Chapter  

8
Tax  avoidance  and  tax  evasion

Introduction

Tax   avoidance   and   tax   evasion   can   next   section   explains   the   motivation   to   products   illegally   traded   across  
decrease   the   economic   welfare   for   tax   avoidance   and   tax   evasion,   borders.   Illicit   trade   is   defined   in  
by   making   tobacco   products   more   and  categorizes  these  motives  based   Article   1   of   the   WHO   Framework  
affordable   and   available,   thus   whether   they   are   related   to   profit   Convention   of   Tobacco   Control  
exacerbating   the   negative   health   generation,   costs   of   supplying   illicit   (World  Health  Organization,  2005)  as  
consequences   associated   with   products,   deterrence   or   an   overall   any  practice  or  conduct  prohibited  by  
tobacco   use   and   secondhand   state  of  the  economy.  The  third  section   law   and   which   relates   to   production,  
smoking. provides   the   most   recent   estimates   shipment,   receipt,   possession,  
Furthermore,   tax   avoidance   of   the   extent   of   tax   evasion   globally,   distribution,   sale   or   purchase,  
and   tax   evasion   can   undermine   the   regionally  and  also  in  some  selected   including   any   practice   or   conduct  
impact   of   tobacco   control   measures,   countries.   The   following   section   intended   to   facilitate   such   activity.  
primarily   tobacco   tax   policies.   The   reviews   the   literature   on   the   impact   Illicit   tobacco   trade   covers   more  
existence   of   illicit   tobacco   trade   of   tax   avoidance   and   tax   evasion   activities   than   the   circumvention   of  
has   been   used   to   increase   political   on   public   health   measures   such   as   taxes,  but  includes  all  illegal  activities  
pressure   on   governments   and   smoking   rate,   smoking   intensity   and   related  to  the  tobacco  trade.
discourage   them   from   adopting   and   heath   disparities.   The   final   section   Economists   mostly   refer   to   the  
implementing   effective   tobacco   tax   reviews   the   impact   of   policies   circumvention  of  taxes,  and  prefer  to  
strategies.   Moreover,   illicit   tobacco   attempting  to  curb  illicit  tobacco  trade   use   the   terms   tax   avoidance   (legal  
trade  can  channel  sales  proceeds  to   and  summarizes  the  lessons  learned   methods   of   circumventing   tobacco  
organized  crime  and  lead  to  a  loss  in   from   the   implementation   of   those   taxes)   and   tax   evasion   (illegal  
government  tax  revenues. policies.   methods   for   circumventing   tobacco  
This   chapter   reviews   and   taxes).
summarizes   the   research   evidence   Defining  and  measuring  tax   This  section  defines  the  activities  
related  to  tobacco  tax  avoidance  and   evasion  and  avoidance   of  tax  avoidance  and  tax  evasion  that  
tobacco   tax   evasion   from   published   fall   into   each   category   and   briefly  
literature  and  empirical  evidence.  This   Among   those   working   on   tobacco   describes   approaches   to   measuring  
body  of  information  is  organized  in  five   tax  issues,  a  variety  of  circumventing   the   extent   of   both,   drawing   heavily  
sections.  The  first  section  explains  the   activities   for   not   paying   all   tobacco   from   the   classification   scheme  
difference  between  tax  avoidance  and   taxes   are   often   grouped   together   proposed  by  Joossens  and  colleagues  
tax  evasion,  defines  the  activities  that   and   referred   to   as   “smuggling”   or   (2000)   and   the   methods   described  
fall  into  each  category,  and  describes   “illicit   trade”   in   tobacco   products.   in   IARC’s   Handbooks   of   Cancer  
methods   used   in   measuring   the   A   clarification   of   the   terms   used   is   Prevention   Volume   12,   Methods   for  
extend  to  which  these  activities  supply   necessary   as   those   terms   cover   Evaluating   Tobacco   Control   Policies  
tobacco   products   to   the   market.   The   different   activities.   Smuggling   refers   (IARC,   2008),   the   World   Bank’s   tool  

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on   tobacco   smuggling   (Merriman,   US  states).  However,  enforcement  of   through   direct   channels   (Chaloupka  
2001),   and   the   book   chapter   by   these  provisions  is  difficult. et   al.,   in   press).   Differences   in   legal  
Merriman  and  colleagues  (2000). Tourist   shopping.   This   type   of   obligations   for   paying   taxes   in   the  
tax  avoidance  is  similar  to  the  cross-­ home   jurisdiction   can   make   this  
Tax  avoidance border   shopping   described   above,   type   of   activity   more   a   form   of   tax  
but  involves  the  purchase  of  tobacco   evasion  than  tax  avoidance  (e.g.  EU  
Tax  avoidance  includes  legal  activities   products  in  more  distant  jurisdictions,   countries).
and   purchases   in   accordance   with   again   subject   to   the   constraints   Industry   reformulation   or  
customs   and   tax   regulations,   most   imposed   by   customs   laws   and/or   repositioning.   Tobacco   companies  
of   which   include   the   payment   of   other   policies   (e.g.   consumption   can   reduce   the   tax   imposed   on  
some   tobacco   taxes,   and   are   done   of   tax-­paid   cigarettes   by   the   large   their   products   by   reformulating   or  
mostly   by   individual   tobacco   users,   tourist   population   in   Thailand).   This   repositioning   their   products.   For  
including   cross-­border   shopping,   is   a   more   limited   phenomenon,   but   example,  in  countries  with  multitiered  
tourist  shopping,  duty-­free  shopping,   can   account   for   a   significant   share   tax   structures   where   higher   taxes  
Internet   and   other   direct   purchases,   of   overall   tobacco   product   sales   in   are   levied   on   higher-­priced   brands,  
industry   reformulation   and/or   popular  tourist  destinations. a   company   can   lower   the   price   of  
repositioning.  These  include: Duty-­free   shopping.   This   type   of   its   product   so   that   it   moves   from   a  
Cross-­border   shopping.   This   tax  avoidance  is  similar  to  the  others,   higher  tax  tier  to  a  lower  tax  tier.  As  
type   of   tax   avoidance   involves   but  in  this  case  involves  the  purchase   occurred  recently  in  Germany,  where  
individual   tobacco   users   residing   in   of   tax-­free   tobacco   products   cigarette  taxes  are  based  on  quantity,  
higher   tax   jurisdictions   purchasing   purchased   in   airports,   on   airlines,   companies  produced  long  cigarettes  
tobacco   products   in   nearby   lower-­ and   in   other   travel-­related   venues.   that   were   readily   cut   into   smaller,  
tax   jurisdictions   for   their   own   Again,   most   governments   impose   standard   size   cigarettes,   effectively  
consumption   within   the   customs   limits  on  how  much  an  individual  can   reducing  the  tax  per  cigarette.
constraints.  This  can  involve  crossing   purchase  and  bring  home  from  duty-­
national   borders,   particularly   where   free  sources. Tax  Evasion
such   border   crossing   is   freely   or   Internet   and   other   direct  
relatively   easily   done   (as   between   purchases.  This  type  of  tax  avoidance   The   activities   included   under   tax  
the  European  Union  Member  States)   involves   individual   tobacco   users   evasion   are   the   illegal   methods  
or   can   take   place   within   a   given   buying   tobacco   products   online,   of   circumventing   tobacco   taxes,  
country   where   there   are   significant   through   the   mail,   or   over   the   phone   such   as   the   purchase   of   smuggled  
differences   in   subnational   taxes   (as   from   establishments   based   in   low-­ and   illicit   manufactured   tobacco  
in   Canada   where   provincial   taxes   tax   jurisdictions   for   consumption   in   products.   Those   activities   include  
differ,   or   in   the   United   States   where   their  own  higher  tax  jurisdiction.  This   both   small   and   large   quantities   and  
state   and   local   taxes   can   vary   has   attracted   the   most   attention   in   often,  but  not  always,  involve  efforts  
considerably   across   jurisdictions).   the  USA,  given  relatively  widespread   to   avoid   paying   any   taxes.   Many   of  
Within   some   countries,   this   also   access  to  the  Internet  and  significant   these   activities   are   done   by   larger  
involves   purchases   from   shops   differences   in   subnational   taxes.   criminal   networks   or   other   large-­
located   in   tax-­exempt   areas,   such   For   US   consumers,   for   example,   scale  operations.
as   Aboriginal   reserves   in   Canada   these   may   include   purchasing   from   Small-­scale  smuggling.  This  type  
and   Native   American   reservations   vendors   based   on   Native   American   of  tax  evasion  involves  the  purchase,  
in   the   USA.   In   some   cases,   there   reservations,   in   low-­tax   states   or   by   individuals   or   small   groups,  
are   limits   on   how   much   can   be   in   low-­tax   countries;;   as   above,   of   tobacco   products   in   low   tax  
purchased  outside  of  the  jurisdiction   however,   purchasers   are   obligated   jurisdictions   in   amounts   that   exceed  
in   which   the   individual   resides   (e.g.   to   pay   taxes   to   their   home   state   on   the  limits  set  by  customs  regulations,  
the  European  Union),  while  in  others   these   types   of   purchases.   Over   the   for   smuggling   or   resale   in   high-­tax  
the  individual  is  supposed  to  pay  the   past   several   years,   US   states   have   jurisdictions.
difference   between   the   tax   in   their   taken  steps  to  curb  direct  purchases   This   type   of   tax   evasion   is  
home   jurisdiction   and   the   tax   they   through   a   variety   of   policy   and   illegal   in   that   the   quantities   involved  
have  paid  on  the  products  purchased   enforcement   actions   and   Internet   exceed   the   allowable   limits   and   that  
in   other   jurisdictions   (e.g.   in   various   and  few  smokers  purchase  cigarettes   the   purchase   does   not   include   the  

