax policy

• As the International Monetary Fund has stated:

“Ultimately, tobacco excise tax rates must reflect the purchasing

power of the local consumers, rates in neighboring countries,

and, above all, the ability and willingness of the tax authority to

enforce compliance.” (source: Curbing the Epidemic, 1999, the

World Bank. Appendix A, A view from the International Monetary

Fund.)

Thank you