1. International Tax and Investment Center Presenter: Elizabeth Allen 1

2. WHAT IS ILLICIT TRADE IN TOBACCO PRODUCTS? WHO FCTC “any practice or conduct prohibited by law and which relates to the production, shipment, receipt, possession, distribution, sale or purchase including any practice or conduct intended to facilitate such activity.” WHO FCTC “any practice or conduct prohibited by law and which relates to the production, shipment, receipt, possession, distribution, sale or purchase including any practice or conduct intended to facilitate such activity.” Main categories are: Main categories are: Illicit Imports Illicit Imports Illegal Domestic Production Illegal Domestic Production 2

3. NATURE OF THE PROBLEM Smuggling From third countries – borders to the east and from middle and far east – especially “cheap/illicit whites” Across uncontrolled borders between EU Member States (especially alcohol escaping from the bonded warehouse system) Counterfeit Off record factories within the EU Counterfeit products from the Middle and Far East Local Tax Evasion Off record production either by poorly controlled excise taxpayers or through completely off record producers. Illicit imports - smuggled across borders Genuine legal products Products produced legally or “off record” in another country – sometimes specifically for smuggling Counterfeit products - often from the Middle and Far East Illicit domestic production - evading local taxation Off record production either by poorly controlled but licensed excise taxpayers or through completely off record producers 3

4. ESTIMATING THE SIZE OF THE PROBLEM No reliable global statistics for tobacco products No reliable global statistics for tobacco products KPMG Project Star estimates illicit cigarettes in the EU in 2012 at 11.1% - or 65.5 billion cigarettes - resulting in an estimated Euro 12.5 billion in lost tax revenues to Member States. KPMG Project Star estimates illicit cigarettes in the EU in 2012 at 11.1% - or 65.5 billion cigarettes - resulting in an estimated Euro 12.5 billion in lost tax revenues to Member States. Euromonitor International 2012 estimates that 10% of all cigarettes consumed in the world are illicit costing governments between US$40 and 50 billion. Euromonitor International 2012 estimates that 10% of all cigarettes consumed in the world are illicit costing governments between US$40 and 50 billion. 4

5. MEASUREMENT METHODOLOGIES Seizures? Seizures? Household surveys/consumption estimates compared with tax-paid products? Household surveys/consumption estimates compared with tax-paid products? Smoker surveys? Smoker surveys? Empty pack and cigarette butt collection and analysis? Empty pack and cigarette butt collection and analysis? International trade data? International trade data? Street prices of illicit goods? Street prices of illicit goods? 5

6. WHY CIGARETTES? SUPPLY Economic drivers Economic drivers Protectionist policy measures Protectionist policy measures Light and portable Light and portable Inadequate enforcement including control of “Free Zones” and porous borders Inadequate enforcement including control of “Free Zones” and porous borders Corruption Corruption Inadequate penalties and time- consuming prosecution process Inadequate penalties and time- consuming prosecution process Not a political priority Not a political priority 6

7. WHY CIGARETTES? DEMAND Unbalanced excise taxation policy Unbalanced excise taxation policy Affordability for consumers Affordability for consumers Reliable organized crime suppliers with well organized distribution in areas of economic and social deprivation Reliable organized crime suppliers with well organized distribution in areas of economic and social deprivation Not seen as a “crime” – resentment Not seen as a “crime” – resentment Sales to minors are illegal in most countries – forbidden fruit! Sales to minors are illegal in most countries – forbidden fruit! 7

8. HOW TO TACKLE IT? A COMPREHENSIVE STRATEGIC APPROACH : Understand and monitor the size and nature of the problem. Understand and monitor the size and nature of the problem. A balanced tax policy and effective tax collection. A balanced tax policy and effective tax collection. Evaluate the main facilitators, including manufacturing and export controls, free zones and transit controls. Evaluate the main facilitators, including manufacturing and export controls, free zones and transit controls. Analysis of existing legislation and regulations to ensure they work, that penalties are adequate and act as a deterrent. Analysis of existing legislation and regulations to ensure they work, that penalties are adequate and act as a deterrent. A functioning judiciary. A functioning judiciary. Robust enforcement. Robust enforcement. Educate the public – tackle demand as well as supply. Educate the public – tackle demand as well as supply. Build and strengthen national and international partnerships. Build and strengthen national and international partnerships. Develop regional consistency in administration as far as possible. Develop regional consistency in administration as far as possible. 8

9. COMPONENTS OF A BALANCED TAX POLICY Key considerations include: Revenue required? Revenue required? Structure and tax rates - Ad Valorem or Specific? Structure and tax rates - Ad Valorem or Specific? Level of external costs of consumption e.g. Healthcare, Crime? Level of external costs of consumption e.g. Healthcare, Crime? Affordability and purchasing power of the consumer? Affordability and purchasing power of the consumer? Tax rates in neighbouring countries/states? Tax rates in neighbouring countries/states? Effectiveness of revenue and border controls? Effectiveness of revenue and border controls? Impacts on legitimate industry, employment and on illicit trade? Impacts on legitimate industry, employment and on illicit trade? Health and other policy drivers e.g. Consumer protection, trade facilitation and crime reduction? Health and other policy drivers e.g. Consumer protection, trade facilitation and crime reduction? 9

