Low taxes on to­bacco prod­ucts give green light to Ukraine’s smug­glers

Yu­liana Ro­manyshyn

Kyiv Post Legal Quarterly - - News - By ro­manyshyn@kyiv­post.com

With cig­a­rettes be­ing so cheap in Ukraine, there’s a wide mar­gin for smug­glers to make a good profit. More­over, the low cost of smok­ing takes a toll on the na­tion’s health, with high rates of smok­ing-re­lated dis­eases and deaths.

Yet par­lia­ment is in no hurry to in­crease taxes on to­bacco. In de­fi­ance of calls by anti-smok­ing ac­tivists to raise to­bacco taxes to com­bat smug­gling and im­prove the na­tion’s health, the Rada’s tax and cus­toms com­mit­tee has been pro­tect­ing the in­ter­ests of the to­bacco in­dus­try, as well as block­ing laws to re­strict cig­a­rette ad­ver­tis­ing.

Add to that the rapid fall in the value of the hryv­nia, the cur­rency hav­ing lost two-thirds of its value over the last two years, the il­licit cross-bor­der trade in cig­a­rettes has con­tin­ued apace. In 2016, even high-level diplo­mats have been caught il­le­gally trans­port­ing cig­a­rettes to Hun­gary. be­tween the to­bacco lobby and anti-smok­ing ac­tivists over the is­sue of to­bacco taxes.

In 2015, a pro­posal for a 40 per­cent in­crease in the tax on to­bacco met stiff re­sis­tance from par­lia­ment's tax and cus­toms com­mit­tee, which sup­ported a rise of only 20 per­cent. Even­tu­ally, the for­mer Fi­nance Min­is­ter Natalie Jaresko man­aged to push the in­crease through the Rada, bring­ing the bud­get an ad­di­tional Hr 6 bil­lion ($240 mil­lion) in to­bacco taxes in 2016.

The tax lobby hasn’t given up though, ac­tivists say. Plans are afoot to block anti-to­bacco laws and re­duce the rates of in­crease of taxes on to­bacco, says An­driy Skipal­skyi, the pres­i­dent of Cen­ter for To­bacco Con­trol.

Skipal­skyi said that the head of the Rada’s tax com­mit­tee, Nina Yuzhan­ina, a mem­ber of the pro-pres­i­den­tial Bloc of Petro Poroshenko fac­tion in par­lia­ment, is on good terms with the to­bacco in­dus­try. And Head of State Fis­cal Ser­vices Ro­man Nasirov, who was head of the tax com­mit­tee be­fore Yuzhan­ina, is also a sup­porter of the in­dus­try.

“Who­ever hap­pens to be the head of the tax com­mit­tee, he or she ac­tively de­fends the in­ter­ests of the to­bacco com­pa­nies,” Skipal­skyi said.

Yuzhan­ina and Nasirov had not re­sponded to re­quests for com­ment by the time of pub­li­ca­tion.

At a news con­fer­ence of the Cen­ter for To­bacco Con­trol on Sept. 20, anti-smok­ing ac­tivists said that be­sides fight­ing to keep to­bacco taxes and cig­a­rette prices down, the com­mit­tee has blocked draft law ban­ning the ad­ver­tis­ing of cig­a­rettes on the in­ter­net and the place­ment of pic­tures of the ef­fects of smok­ing-re­lated dis­ease on cig­a­rette packs. This law, which is sup­ported by the Cab­i­net of Min­is­ters, would bring Ukrainian law into line with Euro­pean Union leg­is­la­tion. Ac­cord­ing to World Health Or­ga­ni­za­tion data, 6 mil­lion peo­ple die pre­ma­turely each year from the con­se­quences of smok­ing-re­lated dis­eases. There are around 63,000 smok­ing-re­lated deaths in Ukraine ev­ery year, ac­cord­ing to Ukraine’s Health Min­istry.

“There is a con­flict of in­ter­est be­tween the to­bacco in­dus­try and pub­lic health, so none of the ac­tiv­i­ties of the in­dus­try would ever be aimed at re­duc­ing to­bacco use,” Petro Korol, a lawyer of the Cen­tre for Democ­racy and Rule of Law, said at the news con­fer­ence.

