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Illicit Tobacco Trade in KSA Causes $80 Million Tax Revenue Loss

Monday, October 22, 2018/ Editor -  

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  • Market research shows a 14.1% incidence of non-domestic cigarette packs in Saudi Arabia for Q2 of 2018, almost doubling from 7.2% in Q4 of 2017
  • Excise and VAT have increased the price of cigarettes in some GCC nations, giving rise to illicit trade 
Riyadh, Kingdom of Saudi Arabia: 22 October 2018:   A recent report by the Gulf Research Centre outlines the prevalence of smoking across the GCC and the implications of cigarette taxation on illicit trade. Smoking statistics for the GCC show a rate of over 7 million adult smokers ; of which more than 3 million adult smokers are in KSA.  
 
Furthermore, Q2 2018 market research conducted by MSintelligence shows a 14.1% incidence of non-domestic cigarette packs in Saudi Arabia, almost doubling from 7.2% in Q4 of 2017. This research aims to provide an indication of the incidence of non-domestic or illicit cigarettes, including tax paid and non-tax paid cigarettes from other countries, as well as counterfeit cigarettes.
 
 “GCC governments are facing significant challenges as they suffer from a consumer population that turns to underground methods of obtaining cheaper products – in effect buying illicit goods,” commented Tamer Shabana, Director Illicit Trade Prevention, Philip Morris Middle East. 
One of the ways that governments attempt to curtail smoking and dissuade smokers is through implementing taxes that increase the price of cigarettes for consumers. This has influenced the majority of smokers to down-trade due to the price hike or turn to illicit goods where the cost of cigarettes is more affordable. 
 
In 2015, the value of illicit trade in tobacco products reached USD $1.7 billion globally , and currently costs governments tens of billions of US dollars every year. Before excise tax was implemented in Saudi Arabia, Bahrain unilaterally introduced a special fee, applied only on tobacco. This levy led to higher cigarette prices than Saudi Arabia, and resulted in increased illicit trade - an estimated 6 million cigarettes crossed the border per month.  
 
Illicit trade provides challenges across the wider Middle East and Africa region, with an illicit trade volume of almost 43 billion cigarette sticks , with customs seizing only 354,000,000 cigarette sticks . In order to deal with this challenge, the report recommends that GCC governments can further deepen coordinating law enforcement efforts and harmonising excise tax policy. The introduction of a minimum cigarettes tax level across the GCC, would bring prices closer, reduce incentives for cross-border smuggling and decrease the profitability of bootlegging, addressing both tax avoidance and revenue collection.
 
According to the Gulf Research Centre, cigarettes are among the most trafficked illegal goods in the world. The global black market for tobacco products is large and growing. The value of the illicit tobacco trade is estimated to be greater than the illicit trade in oil, wildlife, timber, arts and cultural property, and blood diamonds combined. 
 
The report suggests illicit trade in tobacco represents 10 to 12% of global tobacco consumption, with an estimated illicit volume of up to 600 billion illegal cigarettes. Criminals are increasingly attracted to the high profits and minimal risks associated with trafficking illegal cigarettes.
 
“Illicit trade is demand and supply driven. When given an option between cheap and expensive products, consumers will always tend to opt for the cheaper options. And so, the illicit trade in tobacco products is perceived as less significant than it actually is. While consumers may understand that it is illegal to sell counterfeit goods, many don’t know that it is also illegal to buy them,” continued Shabana.  
 
Approximately 30% of cigarettes in the Middle East sold are illegal. The report specifies that 64% of illegal trade occurs in the Levant region and Yemen, while the remainder is split between Iraq and the GCC. Additionally, the report explains that a unified approach to taxation is required in the GCC to ensure that illicit trade is prevented from gaining a competitive edge in one or more markets in terms of cross-border sales. 
 
Shabana concluded “Key elements of an effective effort to stop the illicit tobacco trade include:
  • Use of research and intelligence to better understand the problem and its drivers;
  • A policy framework that regulates the legal supply chain and severely penalizes those involved in illicit trade;
  • Harmonization of GCC excise tax policies through introduction of a minimum excise tax
  • Significant human and financial resources devoted to enforcement to ensure that laws are properly enforced and criminals are brought to justice;
  • A tracking and tracing system based on open standards that can be used by all relevant stakeholders in the supply chain across different technological platforms, geographies and industries to prevent product diversion;
  • Strict control of the supply chain to avoid product diversion from one country to another; and
  • Education campaigns that raise public awareness of the problem and its impact on society”

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