10. EXCISE TAX STRUCTURE OPTIONS “Ad valorem” “Ad valorem” Based on customs procedure Based on customs procedure Subject to valuation fraud Subject to valuation fraud Favours lower quality, lower priced products Favours lower quality, lower priced products Provides a revenue safeguard against inflation Provides a revenue safeguard against inflation “Specific” “Specific” Based on content e.g. weight/size Based on content e.g. weight/size Easier to audit and administer Easier to audit and administer Requires regular indexing to keep pace with inflation Requires regular indexing to keep pace with inflation In line with WHO, World Bank and academic views In line with WHO, World Bank and academic views 10

11. EXCISE TAX ADMINISTRATION POLICY EXCISE DOES NOT COLLECT ITSELF – Tax administration legislation MUST support the Anti-Illicit trade strategy adopting the principle that Producing, storing, operating on and transporting excise goods tax-unpaid MUST be regarded as a privilege not a right. Producing, storing, operating on and transporting excise goods tax-unpaid MUST be regarded as a privilege not a right. And impose stringent penalties on illicit production, storage and transportation of products. 11

12. EXCISE TAX ADMINISTRATION POLICY CONTINUED All aspects of administration can and should contribute to minimizing illicit trade: All aspects of administration can and should contribute to minimizing illicit trade: Licensing of excise operators; registration of retail outlets Licensing of excise operators; registration of retail outlets Regulation of movements of tax unpaid goods Regulation of movements of tax unpaid goods Bond/security requirements Bond/security requirements Offences and penalties Offences and penalties Clarity and simplicity of legislation Clarity and simplicity of legislation Recovery of tax losses through asset confiscation Recovery of tax losses through asset confiscation Support voluntary compliance BUT enforce legislation robustly Support voluntary compliance BUT enforce legislation robustly! 12

13. EXCISE TAX ADMINISTRATION CONTINUED Ensure legislation enables you to: Destroy seized illicit products, raw materials, and manufacturing equipment quickly; Destroy seized illicit products, raw materials, and manufacturing equipment quickly; Seize the means of transport of illicit goods; Seize the means of transport of illicit goods; Require all transporters of tax-unpaid goods to hold a special excise licence; and Require all transporters of tax-unpaid goods to hold a special excise licence; and Impose robust supply chain controls and interventions across manufacturing, tax free movements and on wholesale/retail sales. Impose robust supply chain controls and interventions across manufacturing, tax free movements and on wholesale/retail sales. 13

14. TAX STAMPS AND DIGITAL IDENTIFIERS Tax stamps aim at authentication (fake or real) and volume control (how much has been produced) Tax stamps aim at authentication (fake or real) and volume control (how much has been produced) Paper tax stamps are easily counterfeited and provide consumers with false confidence. They can be costly and ineffective. Revenue authorities must control stamps and products! Paper tax stamps are easily counterfeited and provide consumers with false confidence. They can be costly and ineffective. Revenue authorities must control stamps and products! Unique digital identifiers can track and trace the product (i.e. recreate the path of the product) across the supply chain providing for aggregation/disaggregation and for efficient and effective use by enforcement internationally BUT enforcement interventions will still be essential and what are the enforcement needs? Unique digital identifiers can track and trace the product (i.e. recreate the path of the product) across the supply chain providing for aggregation/disaggregation and for efficient and effective use by enforcement internationally BUT enforcement interventions will still be essential and what are the enforcement needs? 14

15. ENFORCEMENT ENFORCEMENT A cross-government enforcement strategy including all national and local enforcement agencies and across the supply chain to final sales. All parties need adequate powers, resources and tools to act efficiently. A cross-government enforcement strategy including all national and local enforcement agencies and across the supply chain to final sales. All parties need adequate powers, resources and tools to act efficiently. Analyse trends, use risk assessment, intelligence and mutual assistance to target illicit movements and smugglers. Analyse trends, use risk assessment, intelligence and mutual assistance to target illicit movements and smugglers. Channels for co-operation with WCO, Interpol and with other countries and legitimate industry to make best use of combined intelligence, resources and supply chain controls. Channels for co-operation with WCO, Interpol and with other countries and legitimate industry to make best use of combined intelligence, resources and supply chain controls. A robust comprehensive anti-corruption strategy. A robust comprehensive anti-corruption strategy. Enforcement authorities must be involved in policy discussions on tobacco regulation. Enforcement authorities must be involved in policy discussions on tobacco regulation. 15