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taxes   that   are   supposed   to   apply   in   Illicit   manufacturing.   This   type   of   Over  the  past  few  decades,  multiple  
the  jurisdiction  where  they  are  used.   tax   evasion   refers   to   the   production   approaches   have   been   developed  
As   with   cross-­border   shopping,   of   tobacco   products   contrary   to   law.   and  applied,  each  of  which  captures  
this   is   more   likely   to   occur   when   The  laws  in  question  may  be  taxation   some   part   of   the   full   picture.   The  
tax   differentials   among   nearby   laws  or  other  laws  (such  as  licensing   various  approaches  used  to  estimate  
jurisdictions   are   large   and   where   or   monopoly-­related   laws)   that   the   scope   of   tax   avoidance   and  
border  crossing  is  relatively  easy.  For   restrict   the   manufacture   of   tobacco.   evasion  are  briefly  described  below;;  
example,   small-­scale   smuggling   is   This   type   of   tax   evasion   includes   estimates  based  on  these  methods  for  
one   form   of   tax   evasion   that   occurs   underreporting   of   actual   production   various  countries  are  presented  later  
between   US   states,   most   notably   quantities  with  the  difference  between   in   this   chapter.   Given   the   different  
low-­tax   states   with   no   tax   stamps   reported   and   actual   production   dimensions   of   tax   avoidance   and  
(such   as   South   Carolina)   where   diverted   through   illegal   channels   or,   evasion   captured   using   the   different  
small-­scale   smugglers   buy   tax-­paid   in  some  cases,  complete  avoiding  of   methods  and  the  inherent  limitations  
cigarettes  and  then  resell  in  high-­tax   reporting  with  all  production  diverted   in   each   method,   a   combination   of  
states. to   black   markets.   This   type   of   illegal   multiple   methods   will   be   most   likely  
Large-­scale  smuggling.  This  type   manufacturing  is  more  likely  to  occur   to   produce   a   good   measure   of   the  
of   tax   evasion   involves   the   illegal   in   countries   without   effective   tax   extent   of   overall   tax   avoidance   and  
transportation,   distribution,   and   administration  that  includes  monitoring   evasion  (IARC,  2008).
sale   of   large   quantities   of   tobacco   of   actual   production,   and   in   regions   Expert  opinion.  One  widely  used  
products,   conducted   by   criminal   where   distribution   of   the   illegally   approach   to   assess   the   extent   of  
networks,   that   generally   avoid   all   produced  cigarettes  is  relatively  easy.   overall  tax  avoidance  and  evasion  is  
taxes.   As   Joossens   and   colleagues   Counterfeit   tax   stamps   are   often   to   ask   “experts”   for   their   estimates  
(2000)   describe,   this   typically   applied   to   illegally   manufactured   of   these   activities,   where   the  
involves:   international   brands   that   products   when   these   products   are   experts   may   be   customs   and   other  
are   sold   by   multinational   tobacco   distributed   in   countries   that   require   law   enforcement   officials,   industry  
companies  and  which  are  easily  sold;;   tax   stamps.   The   destination   of   the   representatives,   researchers,  
transportation   over   longer   distances   illegally   manufactured   cigarettes   tobacco  control  advocates  or  others  
and   often   involving   “in-­transit”   can   be   the   domestic   or   a   foreign   with  a  particular  interest  in  the  issue  
regimes   and   tax-­free   zones;;   the   market.   Illicit   manufacturing   includes   (Merriman,   2001).   Such   estimates  
passing  of  tobacco  products  through   counterfeiting. are   subjective   and   can   be   biased  
a   wide   range   of   owners;;   large   Counterfeiting.   Counterfeiting   based   on   the   individual   expert’s  
organized-­crime   networks;;   and   a   involves   the   production   and   position   and   interests.   Tobacco  
sophisticated   system   for   distributing   distribution   of   products   bearing   a   industry   informants,   for   example,  
smuggled  cigarettes  locally.  To  avoid   trademark  without  the  approval  of  the   may  have  an  incentive  to  report  high  
detection,  counterfeit  tax  stamps  are   trademark   owner.   These   products   levels  of  tax  avoidance  and  evasion  
often  applied  to  smuggled  cigarettes   are   produced   illegally,   often   bear   as   a   way   of   averting   tax   increases,  
that   are   being   sold   in   jurisdictions   counterfeit   tax   stamps   (depending   while   tobacco   control   advocates  
that   require   such   stamps.   Large-­ on   where   they   are   being   sold),   and   may   understate   the   extent   of   the  
scale  smuggling  has  also  been  used   are  distributed  through  the  networks   problem   in   their   efforts   supporting  
for  large  consignments  of  counterfeit   established  by  large-­scale  smuggling   tobacco   tax   increases.   Estimates  
cigarettes  or  for  legally  manufactured   operations.   China   has   been   a   based   on   expert   opinion   are   most  
cigarettes   which   are   targeting   the   major   manufacturer   of   counterfeit   prominent   in   trade   and   government  
illicit  markets  in  other  countries.  One   cigarettes  (Shen  et  al.,  2010) publications.   Overall,   however,  
example   is   the   cigarette   brand   Jin   measures   based   on   expert   opinion  
Ling,  which  is  legally  manufactured  in   Measuring  tax  avoidance   are   generally   consistent   with   those  
the  Russian  Federation,  but  destined   and  evasion derived   from   other   approaches,  
for  the  illegal  market  in  Germany  and   suggesting   that   such   measures   are  
other  European  countries  and  which   Given   the   illicit   nature   of   tax   valid  (IARC,  2008).
was  one  of  the  most  seized  cigarette   avoidance   and   evasion,   developing   Comparison   of   export   and  
brands   in   Europe   in   2008   (World   accurate   measures   of   the   extent   import   statistics.   One   approach   to  
Customs  Organization,  2009). of   these   activities   is   challenging.   estimating   the   extent   of   large   scale  

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smuggling   is   to   compare   export   of  a  measure  based  on  this  approach   Hyland   and   colleagues   (2006),   for  
and   import   statistics.   The   difference   (IARC,  2008). example,   reported   data   from   the  
between   recorded   exports   and   Modelling   of   tobacco   product   International  Tobacco  Control  Policy  
recorded   imports   is   likely   to   reflect   demand.   A   relatively   widely   used   Evaluation   Study’s   (ITC)   surveys   of  
product   diverted   to   illegal   markets   approach   among   tobacco   control   representative   samples   of   smokers  
while   in   transit.   This   approach   is   researchers   is   the   econometric   in   Australia,   Canada,   the   United  
likely   to   produce   a   valid   measure   modeling   of   tobacco   product   Kingdom  and  the  United  States  which  
for   the   global   level   of   large-­scale   demand   using   data   from   multiple   include   questions   on   cross-­border,  
smuggling   of   legally   manufactured   neighbouring   jurisdictions   (e.g.   US   duty-­free,   native   reserve,   Internet  
cigarettes,  but  is  unlikely  to  produce   states,   European   Union   Member   and   other   direct   purchases,   and  
the   same   for   small-­scale   smuggling   States).   Researchers   using   this   other   options   that   potentially   reflect  
and   illicit   manufactured   cigarettes   approach   have   included   variables   untaxed   or   lower   taxed   purchases.  
or  at  the  country  level  (IARC,  2008).   measuring   the   opportunities   for   They   found   relatively   low   rates   of  
Merriman   and   colleagues   (2000),   tax   avoidance   and   evasion   based   individual   tax   avoidance   in   Australia  
for   example,   used   this   approach   in   on   differences   in   prices   across   (0.7–1.1%),   Canada   (3.1–3.7%),   and  
their   efforts   to   assess   the   extent   jurisdictions,   population   distributions   the   United   States   (4.8–6.1%),   but  
of   illicit   trade   in   cigarettes,   finding   near  borders,  extent  of  cross-­border   high   rates   in   the   United   Kingdom  
that   about   one   third   of   recorded   or  tourist  traffic,  Internet  penetration,   (15.3–19.7%),   with   rates   increasing  
exported  cigarettes  in  the  mid-­1990s   and   other   factors   reflecting   access   in   each   country   over   the   two   waves  
did   not   appear   in   recorded   imports,   to   lower   tax/price   jurisdictions.   of  their  surveys.
accounting   for   about   6%   of   global   Coefficient   estimates   from   the   Observational   data   collection.  
cigarette  consumption. resulting   models   can   be   used   to   A   relatively   untested   but   potentially  
Comparison  of  tax-­paid  sales  and   predict   what   tax-­paid   sales   would   promising   approach   to   assessing  
individually   reported   consumption   have   been   if   the   variables   reflecting   multiple  dimensions  of  tax  avoidance  
measures.   If   there   are   no   reporting   the  incentives/opportunities  were  set   and   evasion   is   direct   observation  
biases   in   measures   of   tax-­paid   to  zero,  with  the  difference  between   of   tobacco   product   vendors   or  
sales   and   measures   of   average   predicted   sales   and   actual   sales   collection   of   packs/containers   from  
consumption   and   prevalence   reflecting  the  extent  of  tax  avoidance   tobacco   product   users   or   other  
obtained   from   representative   and   evasion.   Depending   on   what   sources.   Products   can   be   examined  
population   surveys,   then   the   opportunities   are   being   modelled,   for  tax  stamps,  local  warning  labels,  
difference  between  the  t wo  will  reflect   this  approach  can  be  used  to  assess   other   pack   markings,   and   product  
the   extent   of   overall   tax   avoidance   individual  cross-­border  shopping  and   constituents   to   identify   products  
and  evasion  (IARC,  2008).  However,   direct   purchases,   as   well   as   small-­ that   do   not   bear   the   appropriate  
it   is   likely   that   there   will   be   some   scale  smuggling.  This  approach  has   stamps/labels/markings   or   that  
temporal   biases   in   tax-­paid   sales   been   used   widely   in   the   USA   (see,   include   constituents   that   differ   from  
measures,  as  these  generally  reflect   for   example:   Becker   et   al.,   1994;;   those   contained   in   locally   produced  
shipments  at  the  factory  or  wholesale   Yurekli  and  Zhang,  2000;;  Farrelly  et   products.   As   part   of   the   ITC   survey  
level  rather  than  actual  consumption.   al.,  2003)  and,  to  a  limited  extent,  in   in   Poland,   for   example,   interviewers  
More  importantly,  there  is  likely  to  be   European  countries  (Merriman  et  al.,   were  trained  to  recognize  Polish  tax  
some   degree   of   underreporting   of   2000). stamps,   warning   labels   and   other  
tobacco   use   in   population   surveys.   Survey  of  tobacco  users’  purchase   pack  markings,  as  well  as  the  same  
To   the   extent   that   the   bias   in   each   behaviours.   Representative   surveys   for  Ukraine,  Belarus  and  the  Russian  
is   constant   over   time,   changes   in   of  tobacco  product  users  that  collect   Federation  in  an  effort  to  assess  the  
the   difference   between   the   two   can   information   on   various   aspects   extent  of  tax  avoidance/evasion  in  the  
indicate   whether   tax   avoidance   and   of   purchase   behaviour,   including   Polish  cigarette  market  (IARC,  2008).  
evasion  are  increasing  or  decreasing   purchase   location   and   price,   can   Merriman  (2010)  applied  a  novel  t wist  
over  time  (Merriman,  2001).  However,   be   helpful   in   assessing   the   extent   on  this  approach  by  collecting  littered  
as  social  norms  against  tobacco  use   of   various   forms   of   individual   tax   cigarette   packs   around   Chicago  
strengthen   over   time,   the   extent   of   avoidance,   including   cross-­border   in   an   effort   to   assess   the   extent   of  
underreporting  in  population  surveys   shopping,   direct   purchases,   and   avoidance/evasion  of  the  local  Cook  
is  likely  to  grow,  reducing  the  validity   duty-­free   purchases   (IARC,   2008).   County  and  Chicago  cigarette  taxes,  

