Huge tax spikes ‘boost illicit tobacco trade’

LEVIES MUST BE INTRODUCED GRADUALLY, CONFERENCE HEARS

Abrupt tax spikes on tobacco products will stimulate the illicit counterfeited tobacco trade which, in turn, is linked to other activities of organised crime and terrorism, speakers of the fifth Middle East and North Africa conference on ‘Combating Illicit Trade and Tax Engagement’ said yesterday.

The annual conference, held at the JW Marriott Marquis, was hosted by British American Tobacco (BAT).

International experts and analysts gathered to discuss and review case studies on the tobacco black market trade. The conference also covered taxation-related issues and provided insights into the best practices in adopting sensible tax policy regimes.

“Cigarettes are the most smuggled legal substances in the world. It is estimated that over 600 billion illicit cigarettes are smoked every year,” Wael Esmail, Area Regulatory Affairs Manager of BAT in the Middle East, said.

“It is extremely difficult to control the sale of illicit cigarettes. Smugglers operate wherever there is profit. Illicit cigarette traders will not hesitate selling cigarettes to youngsters. What makes them exceptionally harmful is that these cigarettes do not go through quality Counterfeit cigarette packs are sometimes almost indistinguishable from their genuine counterparts. Here are a few ways to spot them:

Print type:

Counterfeits are commonly printed in litho print while genuines use a gravure print. Use a magnifying lens to look at the print pattern.

Glue pattern:

Machinemade packs have consistent glue patterns, hand-packed packs have glue patterns that are messy and less uniform. Open the side of the pack to look at the glue pattern.

A code should always be present on the base or side of the pack.

Counterfeit packs often have spelling errors.

Production code:

Spelling:

control and their tar, nicotine and carbon dioxide levels are unregulated.”

In the Middle East, 23 per cent of consumed cigarettes are illicit and are counterfeited.

Price differentials

“The illicit trade of tobacco causes governments in the Middle East to loose approximately $800 million (Dh2.93 billion) a year and $1 billion in North Africa,” Esmail said.

The losses to governments in unpaid tobacco taxes are estimated to be $50 billion worldwide.

Tareq Najjar, head of Corporate and Regulatory Affairs of BAT for the Middle East, said there is a link between high taxation and the illicit trade of tobacco.

“Price differentials enable smugglers to profit by purchasing tobacco products at low price markets and reselling them in markets where prices are higher. Introducing big increases in tax rates without careful consideration of all the variables may have negative consequences,” he said. “The wider the price differential the higher the incentive for crossborder smuggling. We have seen this happen in a number of markets that witnessed massive tax hikes.”

Steve Bill, former head of the European Commission’s VAT Unit, said it was normal for governments to raise taxes on tobacco products. The effective way, however, was to do it gradually over a few years.

“After the financial crisis in Greece, the Greek government spiked taxes on tobacco products. They used a specific system which compressed the differential of cigarette brands,” he said. “...As the government raised prices on roll-your-own tobacco as well, citizens had no alternative and started engaging in the illicit tobacco trade.”

Bill said that in order for governments to deter their populace from consuming illicit tobacco products, taxes should be raised gradually over the course of a few years.