Clear The Air News Tobacco Blog Rotating Header Image

Smuggling a result of tax increases?

Tobacco in Australia

15th Feb, 2010

As was evident in Australia in the 1980s—see Section 13.7.1—discrepancies in price between proximal jurisdictions do tend to encourage bootlegging whereby small-scale operators evade duties in the higher-taxing jurisdiction by illegally moving truckloads of cigarettes from lower-taxing jurisdictions for sale in the higher-taxing jurisdictions.

However there is no evidence that tax increases or high taxes per se lead to an increase in large-scale smuggling. Tobacco smuggling is common in many countries with low cigarette prices and it is uncommon in many countries with high cigarette prices. The prevalence of cigarette smuggling in any given country seems to have more to do with government policing of payment of tax liabilities and other enforcement efforts and the general acceptance of black market selling of any kind among its populace. Using indicators of corruption based on an index created by international non-government organisation Transparency International, the World Bank observed that contraband sales tend to increase not with tax levels or cigarette prices but rather with the degree of corruption in any country.2

With the exception of counterfeit cigarettes, smuggling of tobacco products can actually benefit tobacco manufacturers in several ways. First, the companies make the usual amount of profit when the product is sold to wholesalers. Second, cheap cigarettes lower average prices throughout the entire market, thereby boosting demand. Third, smuggling enables tobacco company lobbyists to press for lower rates of tobacco tax in the legal market.209

In recent years it has become clear that several senior employees of major transnational tobacco companies have colluded with operators involved in smuggling of cigarettes.

In 2000 the respected British newspaper, The Guardian, in cooperation with the International Consortium of Investigative Journalists, released damming documents showing how tobacco company British American Tobacco (BAT) secretly encouraged tax evasion and cigarette smuggling. In April 2001 the US non-government organisation, Campaign for Tobacco-Free Kids, released a report and numerous documents that detailed the involvement of BAT, Philip Morris and RJ Reynolds in illicit activities in several markets. Among other things these reports revealed that cigarette companies:

  • intentionally used small amounts of legal imports of certain brands to mask the display and sale of smuggled cigarettes in a country and to provide an excuse for their advertising and marketing efforts designed to promote the sales of the smuggled versions
  • sent high-level executives to meetings with the middlemen companies directly in charge of smuggling efforts to discuss details of the smuggling operations, including destinations, brands, routes, quantities and prices
  • knowingly supplied cigarette smuggling operations used by illegal drug traffickers for money laundering purposes.

Campaign for Tobacco-Free Kids, 2001,226 Executive summary, p vi

In 1997 two British American Tobacco managers pleaded guilty to charges brought by the Royal Canadian Mounted Police related to tobacco smuggling between Canada and the US.227 In August 2004, a Quebec judge ordered JTI-MacDonald, the Canadian Unit of Japan Tobacco Inc, to pay C$1.37 billion in taxes lost to Quebec when tobacco companies exported cigarettes to the US knowing that they would be smuggled back into Canada for sale on the black market.228 In Ottawa in May 2006 a former senior executive of RJR-MacDonalds Corporation commenced serving a conditional sentence after pleading guilty to conspiring to smuggle cigarettes and defraud the Canadian government of more than $1 billion in taxes. The executive, a former company vice president, has admitted overseeing the scheme but told the court that it was developed by more senior executives of the company, now known as JTI-Macdonald. These executives were charged with fraud and a preliminary hearing was held in Toronto late in 2006.229

After an investigation launched in October 2000 by the UK Department of Trade and Industry, the European Commission filed a complaint in August 2001 on behalf of the European Community and 10 of its member states alleging that two US cigarette manufacturers had promoted smuggling. After appeals by tobacco companies were dismissed,230 in October 2006 the European Union started allocating to member countries more than $1 billion received in damages paid by Philip Morris under a 2004 out-of-court agreement as compensation for excise duties and other tax revenue not paid.231 The European Union is also proceeding in the US courts with action against Japan Tobacco on charges of smuggling and money-laundering.232 Colombia, Ecuador, Honduras and Belize have also filed cases against international tobacco companies.

So far there is no evidence of any involvement of tobacco company executives based in Australia.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>