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finding  that  three  fourths  of  the  packs   In   a   competitive   market,   profits   extensively  in  the  USA  and  in  Europe  
collected  in  Chicago  did  not  bear  the   from  illicit  tobacco  trade  will  be  driven   where  sufficient  data  exist  and  where  
Chicago   tax   stamp.   In   an   ongoing   to  zero.  This  implies  that,  in  the  long   a   sizable   population   lives   in   a   close  
effort,   the   ITC   project   is   collecting   run,   the   cigarette   tax   revenue   the   proximity   to   another   state/country  
cigarette   packs   from   survey   government   loses   to   smugglers   is   (Vedder,  1997;;  Cnossen,  2005).
respondents  in  a  variety  of  countries   entirely   consumed   by   excess   travel   Several  US  studies  measured  the  
that   will   be   examined   for   relevant   costs   and   costs   to   avoid   detection.   strength   of   the   relationship   between  
pack   markings,   with   sophisticated   This   is   a   wasteful   use   of   scarce   the   price/tax   differences   and   cross-­
product  testing  methods  used  to  test   societal   resources   (Bhagwati   and   border   shopping.   Baltagi   and   Levin  
for   various   product   constituents   that   Hansen,  1973). (1986)   studied   cigarette   small-­
appear  at  higher  levels  in  counterfeit   scale   smuggling   in   the  USA  using  a  
cigarettes.   These   approaches   are   Price/tax  differences  and  their   dynamic  demand  model  and  a  panel  
limited   by   observers’   abilities   to   magnitude  as  determinants  of  profit data   from   46   states   on   per-­capita  
distinguish  licit  and  illicit  (particularly   sales   over   the   period   1963–1980.  
counterfeit)  products  and  by  the  ability   Cigarette   prices   are   high   relative   to   They   found   the   cigarette   demand  
to  differentiate  licit  and  illicit  products   their   production   costs,   in   part   due   to   be   sensitive   to   price   differences  
based   on   product   constituents,   but   to   higher   level   of   taxation.   Price   of   between   the   state   of   residence   and  
do  appear  promising  for  capturing  at   tobacco   products   and   the   total   tax   the  neighbouring  states:  a  10%  price  
least  some  aspects  of  tax  avoidance   levied   on   them   are   related   to   the   increase   in   a   neighbouring   state  
and  evasion. amount  of  profit  for  those  involved  in   caused   a   0.8%   increase   in   taxed  
illicit  trade. sales   in   the   home   state   in   the   short  
Determinants  of  tax  avoidance/ The   absolute   price   level   and   run   and   a   0.21%   increase   in   the  
evasion the   relative   price   differences   can   long   run.   Baltagi   and   Levin   (1992)  
affect  the  method  of  delivery  of  illicit   updated   their   previous   study   by  
The   determinants   of   tax   avoidance/ cigarettes  to  the  market. adding   data   for   8   additional   years  
evasion   are   related   to   tax/price   Small-­scale   smuggling   and   extending   their   panel   data   to   1963–
differences,   tobacco   products’   legal   cross-­border   shopping   are   1988   for   these   46   US   states.   Using  
affordability,   corruption,   weak   tax   primarily   motivated   by   the   relative   various   model   specifications,   they  
administration   and/or   customs,   and   price   differences   between   adjacent   found   similar   results   with   respect   to  
informal  distribution  networks  as  well   geographical   areas.   These   price   the   price   sensitivity   of   the   cigarette  
as   to   the   involvement   of   global   and   differences  may  be  driven  by  tobacco   market   to   the   price   difference   with  
new   firms.   The   determinants   of   the   taxes   or   tobacco   industry   pricing   the  neighbouring  states.
supply  of  illicit  tobacco  products  are   strategy   (Baltagi   &   Levin,   1986,   Goel   (2008)   used   more   recent  
related   to   the   profit   from   the   sale   of   1992).  The  difference  in  price  or/and   cross-­section   state-­level   cigarette  
these   illegal   products.   The   greater   tax   rate   represents   the   upper   limit   sales   data   from   the   United   States  
the   reward   and   the   lower   the   costs   on   the   incentive   to   bootleg   or   shop   from   2002   to   conclude   that   price  
of  supplying  these  illicit  products,  the   across  the  border  due  to  transaction   differences   provide   the   main  
greater   the   probability   an   individual   costs   involved   in   this   form   of   supply   motivation  for  cigarette  smuggling  as  
will  engage  in  it.  The  reward  depends   (Licari  &  Meier,  1997). compared  to  non-­price  factors  related  
on   the   difference   in   profits   from   Wholesale/large   scale   smuggling   to   the   probability   of   apprehension.  
legally   sold   versus   illegally   supplied   is   likely   to   be   correlated   with   the   According   to   his   study,   a   10%  
cigarettes. country’s   absolute   retail   price   of   increase  in  the  lowest  cigarette  price  
The   costs   are   related   to   the   cigarettes   (Merriman   et   al.,   2000),   in   adjacent   US   states   increases   a  
probability  of  detection,  the  magnitude   because   the   larger   the   retail   price,   state’s  cigarette  sale  by  about  10%.
of  punishment,  the  opportunity  costs   the   larger   the   profit   for   large-­scale   DeCicca   et   al.   (2010)   found  
like   foregone   salaries   from   other   smugglers   who   pay   wholesale   relatively   larger   sensitivity   of   tax  
employment   and   the   cost   of   the   international  price  for  their  supply  (FIA   avoidance   and   tax   evasion   to   the  
capital  employed  in  smuggling.  Other   International  Research  Ltd,  1999a). tax/price   difference:   1%   increase  
costs  may  include  the  cost  of  bribery   The   motivation   for   small-­ in   home-­state   price   increased   the  
(Merriman  et  al.,  2000). scale   smuggling   and   legal   cross-­ likelihood   of   purchasing   cigarettes  
border   shopping   has   been   studied   in   a   neighbouring   state   by   3.1%  

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while   controlling   for   the   distance   to   A   review   of   24   peer-­reviewed   represent   a   fairly   small   part   of   the  
the  border.  However,  the  study  used   studies   and   studies   by   reputable   total  cigarette  market.  However,  legal  
individual-­level   survey   data   that   do   researchers  using  US  data  provided   cigarette   purchases   by   tourists   and  
not   capture   small-­scale   smuggling,   evidence  that  tax  avoidance/evasion   foreign   visitors   (that   are   not   part   of  
and  self-­reported  prices  that  can  be   via  Internet  was  related  to  the  level  of   local  consumption)  were  significant—
endogenous.   Their   result   that   the   cigarette  taxes:  US  smokers  living  in   up   to   50%   of   legal   sales.   This  
probability   of   cross-­border   shopping   states   and   cities   with   high   cigarette   has   been   confirmed   by   the   Finish  
approaches  zero  at  a  distance  to  the   excise   taxes   were   more   likely   to   authorities   that   reported   that   legal  
border   of   about   300   miles   does   not   purchase   non-­taxed   cigarettes   cross-­border   cigarette   shopping   by  
seem  realistic  and  indicates  problems   online  than  smokers  living  in  low-­tax   Finish  travellers  amounted  to  12%  of  
with   the   model   specification.   The   jurisdictions  (Ribisl  et  al.,  2006). total  national  sales  in  1996  (Lipponen  
author   suggested   that   there   is   a   In   Europe,   Merriman   et   al.   et  al.,  1998).
surge   in   cigarette   tax   avoidance   (2000)   used   cigarette   sales   data   Buck,   Godfrey   and   Richardson  
and   evasion   immediately   after   a   for   1989–95,   cigarette   prices   and   (1994)   showed   that   in   the   early   to  
tax   increase,   which   then   quickly   frequency  of  travel  from  18  countries   mid-­1990s   there   was   little   incentive  
subsides   within   several   months.   A   to   estimate   the   incentives   for   small-­ for   cigarette   cross-­border   shopping  
similar   observation   was   made   by   scale   smuggling   and   cross-­border   between  France  and  Britain,  because  
Farrelly,  Nimsch,  and  James  (2003). shopping.   Controlling   for   the   level   the  savings  on  800  cigarettes  bought  
As  noted  above,  Merriman  (2010)   of   corruption   and   income,   he   found   in   France   and   taken   back   to   Britain  
employed  a  novel  empirical  approach   that  policies  that  raise  incentives  for   would   be   outweighed   by   the   cost  
to  estimate  tax  avoidance/evasion  in   small-­scale   smuggling   and   cross-­ of   the   trip.   Cross-­border   shopping  
the  city  of  Chicago  and  its  sensitivity   border  shopping,  such  as  a  cigarette   existed   at   that   time,   but   only   when  
to  tax  differences  in  the  neighbouring   tax  increase,  will  significantly  reduce   smokers   were   already   across   the  
jurisdictions.   He   collected   a   random   domestic   tax-­paid   cigarette   sales.   border   for   other   reasons.   Estimates  
sample   of   2391   littered   cigarette   If   these   incentives   to   bring   cheaper   of   United   Kingdom   Department   of  
packs  in  the  city  in  2007  and  studied   cigarettes  from  abroad  were  reduced   HM  Customs  &  Excise  confirmed  that  
their  probability  of  having  the  correct   to   zero,   the   official   domestic   sale   legitimate   cross-­border   shopping  
local   tax   stamp.   The   difference   would   increase   by   3%.   If   foreigners   was   a   minor   problem   in   1997   when  
between   the   tax   in   Chicago   and   would   not   have   incentives   to   buy   the   legitimate   personal   imports   of  
surrounding  counties  equal  to  $2.68   cheaper   cigarettes   in   a   country,   this   tobacco  products  was  less  than  0.5%  
decreased   the   probability   that   a   country’s  domestic  sale  would  fall  by   of  total  cigarette  sales  (HM  Customs  
littered   pack   has   a   local   stamp   by   1%.   For   example,   a   unilateral   10%   &  Excise,  1998).
almost   60   percent.   On   the   other   cigarette   price   increase   in   Germany   The   situation   changed   in   the  
hand,   increasing   the   distance   to   would   reduce   yearly   cigarette   sale   second  part  of  1990s  when  cigarette  
the   lower-­tax   state   border   by   a   one   by   6   packs   per   capita,   but   would   prices   in   the   United   Kingdom  
mile   increased   the   probability   a   increase   yearly   cigarette   purchases   increased  by  about  25%  from  1997  to  
pack  has  a  local  stamp  by  about  one   abroad   by   3   packs   per   capita,   2000.  The  United  Kingdom  Treasury  
percent.  That  means  that  compliance   resulting   in   a   3-­pack   per   capita   estimates   that   the   market   share   of  
increases   rapidly   with   the   distance   reduction  in  consumption. illicit  cigarettes  in  the  United  Kingdom  
to   lower-­taxed   border   and   that   the   Taal  et  al.  (2004)  analysed  sales   rose   from   about   3%   in   1996–97  
distance   provides   a   significant   and   survey   data   from   Estonia,   to   about   18%   by   1999–2000   (HM  
barrier   to   tax   avoidance.   However,   a   European   country   with   high   Customs  &  Excise,  2000).
the  results  of  Merriman  (2010)  are  not   incentives  for  small-­scale  smuggling   In  France,  similarly,  the  substantial  
directly   comparable   to   econometric   and   cross-­border   shopping   from   tobacco   tax   increases   in   2003   and  
studies   that   report   tax   compliance   1993  to  2000,  when  cigarette  prices   2004   that   led   to   higher   cigarette  
at   the   national   or   state   level   due   to   there  were  up  to  four  times  lower  than   prices   were   blamed   for   an   increase  
the  potential  selection  bias.  This  bias   in  neighbouring  Finland  and  Sweden   in  cross-­border  purchases  of  tobacco  
arises  due  to  the  possibility  that  those   (but   considerably   higher   than   in   products   (both   legal   and   illegal)  
who  litter  are  also  less  law  obedient,   another   neighbour,   the   Russian   IURPDQHJOLJLEOHDPRXQWWRí
therefore  more  likely  to  engage  in  tax   Federation).   They   found   that   illegal   of   total   sales   in   2005   and   2006  
avoidance/evasion. purchases  of  cigarettes  by  Estonians   (Lakhdar,  2008).

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 Tax  avoidance  and  tax  evasion

