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World No Tobacco Day 2015: On illicit trade and taxes

Patricio V. Marquez's picture



On May 31, the global health community will mark World No Tobacco Day 2015.  This year’s theme focuses on the public health priority of stopping the illicit trade of tobacco products.  Perhaps this is a good occasion to clarify that raising tobacco taxes to make this habit-forming product unaffordable is not the cause of illicit trade.  Let me explain.

The benefits of higher tobacco taxes are obvious, both in terms of good health outcomes for individuals and entire communities, which result from reduced consumption of tobacco products.  In particular, this policy measure should be seen as a key strategy relevant for all countries to reduce the growing burden of non-communicable diseases.  In addition, hiking tobacco taxes can help expand a country’s tax base to mobilize additional revenue to fund vital health programs and other essential public services that benefit all of us, even in the presence of cigarette smuggling.  In the post-2015 period, increased tobacco taxation (along with other “sin taxes”) could also represent an important domestic revenue stream for helping finance the UN’s Sustainable Development Goals (SDGs) across the world, which will build upon the Millennium Development Goals (MDGs).

One of the main arguments often raised by the tobacco industry and other parties against the adoption of tax increases on tobacco products is the threat of illicit trade.  Accumulated international experience, however, demonstrates that this argument is flawed.  

Tobacco taxes are not the primary reason for cigarette smuggling and cigarette tax avoidance. Despite high cigarette prices due to high taxes in high-income countries, illicit trade is much less common in these countries than in low-income countries with low tobacco taxes.  Indeed, many countries, such as the United Kingdom, or various states in the United States, have increased tobacco taxes significantly without experiencing major changes in illicit trade.     

While high taxes may create incentives for illicit trade, evidence indicates that other factors have a much bigger effect on illicit trade of tobacco products.  The trade thrives where the potential for illicit gains is high, and the risk to illegal operators is low.  More specifically, as noted in a new report by the World Health Organization (WHO), factors driving illicit trade include: the ease and cost of operating in a country, tobacco industry participation, sophistication of crime networks, and low capacity in a nation’s tax administration system, and the likelihood of being caught and punished.
 
Also, as documented by the U.S.  Government Accountability Office, where  cigarette packs in the United States are taxed at varying rates at the state level,  criminal enterprises  have incentives to engage in cross-border and illicit schemes to profit or take advantage of these tax rate differentials.
 
What to do?   Experience shows that these illegal activities can be controlled by legal means (e.g., use of prominent tax stamps, serial numbers, special package markings, health warning labels in local languages, adoption of uniform tax rates nationwide that facilitate successful collection at the points of manufacture and import), and by increased law enforcement (e.g., improving corporate auditing, better trace and tracking systems, and good governance).  For example, since Her Majesty’s Revenue and Customs’ (HMRC) “Tackling Tobacco Smuggling” Strategy was introduced in the U.K. in 2000, the size of the illicit cigarette market has been cut by almost half, with more than 20 billion cigarettes and over 2,700 tons of hand-rolling tobacco seized.  Additionally, the U.K. has seen more than 3,300 criminal prosecutions for tobacco offences following action by law enforcement officers.  In Chile, a country that has one of the highest tax rates on cigarettes in the world, with taxes accounting for 78% of the price of each pack, the government has also experienced increased success in seizures of smuggled tobacco products. This has affected the country’s tobacco supply and is helping curtail the slight growth in illicit trade observed after a 2013 increase in tobacco prices.

After making the above argument on the need to delink tobacco taxation from illicit trade in policymaking discussions, it needs to be acknowledged that illicit trade of tobacco products is both a major health and fiscal challenge that merits urgent attention and action by governments across the world.

According to WHO research, one in every 10 cigarettes might be illicit.  From a health perspective, increased availability and affordability of untaxed and inexpensive cigarettes puts more people at risk of being harmed because of increased smoking, addiction to a deadly product, and the resulting ill health, premature mortality and disability associated with tobacco-related diseases.  From a fiscal perspective, illicit tobacco trade only benefits a few (often criminal enterprises) at the cost of forgone tax revenues for the government, which results from taxes not being paid on tobacco products.

Ratification of the Protocol to Eliminate Illicit Trade in Tobacco Products, which is a supplementary treaty to the WHO Framework Convention on Tobacco Control (FCTC), is a critical first step to confront this global health, economic and social scourge.  The Protocol is now open for ratification, acceptance, approval, formal confirmation or accession by all Parties to the WHO FCTC. So far, eight countries have ratified it (Gabon, Mongolia, Nicaragua, Spain, Turkmenistan and Uruguay). Thirty-two additional country ratifications are needed to make this Protocol an international law. 

On World No Tobacco Day 2015, let’s all advocate and encourage lawmakers --from across the political spectrum in our respective countries-- to ratify and implement the Protocol to Eliminate Illicit Trade in Tobacco Products, in spite of the strong opposition from the tobacco industry.  Lives and the social well-being of nations depend on it!
 
Follow the World Bank health team on Twitter: @WBG_Health

Related:

Illegal trade of tobacco products: What you should know to stop it (WHO)

WHO video: World No Tobacco Day 2015
 
Illicit Tobacco: Various Schemes Are Used to Evade Taxes and Fees (GAO)

Tackling Tobacco Smuggling–Building on Our Success (UK)

Euromonitor International Country Report: Tobacco in Chile

The Protocol to Eliminate Illicit Trade in Tobacco Products: An overview

PAHO Video: Día Mundial Sin Tabaco 2015 Alto al comercio ilícito de productos de Tabaco

Comments

Submitted by Carlos Santos-Burgoa on

Excellent framing.
Illicit trade targets the poorest and the youngest... killing our efforts to bring out of poverty our people, and handicapping our future generations
All organizations, public, civil, academic and private, we all need to get together towards this common goal.
Thanks for the blog.

