Taxation, Illicit Trade in Tobacco Products and Finance of Terrorism
Editor’s Note: The complete paper “Taxation, Illicit Trade in Tobacco Products and Finance of Terrorism” by Nasser Saidi & Associates is attached here. Below is an excerpt.
This White Paper addresses two important issues relevant to imposing and increasing excise taxes on tobacco: (a) the need to avoid sudden, large tax hikes that would lead to an increase in illicit trade and (b) as a result provide financing to organised crime groups (OCGs) and terrorist organisations operating in or out of the Middle East region. The vastness of the illicit trade network is evident in the fact that trade in illicit (and untaxed) tobacco recently became the fourth-largest global tobacco business by volume, just behind British American Tobacco, Philip Morris International and Japan Tobacco International.
The GCC countries currently have relatively low illicit penetration rates, but are wedged between the tobacco industry’s established smuggling centres. Tariff and tax induced price differentials along with the lack of secure borders within the Middle East are a major driver of illicit trade. We find that an increase in ad-valorem taxes could lead to a massive spread (of more than USD 1 million per container) in cigarette prices between the lowest and highest markets across the region: a definite incentive for a surge in illicit trade.