The   evidence   on   tax   avoidance/ They   found   that   the   countries   with   Islamic   Republic   of   Iran   (World  
evasion  in  Asia  is  scarce.  Tsai,  Sung,   the   lowest   income   had   the   lowest   Health   Organization,   2003)   have  
Yang   and   Shih   (2003)   used   survey   average   prices   for   legally   sold   prohibited   or   severely   limited   the  
data   collected   in   2000   among   437   cigarettes,   but   also   the   highest   illicit   importation   of   foreign   cigarettes.  
smokers   of   imported   cigarettes   and   cigarette  market  share.  This  suggests   The   tax   on   imported   cigarettes   in  
found   that   higher   cigarette   prices   a   negative   relationship   between   the   China   was   244%   in   1997   (reduced  
were   the   primary   motivation   for   illicit   cigarette   market   share   and   the   to   217%   in   1999),   but   foreign  
purchasing   of   smuggled   cigarettes   cigarette  price  level. cigarettes   with   prices   lower   than  
in   Taiwan,   China.   A   1%   increase   in   Joossens   and   Raw   (1998)   found   this   tax   were   easy   to   find   in   urban  
cigarette   price   raised   the   likelihood   the   same   situation   in   EU   countries   China   (Hu   &   Mao,   2002).   Viet   Nam  
of   purchasing   smuggled   cigarettes   in   1995:   many   European   countries   banned   cigarette   imports   from   1990  
at  least  2.60  times  (95%  confidence   with   high   tobacco   taxes   and   prices   till  2007.  Yet,  foreign  cigarettes  were  
interval:   1.08–6.26).   Smokers   who   had   low   estimates   of   cigarette   sold   at   a   premium   in   the   street   of  
spent  more  money  on  cigarettes  were   smuggling,  while  illicit  cigarette  trade   Hanoi   (Joossens,   2003).   Even   after  
more   likely   to   purchase   smuggled   was  prevalent  in  southern  European   lifting   the   import   ban,   cigarettes  
cigarettes,   but   personal   income   countries   where   taxes   and   prices   and   cigars   are   subject   to   an   import  
was   not   significantly   associated   were   low.   The   authors   suggest   that   duty   of   up   to   225%.   The   illegally  
with  smuggled  cigarettes  purchases   the  size  of  illegal  market  in  a  country   imported   brands   (primarily   Winston  
(Tsai  et  al.,  2003).   is   determined   by   fraud   and   illegal   and  Magna)  represented  about  50%  
Nelson   (2002)   suggested   that   trade,  and  not  by  the  level  of  tobacco   of   the   total   cigarette   market   in   the  
the  size  of  the  potential  cross-­border   taxes/prices. Islamic  Republic  of  Iran  in  1994,  and  
market  plays  an  important  role  in  the   Data   from   southeastern   Asia   the  industry  estimated  that  the  illegal  
formulation  of  tax  policy  for  cigarettes.   also  point  to  no  relationship  between   or  tax-­free  products  had  68%  market  
US   states   with   a   large   potential   countries’   tax   rates,   cigarette   prices   share   in   the   country   (World   Health  
cross-­border   market   are   more   likely   and  the  level  of  illicit  cigarette  trade.   Organization,  2003).
to   set   tobacco   tax   rates   below   that   For   example,   in   the   early   2000s   Two   older   studies   suggest   that  
of  neighbouring  states  to  attract  non-­ cigarette   tax   in   Singapore   was   smuggling  in  low-­  and  middle-­income  
residents   to   purchase   cigarettes   in   among   the   highest   in   the   region   countries   increases   with   the   level  
their   state,   therefore   exporting   their   (about   51%   of   retail   price),   but   the   of   tariffs   and   taxes   (Bhagwati   and  
tax   burden.   This   seems   to   be   the   estimated   share   of   illegal   cigarettes   Hansen,  1974;;  Simkin,  1974).
case   of   Luxembourg,   a   country   with   on   the   market   was   only   2%   of   Differential   pricing   for   cigarettes  
a   high   density   of   foreign   population   domestic   sales.   On   the   other   hand,   intended   for   export   and   for   the  
living  near  its  borders  that  is  setting  its   illicit   cigarettes   accounted   for   about   domestic   market   can   motivate   re-­
cigarette  taxes  at  a  level  considerably   37%  of  domestic  sales  in  Cambodia,   import   of   products   designated   for  
lower   compared   to   its   neighbours.   yet   the   tax   represented   only   20%   export.   To   limit   this   behaviour,   in  
Using  data  from  1993,  the  estimates   of   retail   price,   one   of   the   lowest   tax   2000   the   US   federal   government  
indicate   that   85%   of   cigarette   sales   rates  in  the  region  (Ministry  of  Health   banned   imports   of   cigarettes   that  
in   Luxembourg   were   due   to   cross-­ Republic  of  Indonesia,  2004). are   intended   for   export   only   (FIA  
border  sales  (Joossens  &  Raw,  1995). International  Research  Ltd,  1999b).
There  is  less  evidence  to  support   Differential  treatment  of  domestic  
the  theory  that  wholesale/large-­scale   versus  foreign  products   Cost  of  supplying  illicit  tobacco  to  the  
smuggling   is   likely   to   be   correlated   market  determines  net  profit  
with  the  country’s  absolute  retail  price. Restrictions  on  the  supply  of  imported  
Merriman   et   al.   (2000)   found   tobacco  (by  imposing  quotas,  tariffs,   The  costs  of  supplying  illicit  products  
no   significant   correlation   between   and  other  non-­tariff  barriers  such  as  a   include   the   cost   of   manufacturing  
experts’   estimates   of   large-­scale   prohibition  on  sale,  which  is  similar  to   and/or   obtaining   tax-­free   cigarettes,  
smuggling  from  38  countries  and  the   an  infinite  tax)  can  lead  to  significant   the   cost   of   access   to   capital,  
average  legal  cigarette  price. price   differences   and   motivate   illicit   transportation,   distribution   and  
Joossens   et   al.   (2010)   employed   trade  (Taylor  et  al.,  2000). countering   the   government’s   effort  
a  larger  data  set  of  low-­,  middle-­  and   China   (Hu   &   Mao,   2002),   Viet   to   control   tobacco   illicit   trade   as  
high-­income   countries   (84   in   total).   Nam   (Joossens,   2003)   and   the   this   relates   to   the   possibility   that  

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IARC  Handbooks  of  Cancer  Prevention

the   smuggler\counterfeiters   will   The   transportation   costs   for   small-­ Insufficient  pack  markings  reduce  
be   apprehended   and   penalized   if   scale   smuggling   will   be   lower   if   the  probability  of  illicit  cigarettes  being  
caught.   In   addition,   these   costs   a   large   share   of   the   population   confiscated,   therefore   reducing   the  
depend   on   the   opportunity   cost   of   lives   near   the   border   with   another   costs  of  involvement  in  illicit  cigarette  
time   (as   this   influences   the   cost   jurisdiction  (Saba  et  al.,  1995).  This   trade.   Press   articles   have   reported  
of   labour)   and   social   norms   with   is   particularly   relevant   for   Europe   that   introducing   a   tax-­stamp   by   the  
respect  to  supplying  illicit  cigarettes   and   the   USA,   where   a   sizable   state   of   Michigan   in   1998   helped   to  
(people   who   believe   that   engaging   population  lives  in  a  close  proximity   reduce   the   sale   of   illicit   cigarettes  
in   cigarette   smuggling   is   immoral   to   another   state/country   (Vedder,   (Hyde,  1998).
will   need   to   be   compensated   more   1997;;  Cnossen,  2005). The   relatively   weak   government  
to   convince   them   to   get   involved   in   Joossens   (1998)   argued   that   the   controls   and   the   slowness   of  
this  activity). ease   of   evasion   of   legal   authorities   the   judicial   process   reduce   the  
The   costs   of   obtaining   legally   might   be   more   important   than   price   opportunity   costs   of   illegal   cigarette  
produced   cigarettes   are   related   to   when   it   comes   to   the   proclivity   of   manufacturing   in   Brazil   (Ramos,  
export/wholesale   prices   and   can   individuals   to   engage   in   tobacco   2009).   The   majority   of   cases  
vary   by   the   country   of   destination   smuggling. involving   illicit   cigarettes   do   not  
(Yurekli  &  Sayginsoy,  2010). The   perceived   probability   of   fall   under   criminal   jurisdiction,   and  
New   technology   such   as   interdiction   depends   on   the   actual   contraband  cases  are  mostly  treated  
sophisticated   and   less-­expensive   level  of  enforcement.  Anthony  (2004)   as   low-­priority   misdemeanours   that  
computer   scanners   reduce   the   suggests   that   drug   smugglers   ignore   end   with   the   release   of   the   prisoner  
production   costs   of   counterfeit   the   risk   of   being   caught   up   to   a   and   sometimes   even   include   the  
cigarettes  and  boost  their  supply  on   point,   and   that   there   is   a   threshold   restitution   of   goods   and/or   vehicles  
the  market,  such  that  in  2007  these   interception   rate   beyond   which   the   involved.   Inadequate   legislation  
cigarettes   made   up   15%   of   illicit   smuggling  rapidly  declines.  However,   compounded   by   a   lack   or   absence  
cigarette  trade  globally  (Euromonitor   some   smugglers   are   undeterred   of   specialized   prosecutors   and  
International,  2008). even   when   there   is   100%   probability   judges  does  not  enable  authorities  to  
Obtaining   tax-­free   tobacco   of   detection.   This   could   be   due   to   confront   associated   drug   trafficking  
can   require   capital   investment   the   practice   of   receiving   advanced   and   money-­laundering   activities.   In  
into   transportation   equipment.   payments   for   taking   the   risk,   which   addition,  handling  illicit  merchandise  
Smugglers’  transport  costs  are  likely   could  be  greater  than  the  lost  earnings   is   socially   accepted   in   Brazil.   As  
to   be   greater   than   those   engaged   due  to  jail  time. a   result,   the   production   of   illegal  
in   transporting   a   similar   weight   and   In   the   United   States,   small-­ cigarettes   in   Brazil   reached   some   9  
volume   of   legal   goods,   because   of   scale   smugglers   often   use   the   billion  cigarettes  in  2007,  about  6.4%  
the  need  to  avoid  detection  (Bhagwati   superhighways,   where   the   likelihood   of  the  total  cigarette  market  (Ramos,  
and   Hansen,   1974).   Therefore,   this   of   detection   is   minimal   (Walsh   &   2009).  The  size  of  the  illegal  market  
activity   represents   inefficient   use   Ottaway,   2000).   Compared   to   large-­ in   Brazil   is   unclear,   but   experts  
of   limited   resources   (Bhagwati   and   scale   smugglers,   they   face   lower   estimate  that  it  is  about  30%  of  total  
Hansen,   1974).   In   Malaysia,   for   costs   of   supplying   illegal   products   to   sales  (Ramos,  2009).
example,  smugglers  use  speedboats   the   market,   because   purchasing   tax-­ The   opportunity   costs   of   time  
to  increase  their  chances  of  escaping   paid  tobacco  in  a  low-­price  jurisdiction   can   determine   the   willingness   of  
when  chased  by  police  and/or  border   and   transporting   it   to   a   high-­priced   population   to   engage   in   illegal  
patrol  (Unknown,  1995). one   reduces   the   legal   risk   for   those   activities.   When   Australian   farmers’  
On   the   other   hand,   Jensen   involved   in   the   business   (Licari   &   opportunity   costs   of   time   dropped  
and   colleagues   (1991)   argued   that   Meier,  1997). due  to  declining  official  market  price  
transport   costs   in   the   USA   account   Goel   (2008)   found   that   the   of   raw   tobacco   and   the   diminishing  
for   only   0.5   percent   of   the   value   of   probability   of   apprehension,   legal   outlet   for   tobacco,   some   of  
tobacco   products,   and   that   their   measured  by  the  number  of  police  per   them   began   to   divert   their   tobacco  
effect  on  smuggling  is  negligible. 1000   inhabitants,   plays   a   relatively   to   illicit   markets   (Geis   et   al.,   2003;;  
Transportation   costs   may   wary   minor   role   in   cross-­border   cigarette   Geis,  2005).
by   geographical   regions   and   the   smuggling  in  the  USA. The   costs   of   distribution   of   illicit  
type   of   tax   avoidance/evasion.   cigarettes   are   important   motivators.  