Ac­tivists say the price of a pack of cig­a­rettes in Ukraine should be the same as in the rest of Europe, which would elim­i­nate prof­its from smug­gling, raise more money for the bud­get, and de­crease the num­ber of smok­ers. They sug­gest rising the to­bacco tax to 50 per­cent in 2016, bring­ing the price of a pack of cig­a­rettes to an av­er­age of €3 (the cur­rent price in the Baltic states) by 2025. But many in par­lia­ment don’t agree. Samopomich lawmaker An­driy Zhurzhiy, the deputy head of tax com­mit­tee, said he sup­ports a 30 per­cent rise in the to­bacco tax this year, which he said would sig­nal to the in­dus­try that the tax rate is only go­ing to rise in fu­ture. He said a grad­ual in­crease in the tax should re­duce the num­ber of smok­ers, while “not killing the in­dus­try.”

And the govern­ment has an in­ter­est in keep­ing the in­dus­try alive: Zhurzhiy said to­bacco taxes bring in the sec­ond big­gest share of rev­enues to the bud­get af­ter taxes on oil. The to­bacco com­pa­nies paid taxes at a rate of Hr 300 per 1,000 cig­a­rettes in 2015, which raised Hr 10 bil­lion ($400 mil­lion) for the bud­get.

How­ever, Zhurzhiy said rais­ing to­bacco taxes wouldn’t Smug­glers’ choice With the steep cur­rency de­val­u­a­tion and low taxes, Ukrainian cig­a­rettes re­main some of the cheap­est and lowest-taxed in Europe. In neigh­bor­ing Euro­pean Union coun­tries a pack costs six times more: some of the top brands sell for Hr 15-17 (60 cents) a pack in Ukraine, while the same brand in Poland costs $4.

That price dif­fer­ence is a boon for smug­glers. In the Il­licit Trade Re­port 2014, pub­lished by the World Cus­toms Or­ga­ni­za­tion, Ukraine was named as the top coun­try of ori­gin of seized con­tra­band cig­a­rettes. Ac­cord­ing to the re­port, 354 cases of smug­gling cig­a­rettes were dis­cov­ered in 2014. In 2016, au­di­tors KPMG is­sued a re­port nam­ing Ukraine the sec­ond big­gest sup­plier of il­le­gal cig­a­rettes to the EU af­ter Be­larus.

Lawmaker Te­tiana Ostrikova, also a mem­ber of the Com­mit­tee on Tax­a­tion and Cus­toms Pol­icy, says to­bacco is the main type of prod­uct smug­gled from Ukraine. How­ever, no­body knows ex­actly how many cig­a­rettes leave the coun­try il­le­gally ev­ery year.

But ev­i­dence of the size of the prob­lem can be found at the coun­try’s bor­der check­points and ports. In Au­gust, Odesa cus­toms de­tained nine con­tain­ers of con­tra­band cig­a­rettes with an es­ti­mated value of more than Hr 100 mil­lion ($4 mil­lion).

Pro­duc­tion and con­sump­tion fig­ures also give an in­di­ca­tion: in 2015, the of­fi­cial fig­ure for to­bacco con­sump­tion in Ukraine was 73 bil­lion cig­a­rettes. How­ever, the ap­prox­i­mately 10 mil­lion smok­ers in the coun­try would have ac­tu­ally con­sumed, at most, 62 bil­lion, ac­cord­ing to the Cen­ter for To­bacco Con­trol’s Skipal­skyi.

“That leads to a ques­tion– where did those 11 bil­lion (cig­a­rettes) go?” he asks. The an­swer is Poland and other EU coun­tries, Is­rael, Egypt, and Turkey, the ac­tivists said.

Diplo­matic smug­gler Smug­glers evade cus­toms (in most cases) by hid­ing to­bacco prod­ucts among other goods, like lum­ber, us­ing spe­cially de­signed hid­den com­part­ment in­side cars and trucks, and by sub­mit­ting cus­toms doc­u­ments with false data, Il­licit Trade Re­port says.

In a more brazen case in May, Ser­hiy Lishchyshyn, the hus­band of a Ukrainian diplo­mat work­ing in Slo­vakia, at­tempted to smug­gle 60,000 cig­a­rettes into Hun­gary, us­ing a diplo­matic pass­port. A court pun­ished Lishchyshyn with a fine and seized his car.

His wife Ok­sana Lishchyshyn, who had signed a let­ter con­firm­ing that the car was trans­port­ing a diplo­matic cargo, didn't lose her job in the diplo­matic corps, although she was sub­se­quently trans­ferred from the Ukrainian Em­bassy in Slo­vakia.

“Now, the For­eign Min­istry does take care of its em­ploy­ees, but what a dis­grace! These are diplo­mats, the elite, re­spected peo­ple!” Hen­nadiy Moskal, the gover­nor of Zakarpat­tia

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