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Study funded by tobacco firms tries to link high tobacco taxes to lost revenues in unpaid taxes

The SCMP ran an article on 3 Oct 2013, by Samuel Chan, about a newly published study that finds 1 in 3 cigarettes smoked in Hong Kong is illegal. Since illegal cigarettes evade custom duty, it seems that the Hong Kong government is losing out on “HK$3.3 billion in potential tax revenue last year as a result of an estimated 1.8 billion illegal cigarettes smoked.” The study links the high number of illegal cigarettes to the “‘steep’ tobacco tax increases introduced in Hong Kong in 2009 and 2011 that further widened price differences with neighbouring countries, providing incentives for criminal groups to make gains.”

The article points out rather astutely that the study is funded by none other than tobacco giant Philip Morris, and the International Tax and Investment Centre, a lobbying group, jointly published it with Oxford Economics. Tobacco companies have long opposed high tobacco taxes, which have thus far been the most effective way of pricing out young potential smokers from purchasing their products, and so negates their efforts to find a renewable market to sell their products.

Marlboro cigarettes displayed in Montpelier, Vermont. (AP photo/Toby Talbot/Business Inquirer, 17 Jul 2012)

Less well-known, though, is the fact that tobacco companies deliberately supply their products into illegal distribution channels, creating the very problems that they use funded studies to highlight. The problems, ranging from lost revenues to funding criminal activity, are part of measured tactics aimed at pressuring governments to lower their tariffs on the legal tobacco trade, so that their products can reach youths and lower-incomes masses. This is not to mention the various other ways from which the companies benefit from supporting cigarette smuggling, the most obvious of which is that it is the easiest way to lower their product pricing and make it more affordable.

Below are some articles on this issue:

  • The British Medical Journal published an analysis in 2011 on the reasons behind the illicit tobacco trade. Read it here.
  • The National Center for Tobacco-free kids of the U.S. published a very in-depth study on the global smuggling movements of tobacco and how the tobacco companies are involved.
  • Kevin Maguire of the Guardian reported in 2000 about BAT admitting to their role in cigarette smuggling.
  • This is a paper prepared by lobbyists in the US House of Representatives that tries to link cigarette smuggling to terrorists funding, attempting to alarm and pressurize the government and public.

Below is the full article from SCMP:

Disputed report funded by tobacco industry giant claims contraband cigarettes cost the city billions in lost tax revenue last year

About a third of all cigarettes smoked in Hong Kong are illegal and the city is losing out on billions in tax revenue as a result.

Those are the findings of a tobacco industry-funded report on the consumption of illegal tobacco in 11 Asian countries last year.

The study has been disputed by the government and anti-smoking groups.

The report, funded by tobacco giant Philip Morris, was published by the UK-based research institute Oxford Economics and the International Tax and Investment Centre, a lobbying group.

It says Hong Kong lost HK$3.3 billion in potential tax revenue last year as a result of an estimated 1.8 billion illegal cigarettes smoked.

As part of the study, about 10,000 empty cigarette packets were collected across the city last year. Based on their markings, the packs were then classified as either legal domestic, duty-free, counterfeit or illegal imports.

Overall estimates of the number of illegal cigarettes smoked were then derived from the sample collected. Packets left by tourists were not counted, the study said.

The report says “steep” tobacco tax increases introduced in Hong Kong in 2009 and 2011 further widened price differences with neighbouring countries, providing incentives for criminal groups to make gains.

But Lisa Lau Man-man, chairwoman of the Council on Smoking and Health, disagreed.

“Contraband cigarettes have existed ever since taxes were placed on tobacco,” she said.

Lau saw no causal link between a high tobacco tax and the proliferation of illegal cigarettes.

Brunei had low tobacco tax but topped all the countries in the report in terms of prevalence of illegal cigarettes.

In response to the report, a senior customs official said measures combating illegal cigarettes at the source were effective and the situation was improving.

From January to August this year, customs officials seized 59.5 million illegal cigarettes, a 38 per cent year-on-year increase, and made 28 arrests in anti-smuggling raids.

During the same period, tax revenue from tobacco rose to HK$3.48 billion from HK$3.2 billion brought in over the same period the previous year.

SCMP’s Howard Winn follows up in his column (4 Oct 2013):

The recent survey by Oxford Economics and the International Tax and Investment Centre (ITIC) has raised eyebrows among anti-smoking groups.

The survey claims 35.9 per cent of the cigarettes consumed in Hong Kong in 2012 were illicit and resulted in a loss of HK$3.3 billion in government revenues. The main drivers for this, ITIC said, “include very steep tax increases in 2009 and 2011, which led to a further widening of the price disparity of legal cigarettes with those in the neighbouring countries”, which attracted the interest of criminal gangs.

But ITIC is hardly a detached observer in these matters. It is funded by international corporations, including all the big tobacco companies. The centre is involved in advising governments on the taxation of tobacco. Its advice is always for “moderate” taxes. But the evidence from the World Health Organisation and other bodies is that high taxation is the single most effective deterrent to smoking, particularly among children. This is recognised by the tobacco industry.

In recent years, millions of pages of internal tobacco company documents have been released as a result of litigation in the United States. A document from Philip Morris in 1985 notes: “Of all the concerns, there is one – taxation – that alarms us the most. While marketing restrictions and public and passive smoking do depress volume, in our experience taxation depresses it much more severely.”

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