304
 Tax  avoidance  and  tax  evasion

These  are  discussed  in  more  details   Germany.  Taal  et  al.  (2004)  reported   US$   2   068   668   revenue   loss   for   the  
below. that   Finns   made   approximately   3   state   of   Washington   (The   Financial  
million   visits   to   Estonia   in   1998,   Action   Task   Force,   2010).   Duty-­
The  supply  chain  for  illicit  tobacco   and   that   travellers   from   Finland   and   free   shops   facilitated   small-­scale  
(distribution)  reduces  cost  of  illicit   Sweden   consume   up   to   50%   of   smuggling  from  Estonia  to  Finland  and  
transactions total  legal  cigarette  sales  in  Estonia.   Sweden  (Taal  et  al.,  2004).
Higher   prices   in   Sweden   motivated   The  Akwesasne  Indian  reservation,  
Increase   in   international/interstate   airline  passengers  from  the  Russian   located   on   the   US–Canadian   border,  
trade.   Large-­scale   organized   Federation   to   bring   with   them   was  used  by  the  tobacco  industry  for  
cigarette   smuggling   generally   cigarettes   when   they   travelled   to   re-­importation   of   cigarettes   exported  
involves  cigarettes  that  have  passed   the  country  (Unknown,  1994).  There   from  Canada  to  avoid  Canadian  taxes  
through  a  wide  range  of  international   is   anecdotal   evidence   that   youth   (Cunningham,  1996;;  Segal,  1999).
traders   (European   Parliament,   in   Scotland   have   been   given   free   Native   American   reservations   in  
1997).   A   loose   export-­import   vacations  in  Europe  in  exchange  for   the  USA  are  also  the  primary  source  
recording   system   combined   with   smuggling  tobacco  back  to  Scotland   of   tax-­free   cigarettes   sold   over   the  
large   quantities   of   traded   cigarettes   (Unknown,  1994). Internet.  In  2005,  nearly  two  thirds  of  
reduces   the   probability   of   detection.   Presence  of  tax  free  zones.  Tax-­ the   US   web   sites   selling   cigarettes  
Pitt  (1981)  concluded  that  the  greater   free  zones  or  free-­trade  zones  play  a   were   affiliated   with   a   reservation.   In  
the   volume   of   legal   trade,   the   lower   significant   role   in   illicit   trade   in   both   2003,   95%   of   Seneca   tribe   cigarette  
the   costs   of   smuggling.   In   Hong   genuine   and   counterfeit   cigarettes   sales  were  conducted  over  the  web  or  
Kong  Special  Administrative  Region,   (World  Customs  Organization,  2007).   phone  (Chen,  2008).
trucks   with   smuggled   cigarettes   The   Financial   Action   Task   Force   Informal   market/retail   networks,  
have   been   disguised   as   containing   (FATF)   of   the   OECD   estimated   that   street-­selling,  existing  smuggling  routes  
duty-­free   components   for   assembly   there   were   about   3000   free-­trade   and   black   markets.   The   opportunity  
at   factories   within   mainland   China   zones   in   135   countries   around   the   cost   of   labour   could   determine   the  
(Unknown,  1999).  The  opening  of  the   world  in  2009  and  that  their  numbers   existence   of   the   informal   distribution  
market  in  Taiwan,  China  in  1987  led   are   growing   (The   Financial   Action   networks.   If   the   potential   rewards  
to  an  increase  in  cigarette  smuggling   Task  Force,  2010). from  legal  occupations  are  very  small  
measured  by  an  increase  in  cigarette   The   International   Consortium   of   compared  to  engagements  in  shadow/
seizures  and  reports  by  the  industry   Investigative   Journalists   discovered   underground  economy,  people  should  
(Wen  et  al.,  2006). that   free-­trade   zones   on   the   island   be  more  willing  to  provide  an  informal  
Liberalization   and   frequency   of  Aruba  and  in  Colombia  are  being   distribution   network   for   illicit  products  
of   international   travel.   The   ease   of   used   for   cigarette   smuggling   into   including   cigarettes   (Merriman   et  
small-­scale  smuggling  is  proportional   other  areas  of  Colombia,  such  as  the   al.,   2000).   However,   Merriman   et   al.  
to   the   total   number   of   cross-­border   city  of  Bogota  (Beelman,  2000). (2000)  found  no  association  between  
travellers   taking   into   account   Free-­trade   zones   have   been   experts’  estimates  of  smuggling  in  38  
the   stringency   of   border   controls   misused   for   money   laundering   and   countries  and  these  countries’  income  
(Merriman  et  al.,  2000). terrorist   financing.   A   US   company   measured  by  per-­capita  GDP.
Travellers   can   also   take   used  a  free-­trade  zone  to  repackage   In  some  countries,  illicit  cigarettes  
advantage  of  duty-­free  sales.  In  1996,   tobacco   and   ship   it   to   another   free-­ are  distributed  via  separate  channels,  
approximately   45   billion   cigarettes   trade   zone,   ultimately   smuggling   it   but   in   some   countries   illicit   tobacco  
were   sold   through   duty-­free   outlets.   into  US  market.  The  profit  was  used   products   are   distributed   alongside  
This  represents  0.8%  of  all  cigarettes   to   finance   the   Abu   Sayyaf   Group,   a   the   legal   products   via   regular   retail  
sold   in   the   world   (Market   Tracking   terrorist   organization   based   in   the   channels.  The  existence  of  smuggling  
International  Ltd,  1997). Philippines   (The   Financial   Action   routes   and   black   markets   for   other  
Merriman   et   al.   (2000)   partially   Task   Force,   2010).   Large-­scale   products   as   well   as   the   presence   of  
attributed   a   higher   share   of   the   cigarette  smuggling  from  China  to  the   unlicensed   distributors   reduce   the  
German   cigarette   market   being   United   States   (state   of   Washington)   transportation   and   the   distribution  
supplied   via   cross-­border   shopping   has   been   facilitated   by   a   free-­trade   costs  of  illicit  tobacco  supply  (Thursby  
and   small-­scale   smuggling   to   high   zone  in  Hawaii.  The  cigarettes  seized   &   Thursby,   2000;;   Campaign   for  
frequency   of   travel   from   and   to   in  this  free-­trade  zone  represented  a   Tobacco-­Free  Kids,  2008).

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IARC  Handbooks  of  Cancer  Prevention

Joossens   and   Raw   (1998)   and   time  and  the  lower  the  probability  of   These   resources   are   related,   for  
Joossens  et  al.  (2000)  pointed  to  the   buying   illicit   products.   In   California,   example,  to  travel  costs  or  to  costs  of  
association   between   the   tradition   of   most   smokers   purchased   their   getting  internet  access  (Hyland  et  al.,  
street-­selling   and   higher   share   of   cigarettes   from   the   most   convenient   2005;;  DeCicca  et  al.,  2010).
illicit   cigarettes   in   markets   in   Spain   (but   more   expensive)   sources   Social   norms   with   respect   to   the  
and  Italy. despite   relatively   large   price   use  of  illicit  products  and  government  
Social   networks   often   serve   as   differences   between   the   legal   and   interventions   can   be   an   important  
important   distribution   channels   for   illegal  cigarettes  (Emery  et  al.,  2002).   determinant   of   the   demand   for   non-­
illicit  products  (Merriman  et  al.,  2000).   Very  few  (5.1%)  of  California  smokers   taxed   products.   In   Taiwan,   China,  
In   the   United   Kingdom,   between   purchased   cigarettes   from   non-­   or   smokers   who   opposed   cigarette  
2.5%   and   3.3%   of   all   cigarettes   sold   lower-­taxed   sources,   such   as   out-­of-­ taxation  policy  were  1.69  times  more  
in   2002–2003   were   supplied   via   an   state  outlets,  military  commissaries  or   likely   to   buy   smuggled   cigarettes  
informal   network   of   independent   the  internet  (Emery  et  al.,  2002). (Tsai   et   al.,   2003).   United   Kingdom  
sellers  (Hyland  et  al.,  2006).  Coleman   The   opportunity   costs   of   time   smokers   living   in   socioeconomically  
(1998)  found  that  the  majority  of  illegal   seemed   to   be   a   major   deterrent   of   deprived  areas  were  quite  supportive  
tobacco   products   consumed   in   the   cross-­border   shopping   between   of   smuggling,   as   they   perceive   it  
United  Kingdom  were  sold  in  pubs. California   and   Mexico,   as   the   wait   helpful   in   dealing   with   the   rising  
Technology   allowing   virtual   to   enter   Mexico   was   well   over   30   financial  costs  of  smoking  (Wiltshire  
transactions   (online   purchases   minutes   and   travellers   were   also   et   al.,   2001).   DeCicca   et   al.   (2010)  
and   mail-­orders).   In   the   USA,   the   subject  to  a  customs  check  on  return   reports   that   anti-­smoking   sentiment  
number  of  web  sites  selling  cigarettes   to  the  USA  (Emery  et  al.,  2002). reduces   the   likelihood   of   cross-­
increased   from   88   in   2000   to   772   in   Using   the   2003   CPS   Tobacco   border  shopping.
2006   (Chen,   2008).   Smokers   in   the   Use  Supplement  (TUS)  on  individual  
US   who   purchase   cigarettes   online   purchase   quantities   and   locations,   Ineffective  tobacco  tax  
are   primarily   motivated   by   lower   Chiou  and  Muehlegger  (2008)  found   administration,  insufficient  tax  
prices,   because   Internet   vendors   that  the  impact  of  a  state’s  tax  change   enforcement  resources,  and  lack  of  
generally   sell   cigarettes   without   on  cigarette  sales  depends  upon  the   control  over  the  movement  of  tax-­
paying   tobacco   excise   taxes   for   the   tradeoffs  between  the  cigarette  price   free  cigarettes  
destination   state   (Kim   et   al.,   2006).   difference   and   distance   to   the   state  
Almost   all   online   cigarette   sales   are   with   lower   cigarette   prices.   They   The   lack   of   clarity   regarding   the  
illegal   due   to   failure   to   report   the   calculated  that  a  consumer  is  willing   regulations   covering   the   control   of  
transaction   and/or   verify   the   age   to   travel   2.7   miles   to   save   $1   on   a   free-­trade  zones  is  a  major  reason  for  
of   the   buyer   (Chen,   2009).   With   the   pack   of   cigarettes.   The   willingness   their  misuse  for  illicit  trade  according  
recent  crackdown  on  this  form  of  sale   to   travel   depends   on   the   number   to   the   World   Customs   Organization.  
in   the   USA,   the   overseas   internet   of   cigarette   consumed:   smokers   As  the  government  and  the  customs  
vendors  expanded  their  role  in  the  US   who   report   smoking   every   day   (or   authorities   dispute   who   has   the  
market.   In   2003,   10%   of   all   internet   individuals  who  smoke  more  than  14   jurisdiction   over   free-­trade   zones,  
vendors   were   based   outside   the   cigarettes  a  day)  have  a  significantly   enforcement   loopholes   allow   these  
USA,   but   in   2006   over   45%   of   them   lower  marginal  cost  of  travelling  than   zones   to   play   a   facilitating   role   in  
were   based   overseas   (Chen,   2009).   smokers   who   only   report   smoking   illicit  cigarette  trade  (World  Customs  
These  overseas  vendors  are  beyond   some  days  (or  those  who  smoke  less   Organization,  2007).
the  reach  of  the  US  law  enforcement. than   14   cigarettes   a   day),   and   are   Examining   trade   transaction  
therefore  more  likely  to  travel  across   between   the   USA   and   North   Africa  
Transaction  cost  associated   the   border   to   purchase   cigarettes.   and   between   Hong   Kong   Special  
with  illicit  tobacco  products   Everyday   smokers   purchase   Administrative   Region   and   the   rest  
approximately   3   times   as   many   of   SE   Asia   showed   that   inadequate  
The  convenience  of  a  transaction  that   cigarettes   when   crossing   a   border   controls  over  the  in-­transit  cigarettes  
reflects  the  opportunity  cost  of  time  is   than  do  some-­days  smokers. results   in   a   substantial   leakage,  
related  to  costs  of  illicit  tobacco  use.   A  minimum  set  of  resources  seems   with  many  of  the  cigarettes  failing  to  
The  less  convenient  the  transaction,   to  be  necessary  for  a  person  to  have   arrive   at   their   intended   destination  
the   higher   the   opportunity   cost   of   access   to   low/untaxed   cigarettes.   (Joossens  et  al.,  2000).