16. SOME QUESTIONS Is your legislation easy to understand and implement? Is your legislation easy to understand and implement? Does Customs get sufficiently involved in determining how other public sector organizations decide on and implement policy changes that can impact on illicit trade? Does Customs get sufficiently involved in determining how other public sector organizations decide on and implement policy changes that can impact on illicit trade? How do you measure illicit trade? And how frequently? How do you measure illicit trade? And how frequently? What proportion of illicit trade in tobacco products gets through your borders? What proportion of illicit trade in tobacco products gets through your borders? How effective are your country’s controls on domestic production and sales to consumers once illicit goods have found their way across borders undetected? How effective are your country’s controls on domestic production and sales to consumers once illicit goods have found their way across borders undetected? 16

17. QUESTIONS FOR ADMINISTRATORS Do you have appropriate legislative powers, offences and penalties? Do you have appropriate legislative powers, offences and penalties? Do you implement a robust anti-corruption policy? Do you implement a robust anti-corruption policy? Do you work across the public sector to reduce illicit trade? Do you work across the public sector to reduce illicit trade? Does your judiciary understand the implications of illicit trade and impose appropriate penalties? Does your judiciary understand the implications of illicit trade and impose appropriate penalties? Do you publicise your successes in the media? Do you publicise your successes in the media? Do you have a public awareness campaign about illicit trade and its implications? Do you have a public awareness campaign about illicit trade and its implications? 17

18. UK TOBACCO STRATEGY PARTNERS UK Border Force HMRC/Border Force Partnership Agreement – commissioning anti- smuggling activity at the border UK Regional Intelligence Units HMRC Intelligence Officers embedded with other agency staff National Crime Agency HMRC is part of the newly formed NCA Local Authorities Joint working protocol dealing with tobacco offences Vehicle & Operator Service Agency (VOSA) Information sharing protocol between HMRC, VOSA and The Traffic Commissioners Stakeholder engagement with targeted sectors: Self Storage Association, Mail Boxes etc., International couriers Advice notes and aide memoires issued to managers 18

19. UK - Collaboration with public health organisations UK - Collaboration with public health organisations Joined up tobacco control plans Joined up tobacco control plans Understanding the impact on the illicit market of any health-related policy initiatives Understanding the impact on the illicit market of any health-related policy initiatives Regional programmes to tackle illicit tobacco for better health Regional programmes to tackle illicit tobacco for better health Cross-government approach to illicit tobacco marketing & communications Cross-government approach to illicit tobacco marketing & communications to shift public behaviour and attitudes to illicit tobacco and reduce demand to shift public behaviour and attitudes to illicit tobacco and reduce demand drawing on expertise in health sector drawing on expertise in health sector agreeing key messages and how/when to target common audiences agreeing key messages and how/when to target common audiences achieving wider reach through pooled resources achieving wider reach through pooled resources Help to keep tackling illicit tobacco on the local authority agenda Help to keep tackling illicit tobacco on the local authority agenda 19

20. The Protocol to Eliminate Illicit Trade in Tobacco Products Not all provisions of the Protocol are mandatory Not all provisions of the Protocol are mandatory Shall; Shall; Shall endeavour to; Shall endeavour to; Shall as/where appropriate; Shall as/where appropriate; Shall consider; Shall consider; Consistent with its national law; Consistent with its national law; If feasible; and If feasible; and may include. may include. 20

21. AN EXAMPLE - LICENSING SHALL LICENSE – manufacture of tobacco products and manufacturing equipment and import or export of tobacco products and manufacturing SHALL LICENSE – manufacture of tobacco products and manufacturing equipment and import or export of tobacco products and manufacturing SHALL ENDEAVOUR TO LICENSE, to the extent considered appropriate– transporting commercial quantities of tobacco products or SHALL ENDEAVOUR TO LICENSE, to the extent considered appropriate– transporting commercial quantities of tobacco products or Question: Would it help customs if tobacco products transporters were to be required to be licensed? Question: Would it help customs if tobacco products transporters were to be required to be licensed? 21

22. QUESTIONS ON “TRACK AND TRACE” How do you want to be able to use the “Track and Trace” provisions of the Protocol to Eliminate Illicit Trade in Tobacco Products? How do you want to be able to use the “Track and Trace” provisions of the Protocol to Eliminate Illicit Trade in Tobacco Products? What needs to be in place to enable you to make best use of the data that will be available? What needs to be in place to enable you to make best use of the data that will be available? Will Customs be involved in deciding on how best to implement track and trace in your country? Will Customs be involved in deciding on how best to implement track and trace in your country? What transitional issues do you envisage ? What transitional issues do you envisage ? How do you expect illicit trade to adapt when the track and trace provisions are implemented? How do you expect illicit trade to adapt when the track and trace provisions are implemented? 22

23. AND FINALLY Criminals always attack the weakest points in official controls - porous borders, corrupt officials, ineffective and predictable excise controls on industry, insufficient or poorly trained staff, poorly controlled transporters and wholesale/retail outlets, easily counterfeited tax stamps and inadequate facilities for examination at borders. Criminals always attack the weakest points in official controls - porous borders, corrupt officials, ineffective and predictable excise controls on industry, insufficient or poorly trained staff, poorly controlled transporters and wholesale/retail outlets, easily counterfeited tax stamps and inadequate facilities for examination at borders. 23

24. THANK YOU 24