From: Public Service Europe
by Daniel A. Witt
Some 10 per cent of cigarettes smoked in Europe are counterfeit, creating serious health concerns for citizens and major financial headaches for industry and governments
The illicit trade of tobacco has been a growing problem in the European Union over the last few years. In fact, globally, approximately one out of every nine cigarettes consumed is illegal. This statistic alone proves that, while the tobacco industry is highly regulated, there is also a need for legislation focusing specifically on tackling illicit tobacco trade. The importance of clamping down can be illustrated by exploring the size and scale of the problem, the causes and the impacts – before going on to look at the possible solutions. At present, this illicit trade is escaping regulation and taxation.
Estimates show that in 2010, some 64 billion counterfeit and contraband cigarettes were consumed in the EU – a record level since 2006. In some countries – such as Lithuania – as many as four out of every 10 cigarettes are smuggled or counterfeit. Germany, France, the United Kingdom and Poland account for more than half of the total EU consumption of contraband and counterfeit cigarettes. And, at the same time, almost one in five cigarettes smoked in Ireland comes from illicit sources. Illicit trade is a growing problem. A KPMG report estimated that, in 2009, the counterfeit and contraband share of cigarette consumption in Europe was 9 per cent; a number which has grown to 10 per cent according to recent estimates. In eastern border states, the market share of illicit cigarettes has increased rapidly from nearly 9 per cent in 2007, to more than 15 per cent in 2010
Cigarettes are among the most illegally trafficked goods in the world. They are highly taxed, easy to transport and offer an attractive risk to reward ratio for criminal organisations. And, as such, the industry is booming. Think of it this way, it costs approximately 20 cents to make one packet of 20 illicit cigarettes – which means that the cost of one container of 10 million smuggled or counterfeit cigarettes is only $100,000. Given that the average street value of a packet of cigarettes in countries such as the UK and France is more than $5.00, criminals stand to make a profit well beyond $2,000,000 for each container of illicit cigarettes. A second cause of the increase in illicit trade is excessive tax hikes. Excise rate increases, which are too high lead to a sudden decline in consumer affordability and tend to drive the emergence of illicit trade. In Ireland, for example, the steep excise duty increases during 2000-2009 were not shown to provide any increases in tax revenue. It showed little, if any, drop in tobacco consumption; yet, illicit trade increased from 8 per cent in 2005 to approximately 25 per cent of the market in 2009.
A third cause is high public tolerance of illicit tobacco products. While consumers are generally aware that they are buying smuggled or counterfeit goods, there is little awareness that purchasing from street vendors means financing large-scale organised crime. Citizens have no knowledge of where these illicit cigarettes come from. In Germany, for example, Jin Ling now ranks ninth in the list of all cigarette brands preferred by German smokers – despite the fact that Jin Ling has no legal market in the country. One main consequence of the illicit tobacco trade is the loss in government tax revenues, which globally is estimated to be a staggering $40-50bn. Closer to home, the European Commission estimates that member states lose up to €10bn in tax revenues a year. But data from individual member states estimates that France loses at least €2bn, the UK more than €3bn and Poland some €1.5bn.
Illicit tobacco trade also causes a great deal of financial loss to the legitimate industry – impacting sales, revenues and consequently jobs. Small tobacco retailers are amongst the worst hit by easily available illicit cigarettes. Research in Canada found that the illicit trade resulted in a 30 per cent loss to convenience stores. Finally, the growth of the illicit trade undermines the work that is done from a health perspective within the legal industry; given that counterfeit cigarettes are not subject to regulation in terms of restricting consumer consumption through age limits and health warnings. Furthermore, counterfeit cigarettes are often made in insanitary conditions and there is no control over what goes into them. Cigarettes recently intercepted by the UK Border Agency contained asbestos, rat droppings and human faeces among other substances. Furthermore, the profits from illicit tobacco trade are often used to fund other crime activities including drugs, guns and people trafficking.
So what can be done? One way governments can combat the problem is to make sure that they have a balanced tax policy. When setting a tax rate, administrations should take into account a number of factors – including the level of economic development, consumer purchasing power and tax rates in neighbouring countries. Another step is for governments to make sure that their legislation is clear, easy to administer and that it is has sufficient deterrent power. There should also be a clear focus on increasing supply chain control throughout the industry, as well as increased protection measures for brand owners against intellectual property rights violations.
The focus of laws should be on making sure that any legislation introduced both regulates the legal tobacco industry, as well as combating the illicit tobacco trade. A comprehensive governmental approach needs to include a strong political desire to address the many different aspects of the problem, as well as a commitment to ensuring that there is adequate financial resource available. The bottom line is that across the EU, governments and the tobacco industry must work together to tackle the causes of the illicit trade in order to effectively eliminate illicit tobacco trade and its associated economic and social consequences.
Daniel A. Witt is president of the International Tax and Investment Centre research foundation