306
 Tax  avoidance  and  tax  evasion

In   the   USA,   a   change   in   the   associated   with   a   two-­percentage-­ and   fostered   the   development   of   a  
balance   of   enforcement   activities   point  decrease  in  experts’  estimate  of   regional   net   of   smuggling   channels  
between   the   US   state   and   US   cigarette  smuggling.  Since  corruption   affecting   neighbouring   countries  
federal   authorities   after   passing   the   is   more   pervasive   in   low-­income   like   Bulgaria,   Romania   and   Albania.  
Contraband   Cigarette   Act   (CCA)   in   and   middle-­income   countries,   these   These   illegal   activities   became   an  
1978   generated   a   loophole   in   the   countries  are  at  greater  risk  of  large-­ important   source   of   income   during  
tax   audit   (Thursby   and   Thursby,   scale  smuggling  activities. the  war  for  people  of  all  social  groups  
2000).   This   led   to   an   increase   in   Cambodia   is   an   example   of   (Hajdinjak,  2002).
illicit   cigarette   trade   as   well   as   to   a   country   where   a   high   level   of   The   US   Government  
a   change   in   the   preferred   method   corruption   facilitates   cigarette   Accountability   Office   reported   that  
of   tax   evasion.   Commercial/large   smuggling.   It   is   estimated   that   79%   terrorist   organizations   including  
scale   smuggling   began   to   focus   on   of  cigarettes  imported  into  Cambodia   Hezbollah   made   money   through  
underreporting   of   the   amount   of   are  re-­exported  or  smuggled  across   the   tobacco   black   market   (United  
cigarettes  released  to  the  distribution   Cambodia’s   borders   (Ministry   of   States   General   Accounting   Office,  
(“diversion”)   that   could   have   been   Health  Republic  of  Indonesia,  2004). 2003).   The   profit   from   large-­scale  
discovered   by   the   tax   audit.   The   The   European   Commission   cigarette   smuggling   via   free-­trade  
study   concluded   that   effective   (1998)   identified   over   50   criminal   zones   was   used   to   finance   the  
enforcement  requires  participation  of   networks   potentially   engaged   in   terrorist   organization   Abu   Sayyaf  
both   law   enforcement   agencies   and   large-­scale   tobacco   smuggling.   Group  based  in  the  Philippines  (The  
tax  administrators. In   2005,   the   investigation   by   the   Financial  Action  Task  Force,  2010).
A   law   that   would   allow   US   states   European   Council   concluded   that   Corruption   and   organized   crime  
to  recover  taxes  from  cigarettes  sold   the   threat   imposed   by   cigarette   does   not   seem   to   be   a   predictor   of  
over   the   Internet   (the   Jenkins   Act)   is   smuggling  within  the  European  Union   small-­scale   smuggling   and   cross-­
enforced  by  the  US  federal  authorities,   is  primarily  related  to  the  involvement   border   shopping.   Goel   (2008)   found  
who   are   much   less   motivated   than   of   organized   crime   (Council   of   the   that   the   average   number   of   public  
individual   states   to   enforce   the   law   European  Union,  2005). corruption   convictions   is   not   a  
(Goolsbee   et   al.,   2007).   However,   Cigarette  smuggling  is  claimed  to   statistically   significant   predictor   of  
in   October   2002   Washington   State   be   the   third   largest   illegal   business   cross-­border   cigarette   smuggling   in  
successfully   applied   the   Jenkins   in   Germany,   behind   drug   trafficking   the  USA.
Act   to   internet   sales,   leading   to   and   illegal   gambling,   with   extensive  
similar   efforts   in   many   other   states   involvement  of  organized  crime  (Von   Tobacco  companies’  profit  motivation  
(Chaloupka  et  al.,  in  press). Lampe,   1999   as   cited   in   Merriman,   translated  to  their  marketing  strategy  
2001).   In   southern   Italy,   Calabrian   and  political  agendas  reduce  the  cost  
Corruption,  war  and  organized  crime   gangsters  have  been  involved  in  the   of  supplying  illicit  cigarettes
facilitate  law  circumvention,  reducing   tobacco  smuggling  (Unknown,  1997).
the  cost  of  supplying  illicit  products The  presence  of  organized  crime   The   tobacco   industry   itself   often  
networks   can   increase   pressure   promotes   the   smuggling   of   their  
Criminal   networks   specializing   in   on   legitimate   distribution   networks   products,   because   smuggling   does  
cigarette   smuggling   operate   more   by   reducing   their   profitability   or   by   not   impact   their   profit   margins,  
easily   in   countries   where   corruption   forcing   them   to   join   in   the   black   reduces   the   impact   of   higher   tax/
is  high,  the  control  of  the  authorities   market  (Joossens  et  al.,  2000). price   on   cigarette   consumption  
is   lax   and   commodities   other   than   Smuggling   of   various   goods,   and   can   be   used   to   advocate   for  
tobacco   are   also   being   smuggled   and   particularly   cigarettes,   was   an   excise   tax   reduction   as   a   way   to  
(Joossens,   1999).   Using   data   from   a   prosperous   “business”   in   the   reduce   smuggling   and   associated  
38  countries,  Merriman  et  al.  (2000)   Yugoslav  republics  during  the  Balkan   criminal   activities   (Leverett   et   al.,  
found   that   the   level   of   corruption   War  in  1991–1995,  helping  to  finance   2002).  In  fact,  cigarettes  confiscated  
(measured   by   the   transparency   weaponry   and   otherwise   supporting   and   destroyed   by   law   enforcement  
index)   is   positively   related   to   the   war   operations   (Hajdinjak,   2002).   authorities   increase   demand   for  
size   of   the   illicit   cigarette   market.   Smuggling   was   done   with   the   close   replacement  cigarettes  and  therefore  
A   one-­point   improvement   in   a   cooperation   of   politicians,   their   the   profitability   of   the   industry  
country’s   transparency   index   was   security  forces  and  organized  crime,   (Leverett  et  al.,  2002).

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IARC  Handbooks  of  Cancer  Prevention

Delipalla   (2009)   developed   a   Canada’s   significant   increases   of   tobacco   growers   and   cigarette  
decision-­making   model   analysing   in   cigarette   tax   in   1980s   and   early   manufacturers,   has   long   argued  
the  factors  motivating  the  industry  to   1990s   motivated   the   tobacco   that   high   taxes   relative   to   those  
get   involved   in   illicit   tobacco   trade.   industry   to   orchestrate   smuggling   of   neighbouring   countries   are  
The  model  assumes  that  the  industry   of   cigarettes   to   Canada   to   exercise   responsible   for   the   growth   in   illicitly  
operates   as   an   oligopoly,   and   that   pressure   on   Canadian   government   traded  cigarettes.  They  claim  that  illicit  
the   market   does   not   differentiate   to   reduce   these   taxes   (Canadian   cigarettes   represent   20%   of   the   total  
between   legal   and   illegal   products   Cancer   Society,   Non-­smokers’   market   (Tobacco   Institute   of   South  
(their  prices  are  similar).  To  maximize   Rights   Association,   Physicians   for   Africa,   2008)   without   providing   solid  
its   profit,   each   firm   decides   the   a   Smoke-­free   Canada,   &   Quebec   evidence  to  support  this  claim.  A  peer-­
total   quantity   sold   on   the   market   Coalition   for   Tobacco   Control,   reviewed   academic   study   contradicts  
and   the   fraction   of   that   total   it   will   1999).   The   industry   developed   the   industry   estimates,   estimating  
attempt  to  sell  illegally  (without  tax)   a   tax-­dodging   scheme   allowing   the   maximum   penetration   of   illicit  
taking  into  account  the  probability  of   the   company   to   smuggle   billions   FLJDUHWWHVRIíRIWKHWRWDO
successful   tax   evasion,   the   level   of   of   cigarettes   into   Canada   using   market  in  2007  (Blecher,  2010).
enforcement,  the  cost  of  smuggling,   a   Native   American   reservation   in   Illicit  cigarette  trade  can  provide  
and   fines   paid   if   caught.   The   paper   the   USA   (Segal,   1999;;   Sugarman,   the   industry   a   market   entry   for  
then   examines   the   relative   effects   2002).  In  response,  the  government   prohibited   brands   (brands   that  
of   specific   and   ad   valorem   taxes   cut  cigarette  taxes  in  1994.  Imperial   are   not   legally   sold   in   the   market).  
on  the  firm’s  evasion  decision  given   Tobacco   Canada   Limited   and   Producers   then   use   customer  
that  it  is  optimal  for  a  firm  to  engage   Rothmans   Benson   &   Hedges,   the   loyalty  as  a  political  wedge  to  lobby  
in   tax   evasion.   It   concludes   that   two   tobacco   companies   involved   for   legal   access   to   the   market.   The  
the   optimal   fraction   of   tax-­not-­paid   in   this   smuggling   scheme,   pleaded   international   trade   journal   World  
products  is  increasing  in  sales  under   guilty   in   2008   and   admitted   “aiding   Tobacco   reported   in   1996   that  
purely   specific   taxation   and   when   persons   to   sell   or   be   in   possession   “smuggling   has   helped   to   promote  
the  ad  valorem  tax  is  imposed  as  a   of   tobacco   products   manufactured   some   of   the   world’s   leading   brands  
percentage   of   the   fixed   wholesale   in   Canada   that   were   not   packaged   in   markets   which   had   remained  
price.   When   the   ad   valorem   tax   and  were  not  stamped  in  conformity   closed   to   foreign   imports”   (Market  
is   imposed   as   a   percentage   of   the   with   the   Excise   Act”   between   1989   Tracking  International  Ltd,  1997).
retail   price,   the   optimal   fraction   of   and  1994.  The  companies  agreed  to   Since   the   1980s,   the   British  
tax-­not-­paid  products  is  decreasing.   pay  CA$1.15  billion,  the  largest  fine   American   Tobacco   (BAT)   relied   on  
The   analysis   suggests   that   (for   ever   levied   in   Canada   (Joossens   illegal  channels  to  supply  markets  in  
given   tax   rates   and   enforcement)   and  Raw,  2008).  R.  J.  Reynolds,  the   Africa  (LeGresley  et  al.,  2008).  Illicit  
if   demand   falls   (for   example   due   to   third   tobacco   company   involved   in   cigarette  trade  has  been  an  important  
effective   tobacco   control   policies),   the   smuggling   scheme,   has   agreed   component   of   BAT’s   market  
smuggling   will   also   be   reduced   to  pay  CA$325  million  ($325  million)   entry   strategy   to   gain   leverage   in  
under  a  specific  tax  regime,  but  it  will   to   the   Canadian   governments   in   negotiating  with  governments  for  tax  
increase   under   an   ad   valorem   one.   April  2010  (Schneider,  2010). concessions,   compete   with   other  
The  impact  of  a  mixed  tax  structure   There   is   evidence   that   British   transnational   tobacco   companies,  
on  optimal  illicit  trade  is  ambiguous.   American   Tobacco   (BAT)   in   circumvent  local  import  restrictions,  
The   analysis   concludes   that   higher   Bangladesh   had   some   degree   and  to  gain  a  market  presence.  BAT  
tax   rates   do   encourage   smuggling   of   control   over   the   proportion   exploited  weak  government  capacity  
under   purely   or   predominantly   ad   of   contraband   products   on   the   to   combat   illicit   trade   and   gained  
valorem   taxation,   but   their   effect   market.   BAT   has   altered   the   flow   substantial   market   share   in   major  
is   ambiguous   under   purely   or   of   illicit   cigarettes   while   making   the   countries  (LeGresley  et  al.,  2008).
predominantly  specific  taxation. argument   that   tax   increases   lead   to   Smuggling  has  been  an  important  
The   industry   has   used   the   higher  consumption  of  illegal  tobacco   component   of   BAT’s   market   entry  
occasion   of   a   tax   increase   to   products  (Collin  et  al.,  2004). strategy  in  Lebanon,  a  country  with  a  
promote   illicit   cigarette   trade   to   put   In   South   Africa,   the   Tobacco   state   tobacco   monopoly   and   chronic  
pressure   on   the   governments   to   Institute   of   South   Africa   (TISA),   a   political  instability.  After  the  end  of  the  
reverse  their  decision. body   which   represents   the   majority   civil   war   in   the   early   1990s,   BAT   and  