Submitted by Wlliam Savedoff on

Patricio: Glad to see this blog up and your clear point about delinking the tobacco tax discussion from the issues surrounding illicit trade.

It would be good to remind people that tobacco companies themselves have been among the largest smugglers - Canada and the EU have both won large compensation from the tobacco industry for conspiring to evade taxes through illicit trade in the last two decades. Many prominent studies providing data on illicit tobacco trade are also funded by tobacco companies and have been criticized in peer-reviewed journals for overstating the scale of smuggling.

We've got good strategies for tackling illicit trade. Let's use them!

Submitted by Anne_Brockmeyer on

Thank Patricio for an insightful blog, and I totally support this cause. However, I am a little hesitant of drawing conclusions on the effectiveness of tobacco taxes from developed countries such as the US and the UK.

The fact that the smuggling is lower in the US than in many other countries which have lower tobacco taxes does not mean that tobacco taxes have no effect on smuggling. These countries are different from the US in many other ways (e.g. smugglers' likelihood of being caught and punished, operating costs for criminal networks) which can facilitate smuggling, regardless of the level of tobacco taxes.

Similarly, the fact that the US and the UK are able to raise tobacco taxes without triggering an increase in smuggling does not necessarily mean that developing countries can do the same. As you point out, a country’s administrative and enforcement capacity is a key determinant of smuggling, and most developing countries have low administrative capacity and find it difficult to prevent or reduce smuggling...

Submitted by Judith Mackay on

All governments, WHO, WCO and tobacco control advocates need to be aware of the powerful ITIC (International Tax and Investment Centre) along with its sister, Oxford Economics. These organisations are funded by the tobacco industry, and are organising seminars around the world, meeting with top government officials, in an attempt to dissuade them from increasing tobacco tax and price. Organisations like the World Bank and World Customs Organisations should not be working together with ITIC, as they are Accreditd Observors to the WHO FCTC Conference of Parties, and working with WHO to reduce tobacco use.
These organisations have been denounced by the WHO Director General Dr Margaret Chan: https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=IX-4&chapter=9&lang=en
Address to the Sixth Session of the Conference of the Parties to the WHO Framework Convention on Tobacco Control Moscow, Russian Federation 13 October 2014.
“ Most recently, and in a particularly brazen move, the tobacco industry brought its agenda and it its voice here to the heart of tobacco control. Yesterday, the International Tax and Investment Centre, whose board of directors includes several tobacco companies, convened Parties and Observers to discuss tobacco tax and price policies without fully disclosing their vested interests. Please, do not be fooled by them. Their agenda, at least, is easy to see: to undermine your power, your efforts to adopt the robust, expert-driven proposed guidelines on tobacco tax and price policy. These guidelines, when used to implement the treaty’s Article 6, will protect children and young people, in particular, from initiating tobacco use. So ladies and gentlemen, this is the kind of tobacco industry tactic. They just want more and more market share. They could not care less if they are killing children. Again, don’t be fooled by them. What is the next challenge? As I have said before, giving any tobacco company a place at the negotiating table is akin to appointing a committee of foxes to take care of your chickens.”

And Dr Douglas Bettcher, Director,Prevention of Noncommunicable Diseases (PND).
“ The UK is a signatory to the World Health Organisation’s framework convention on tobacco control, which was established to check the influence of tobacco companies and their front organisations. In an unusual move, the organisation has openly called for governments to distance themselves from ITIC.
“ITIC has published extensively in favour of the tobacco industry’s false positions on excise taxation, investment and illicit trade in tobacco products,” said Dr Douglas Bettcher, director of prevention of noncommunicable diseases for the WHO. “ITIC have used their international conferences, such as in Moscow in 2014 and in New Delhi earlier this month, to lobby government officials against tobacco taxation. This is despite tobacco taxation being the most effective and efficient measure to reduce demand for tobacco products. Parties to the WHO framework convention on tobacco control are obliged to protect their public health policies from interference by the tobacco industry and its allies.
In this light, WHO urges all countries to follow a non-engagement policy with ITIC.”

Submitted by James Middleton on

Dr Vera Luisa Da Costa e Silva – Head FCTC Secretariat – reminder of Note Verbale Re:ITIC
http://www.who.int/fctc/mediacentre/iticreminder/en/

WHO Note Verbale to all Parties, Moscow 2014
http://www.tobaccotactics.org/images/3/3f/WHO-letter-to-the-parties.pdf

Dr Margaret Chan - WHO Director-General comment re: ITIC
http://www.who.int/dg/speeches/2014/tobacco-control-cop6/en/

WHO Dr Douglas Bettcher Quote re: ITIC
http://www.theguardian.com/business/2015/may/16/uk-tax-chief-smoking-health-dave-hartnett-tobacco-hmrc

FCA Factsheet re: ITIC
http://www.fctc.org/publications/fact-sheets?layout=blog&start=12

The World Bank has OBSERVER status to the FCA COP
The World Customs Organisation has OBSERVER status to the FCA COP
http://www.who.int/fctc/cop/observers_igo/en/

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