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 Tax  avoidance  and  tax  evasion

other  transnational  tobacco  companies   Kingdom   (HM   Customs   &   Excise,   of   global   cigarette   consumption   is  
sought  a  legal  presence  in  the  country,   2001a,   2001b;;   House   of   Commons   illicit,   including   17%   in   low-­income  
but   continued   to   achieve   substantial   &   Treasure   Committee,   2005).   countries,   12%   in   middle-­income  
sales   through   illicit   cigarette   trade   The   volume   of   seized   counterfeit   countries,   and   10%   in   high-­income  
(Nakkash  &  Lee,  2008). cigarettes   increased   threefold   countries.
Smuggling   has   been   used   as   between   2000   and   2004.   In   2003–
a   market   entry   in   Argentina,   Italy,   2004,  5 4%  of  seized  c igarettes  were   Europe
Islamic   Republic   of   Iran,   Bulgaria,   counterfeit   (House   of   Commons,  
the  former  Soviet  Union  and  China,   Treasure  Committee,  2005). European   Union.   Using   cigarette  
for  example  (Joossens  &  Raw,  1998;;   sales   data   1989–95   from   18  
World   Health   Organization,   2003;;   Extent  of  tax  evasion  and  tax   European  countries,  Merriman  et  al.  
Gilmore  and  McKee,  2004). avoidance  globally,  regionally   (2000)   estimated   that,   in   a   typical  
After   the   market   opening   in   and  in  key  countries European   country,   the   share   of  
Taiwan,   China   in   1987,   Japan   cigarettes   acquired   by   small-­scale  
Tobacco  International  (JTI)  set  up  a   Joossens,   Merriman,   Ross   and   smuggling   and/or   cross-­border  
Swiss   plant   as   a   legal   cover   for   its   Raw   (2010)   collected   data   on   shopping  accounted  for  about  3%  of  
smuggling  operation  to  the  country.   illicit   cigarette   trade   from   different   domestic  consumption.
This   allowed   JTI   to   overcome   the   sources.   Their   estimates   of   illicit   Based   on   in-­depth   analysis   of  
existing   legal   quota   of   exports   to   market  share  (Table  8.1)  are  based   data   collected   by   the   professional  
Taiwan,  China  (Wen  et  al.,  2006). on   academic   articles,   official   services   company   Klynveld   Peat  
The   involvement   of   the   industry   government  publications,  estimates   Marwick   Goerdeler   (KPMG,   2005),  
in   smuggling   operations   in   Europe   from   market   research   companies   a   study   commissioned   by   the  
became  clear  when  the  level  of  illicit   (whose   clients   include   the   tobacco   European   Commission   estimated  
trade  on  the  continent  substantially   industry   and   governmental   that  in  2004  total  market  penetration  
declined   following   the   2004   and   organizations),   tobacco   trade   of   illicit   cigarette   trade   represented  
later   agreements   between   major   journal  articles,  newspaper  articles   approximately   8–9%   of   European  
manufacturers  (e.g.  PMI,  JTI)  and  the   and   sometimes   estimates   from   Union   (which   had   25   Member  
EU  authorities  without  admission  of   personal   contacts   in   customs   States   at   the   time,   designated  
liability.   This   agreement   financially   organizations.   The   estimates   vary   EU25)   cigarette   sales.   The   above-­
motivated   the   industry   to   control   greatly  in  rigour  and  in  the  measure   cited  report  noted  also  that  the  illicit  
the   illegal   supply   of   their   products   of   illicit   trade   used.   Some   for   market  share  in  the  new  EU  Member  
to  the  EU  market.  Since  counterfeit   example  express  the  size  of  the  illicit   States  (Estonia,  Hungary,  Lithuania,  
cigarettes   are   excluded   from   the   market  as  a  percentage  but  without   Poland  and  Slovakia)  were  far  above  
agreement,   companies   have   an   saying   what   it   is   a   percentage   of,   the   EU25   average   (KPMG,   2005).  
incentive   to   have   seized   products   and   some   do   not   even   state   what   The   KPMG   report   has   limitations,  
declared   as   counterfeit   (World   measure   was   used.   Nor   is   there   a   as   it   is   based   on   cigarette   seizures  
Health  Organization,  2007). clearly   defined   methodology   for   in   the   EU   and   on   studies   provided  
The   improved   collaboration   assessing  if  an  estimate  is  accurate.   by   the   tobacco   industry   and  
between  the  industry  and  the  United   Joossens   and   colleagues   (2010)   governments,   however   as   its  
Kingdom   government   reduced   have   included   in   their   estimates   estimate   falls   between   the   higher  
the   availability   of   genuine   brand   what   seem   reasonable   in   terms   of   estimates   from   the   United   Kingdom  
cigarettes   on   the   black   market.   the   country’s   population,   smoking   and   eastern   and   central   European  
This   can   be   regarded   as   evidence   prevalence,  legal  infrastructure  and   countries   and   the   lower   estimates  
that   cigarette   manufacturers   are   other   relevant   parameters.   Thus   a   from   southern   European   countries  
indeed   in   a   position   to   control   combination   of   methods,   including   like  Spain  and  Italy,  the  overall  f igure  
the   supply   of   illicit   cigarettes   to   informed   expert   judgement,   is   of  8–9%  is  a  reasonable  estimate.
the   market.   However,   counterfeit   often   necessary   to   cross-­validate   In   2008,   the   European  
products   began   to   play   a   larger   estimates.   Bearing   in   mind   these   Commission   estimated   that   around  
role  in  the  supply  of  illicit  cigarettes   methodological  c hallenges,  the  data   13%   of   total   consumption   in   the   27  
as   evidenced   by   the   type   of   illegal   on  illicit  and  legal  market  estimates   EU   Member   States   had   not   been  
cigarettes   seized   in   the   United   from   2007   show   that   almost   12%   taxed  in  the  country  of  consumption.  

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IARC  Handbooks  of  Cancer  Prevention

Table  8.1.  Estimates  of  the  illicit  cigarette  market  around  the  world

Country %  illicit  market Measure  used Year Illicit  %  total  market

High-­income  countries

Hong  Kong  Special   42 Percentage  of  legal  sales 2005 30

Administrative  Region

UAE 30 Percentage  of  legal  cigarette  sales 2005 23

Singapore 18 Percentage  of  legal  cigarette  sales 2005 15

Percentage  of  total  cigarette  market:  estimate  

Canada 15–20 2007 15–20
based  on  multiple  sources  and  surveys
Percentage  of  consumers  that  purchased  
USA 13–25 1992–2002 13–25
lower-­priced  cigarettes
Percentage  of  total  cigarette  consumption  (not  
United  Kingdom 13 2006–2007 13
including  hand  rolled  tobacco)

Taiwan,  China 11 Percentage  of  legal  cigarette  sales 2005 10

Australia 6 Percentage  of  legal  cigarette  sales 2007 6

Israel 5 Percentage  of  legal  cigarette  sales 2005 5

Saudi  Arabia 4 Percentage  of  legal  cigarette  sales 2006 4

Italy 2 Percentage  of  total  cigarette  market 2006 2

Japan 2 Percentage  of  legal  cigarette  sales 2006 2

New  Zealand 1 Percentage  of  legal  cigarette  sales 2003 1

Spain 1 Percentage  of  total  cigarette  market 2006 1

Upper-­middle-­,  lower-­middle-­  and  low-­income  countries

Georgia 49 Percentage  of  total  cigarette  market 2005 49

Bolivia 46 Percentage  of  legal  cigarette  sales 2005 32

Albania 40–50 Not  stated Not  stated 40–50

Bosnia  &  Herzegovina 35–45 Not  stated Not  stated 35–45

Smuggling  as  a  percentage  of  total  cigarette  

Uzbekistan 40 2006 40
consumption

Ethiopia 38 Percentage  of  total  cigarette  market 2006 38

Brazil 35 Percentage  of  legal  cigarette  sales 2006 26

Lao  People’s  Democratic  

35 Not  stated 2005 35
Republic

Iraq 35 Percentage  of  total  cigarette  market 2006 35

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 Tax  avoidance  and  tax  evasion

Country %  illicit  market Measure  used Year Illicit  %  total  market

Former  Yugoslav  Republic  

30–35 Not  stated Not  stated 30–35
of  Macedonia

Cameroon 26 Percentage  of  legal  cigarette  sales 2005 21

Syrian  Arab  Republic 26 Percentage  of  total  cigarette  market 2007 26

Estonia 19–32 Percentage  of  total  cigarette  market 2003 19–32

Sudan 25 Percentage  of  legal  cigarette  sales Not  stated 20

Zambia 25 Not  stated 2003 25

Croatia 25 Percentage  of  legal  cigarette  sales 2005 20

Malaysia 24 Percentage  of  total  cigarette  market 2008 24

Venezuela 23 Percentage  of  legal  cigarette  sales 2005 19

Russian  Federation 23 Percentage  of  legal  cigarette  sales 2004 19

Peru 23 Percentage  of  total  cigarette  consumption 2006 23

Lebanon 23 Not  stated 2000–2006 23

Morocco 23 Percentage  of  total  cigarette  market 2006 23

Algeria 20 Percentage  of  total  cigarette  market 2007 20

Philippines 19 Percentage  of  legal  cigarette  sales 2006 16

Nigeria 18 Percentage  of  total  cigarette  consumption 2006 18

Ghana 18 Percentage  of  legal  cigarette  sales 2005 15

Pakistan 17 Percentage  of  total  cigarette  market 2005 17

Armenia 16 Percentage  of  total  cigarette  consumption 2004 16

Côte  d’Ivoire 15 Percentage  of  legal  cigarette  sales 2005 13

India 14 Percentage  of  total  cigarette  consumption 2004 14

Columbia 14 Percentage  of  total  cigarette  consumption 2004 14

Islamic  Republic  of  Iran 14 Percentage  of  total  cigarette  market 2007 14

Ecuador 12 Percentage  of  total  cigarette  consumption 2006 12

Uruguay 12 Percentage  of  total  cigarette  market 2006 12

Guatemala 12 Percentage  of  total  cigarette  market 2006 12

Jordan 10–12 Percentage  of  total  cigarette  market 2007 10–12

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IARC  Handbooks  of  Cancer  Prevention

Table  8.1.  Estimates  of  the  illicit  cigarette  market  around  the  world

Country %  illicit  market Measure  used Year Illicit  %  total  market

Thailand 11 Not  stated Not  stated 11

Yemen 11 Percentage  of  legal  cigarette  sales Not  stated 10

Turkey 11 Percentage  of  total  cigarette  market 2006–2007 11

Nicaragua 10 Not  stated 2001–2002 10

Panama 10 Percentage  of  legal  cigarette  sales 2000 9

Tunisia 10 Percentage  of  total  cigarette  consumption 2007 10

El  Salvador 10 Not  stated Not  stated 10

Argentina 10 Percentage  of  total  cigarette  market 2006 10

Smuggling  as  a  percentage  of  total  cigarette  

Viet  Nam 10 2004 10
market
Percentage  of  total  cigarette  market:  
China 8–10 Multiple 8–10
extrapolated  from  multiple  sources
Smuggling  as  a  percentage  of  total  cigarette  
Kazakhstan 9 Early  2000s 9
consumption

South  Africa 9 Percentage  of  total  cigarette  consumption 2007 9

Percentage  of  total  cigarette  market:  multiple  

Ukraine 9 Multiple 9
sources

Costa  Rica 9 Percentage  of  legal  cigarette  sales 2006 8

Indonesia 5–6 Percentage  of  total  cigarette  market 2005 5–6

Mexico 3 Percentage  of  total  cigarette  sales 2006 3

Chile 3 Percentage  of  legal  cigarette  sales 2006 3

Adapted  from  Joossens  L,  Merriman  D,  Ross  H,  Raw  M.  The  impact  of  eliminating  the  global  illicit  cigarette  trade  on  Health  and  Revenue.  Addiction.  2010;;  105(9):1640–1649  with  
permission  from  John  Wiley  and  Sons.  Notes:  The%  illicit  market  has  been  rounded  to  nearest  integer;;  UAE  =  United  Arab  Emirates;;  Russian  Fed.  =  Russian  Federation;;  the  EU-­25  
average  illicit  market  share  is  8.5%.  In  this  table  we  list  only  countries  for  which  we  have  country-­specific  data.  The  EU-­25  countries,  which  are  included  in  the  model  calculations  using  
8.5%  illicit  market  share,  are:  Austria,  Belgium,  Cyprus,  Czech  Republic,  Denmark,  Estonia,  Finland,  France,  Germany,  Greece,  Hungary,  Ireland,  Italy,  Latvia,  Lithuania,  Luxembourg,  
Malta,  Netherlands,  Poland,  Portugal,  Slovenia,  Slovakia,  Spain,  Sweden,  United  Kingdom.  EU-­27  includes  in  addition  to  the  EU-­25  Bulgaria  and  Romania.  Estimates  contained  in  
Table  8.1  uses  standardized  terminology  determined  by  the  authors  to  facilitate  cross-­study  comparison;;  verbatim  study  terminology  are  reported  in  the  online  version.  The  third  
column,  ‘Measure  used’,  reports  the  measure  used  in  each  source  document,  as  described  in  the  original  publication,  including  where  the  measure  was  not  specified.  There  is  no  
standard  measure  thus  the  table  reflects  the  varied  data  sources.

About   8–9   percentage   points   had   commissioned  by  the  Commission  in   products   being   sold   in   the   past   six  
been   attributed   to   tax   evasion   and   2005  (KPMG,  2005). months   which   they   think   might   have  
around   4   percentage   points   to   legal   According   to   a   survey   of   26   500   been  smuggled  into  the  country.  The  
cross-­border   shopping   (European   Europeans  (EU27  plus  Norway;;  EU27   proportion   of   respondents   who   had  
Commission,   2009).   These   is  EU25  plus  Bulgaria  and  Romania;;   seen   potentially   smuggled   tobacco  
estimates  are  in  line  with  the  findings   see  Table  8.1  footnotes)  conducted  in   products   being   sold   in   the   past   six  
of   the   KPMG   study   cited   above   on   December  2008,  just  over  one  tenth  of   months  was  the  highest  in  Lithuania  
the   EU25   tobacco   market   in   2004   EU  citizens  (12%)  had  seen  tobacco   (36%),   followed   by   Greece   (25%),  

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 Tax  avoidance  and  tax  evasion

then  Poland,  Hungary  and  Latvia  (22– suspected   that   some   of   the   USA.   Cigarette   taxes   in   the  
24%).   In   Belgium,   the   Netherlands,   cigarettes   that   they   had   purchased   US   vary   at   the   different   levels   of  
Italy,   Portugal,   Luxembourg   and   in   the   last   year   were   illicit.   Half   of   government.   Saba,   Beard,   Ekelund  
Denmark,  on  the  other  hand,  only  5%   these   respondents   cited   a   missing   and   Ressler   (1995)   used   data   from  
of   respondents   had   seen   potentially   tax  stamp,  and/or  a  missing  Albanian   the   48   continental   US   states   and  
smuggled   tobacco   products   in   the   health   warning   and/or   not   having   the   District   of   Columbia   from   1960  
past  six  months.  In  Norway,  where  in   nicotine/tar   information   in   Albanian   to   1986   to   estimate   that   small-­
January   2008   a   packet   of   Marlboro   as  features  of  an  illicit  cigarette  pack.   scale   smuggling   accounts   for   a  
cost  $12  (the  country  with  the  highest   Another   29%   cited   tax   stamps   and   small   portion   of   market,   usually   not  
cigarette   prices   in   the   world),   only   health   warnings   written   in   a   foreign   exceeding  2%  of  legal  sales  despite  
6%  of  survey  respondents  had  seen   language,   and   27%   cited   the   taste   the  price/tax  differences.
tobacco   products   during   the   last   12   of   cigarettes.   It   is   important   to   note   In  a  more  recent  study  using  data  
months   which   they   believed   were   that   is   not   illegal   to   purchase   illicit   from   the   Behavioural   Risk   Factor  
smuggled.   In   Lithuania,   where   in   cigarettes   in   Albania,   and   smokers   Surveillance  System  (BRFSS),  Stehr  
January   2008   a   packet   of   Marlboro   would   not   be   subject   to   legal   (2005)   found   that   the   tax   avoidance  
cost   $2   (the   country   with   the   lowest   sanction  by  providing  this  information   represented   up   to   9.6%   of   sales  
cigarette   prices   in   the   EU)   the   (Zaloshnja  et  al.,  2010). in   the   US   between   1985   and   2001.  
percentage   was   36%   (European   Russian   Federation.   The   However,   according   to   Stehr’s  
Commission,  2009). European   Regional   office   of   the   findings   the   level   of   legal   border  
United   Kingdom.   According   to   World  Health  Organization  estimates   crossing  in  the  USA  was  low  relative  
United  Kingdom  customs  officials  the   that   in   the   Russian   Federation   20– to  other  forms  of  tax  avoidance.
illicit   market   share   (of   consumption)   30%   of   cigarettes   are   smuggled,   Combined  federal,  state  and  city  
in   2006–07   was   13%   for   cigarettes   and   concludes   that   the   Russian   taxes   are   highest   in   New   York   City.  
and   53%   for   hand-­rolled   tobacco   Federation  remains  the  biggest  illicit   In   2004,   57%   of   smokers   in   New  
in   the   United   Kingdom.   The   United   European  market  in  terms  of  volume   York   state   purchased   cigarettes   at  
Kingdom  is  one  of  the  few  countries   (World   Health   Organization,   2007).   least  once  from  a  low-­tax  or  untaxed  
to   produce   reliable   yearly   estimates   Independent   research   estimated   source,  while  37%  purchased  low-­tax  
of   illicit   trade,   with   a   methodology   that  23%  of  legal  sales  were  illicit  in   or  untaxed  cigarettes  regularly  (New  
based   on   the   discrepancy   between   the   Russian   Federation   in   2004   (70   York   State   Department   of   Health,  
trends   in   legal   sales   and   household   billion  cigarettes)  (Ross  et  al.,  2008;;   2006).   The   large   tax   differentials  
survey  smoking  habits  (HM  Revenue   Joossen  et  al.,  2009). between   Chicago   and   neighbouring  
&  Customs,  2008). jurisdictions   provide   an   incentive   for  
Finland.   The   Finish   authorities   Americas cigarette   tax   avoidance.   Data   from  
reported   that   legal   cross-­border   a  random  sample  of  cigarette  packs  
cigarette  shopping  by  Finish  travellers   Canada.   The   Canadian   tobacco   littered  in  Chicago  in  2007  reveals  a  
amounted   to   12%   of   total   national   industry   contracted   a   research   high   degree   of   tax   avoidance:   three  
sales  in  1996  (Lipponen  et  al.,  1998). company,   GfK   Group,   to   assess   fourths  did  not  display  a  Chicago  tax  
Poland.   A   2004   survey   of   the   smoking   trends   in   Canada.   Their   stamp  (Merriman,  2010).  Based  on  a  
Cancer   Epidemiology   &   Prevention   research   reported   that   16.5%   of   comparison  between  cigarette  sales  
Division   of   the   city   of   Warsaw   also   smokers   said   in   2006   that   they   had   data  and  cigarette  consumption  data  
suggested  that  only  11%  of  smokers   purchased   illicit   tobacco   products   from  surveys,  a  researcher  from  the  
could  have  bought  cigarettes  on  the   within   the   previous   seven   days,   the   Department   of   Economics   of   Drexel  
illicit   market   in   Poland   (Gumkowsky   figure  rising  to  22%  in  2007.  The  major   University   estimated   that   in   1985   in  
et   al.,   2006).   Studies   based   on   source   of   the   Canadian   illegal   trade   the   USA,   7.2%   of   cigarettes   were  
six   surveys   in   the   period   2004–6   is   cigarettes   illicitly   manufactured   purchased   without   payment   of   state  
concluded   that   11%   of   cigarettes   in   aboriginal   native   reserves   on   the   taxes  and  that  this  had  risen  to  12.7%  
sold  in  Poland  were  illicit  (Ciercierski,   border  between  Canada  and  the  USA,   in   2001   (Stehr,   2005).   A   researcher  
2007). which   are   smuggled   into   Canada   from  the  Stanford  University  Institute  
Albania.   In   2009,   approximately   (mainly  the  provinces  of  Ontario  and   for   Economic   Policy   Research  
19%   of   smokers   in   urban   areas   Quebec)   (Royal   Canadian   Mounted   estimated  that  between  13%  and  25%  
and   27%   in   rural   areas   in   Albania   Police,  2008) (average   17.5%)   of   US   consumers  

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purchased  cigarettes  in  a  lower-­price   Middle  East  and  Africa as   80%   of   the   cigarette   market   in  
bordering   state   or   Native   American   Guinea   Bissau   and   the   Libyan   Arab  
reservation   over   the   period   1992– Islamic   Republic   of   Iran.   Based   Jamahiriya   is   illicit.   In   Mali   the   illicit  
2002  (Lovenheim,  2007). on   a   report   of   the   Iranian   tobacco   market   share   is   40%;;   estimates  
companies   and   the   Central   are   lower   for   other   listed   countries  
Asia  and  Australasia Headquarters   of   the   Fight   against   (United  Nations  Office  of  Drugs  and  
Smuggling,   which   is   a   department   Crime,  2009).
China.   There   are   varying   and   of   the   Presidential   office,   the   illicit  
contradictory   estimates   of   the   level   cigarette  market  share  in  the  Islamic   Impact  of  tax  avoidance/evasion  
of   illicit   cigarette   trade   in   China.   Republic  of  Iran  was  74%  of  the  total   on  public  health
China  is  by  far  the  biggest  producer   market  in  2001  (40  billion  cigarettes)  
in  the  world  of  counterfeit  cigarettes,   and  14%  of  the  total  market  in  2007   The   impact   of   tax   avoidance/
which   are   destined   for   domestic   (8.3   billion   cigarettes)   in   the   Islamic   evasion   on   tobacco   products   on  
and   foreign   markets.   A   2005   Republic   of   Iran   (Joossens   et   al.,   public   health   can   be   classified   as  
national   survey   conducted   by   the   2009).   The   extremely   high   level   the   impact   on   average   tobacco  
China   National   Bureau   of   Statistics   of   smuggling   in   2001   is   probably   price,   on   health   disparity,   on   other  
on   behalf   of   the   China   National   because   there   was   insufficient   tobacco   control   policies,   and  
Tobacco   Company   (CNTC)   found   domestic  production  to  meet  demand,   generally  on  public  safety.
that   about   10%   of   cigarettes   on   the   and  imported  cigarettes  were  subject   The  impact  of  higher  taxes/prices  
market   were   counterfeit   (Joossens   to   high   import   duties,   so   the   Islamic   on  tobacco  use  is  not  diminished  by  
et   al.,   2009).   China’s   State   Tobacco   Republic   of   Iran   was   a   target   for   smuggling   if   the   market   equilibrium  
Monopoly  Administration  announced   internationally   smuggled   cigarette   quantity  of  the  taxed  products  in  the  
in   January   2008   that   it   had   seized   brands.  However,  between  2001  and   absence  of  tax  avoidance/evasion  is  
9.28   billion   counterfeit   cigarettes   in   2007  the  market  was  liberalised  and   equal   to   the   quantity   of   their   supply  
2007  (Globalink  news  service,  2008).   national   production   was   increased,   in   the   presence   of   tax   avoidance/
Thus   the   production   of   counterfeit   leading  to  a  dramatic  fall  in  smuggling.   evasion.   This   equilibrium   depends  
cigarettes   can   be   estimated   at   93– Studies  on  illicit  cigarettes  undertaken   on   the   degree   of   substitution  
186   billion   cigarettes   if   we   assume   by   the   Tobacco   Prevention   and   between   legal   and   illegal   cigarettes  
that   the   seized   cigarettes   represent   Control  Research  Center  and  relying   and   whether   the   availability   of  
about  5–10%  of  total  illicit  counterfeit   on   smoker   self-­reports,   found   that   illegal   substitutes   increases   total  
production,  a  plausible  assumption. 22.5%  of  the  cigarettes  consumed  in   consumption.   To   the   extent   that  
Japan.  Most  observers  in  the  f ield   Teheran  in  2006  were  illegal  (Heydari   legal   and   illegal   tobacco   products  
agree  that  illicit  cigarette  trade  is  low   et   al.,   2009).     A   similar   study   was   are   not   perfect   substitutes,   an  
in   Japan.   A   possible   explanation   for   undertaken   during   a   randomized   increase  in  cigarette  taxes  translated  
the  low  level  of  smuggling  is  the  strict   cross-­sectional   survey   in   Tehran   in   to   increased   cigarette   prices   will  
control   of   the   distribution   network   in   2008–2009,   finding   that   21%   of   the   reduce  their  consumption  even  when  
this   country.   All   retailers   of   tobacco   cigarettes   were   smuggled   (Heydari   smuggling   is   possible   (Merriman   et  
products   have   to   be   approved,   et  al.,  2010). al.,  2000;;  Merriman,  2002).
and   are   licensed   by   the   Ministry   of   South   Africa.   An   independent   The   degree   of   substation  
Finance. researcher  estimates  the  size  of  the   between  legal  and  illegal  products  is  
Australia.   The   large   difference   illicit   market   in   South   Africa   to   have   based   on   the   notion   that   consumer  
between   the   price   received   by   grown   substantially   from   1997   until   incurs   both   “transaction”   and  
tobacco   farmers   in   Australia,   and   peaking   in   2000   between   9.4%   and   “inconvenience”   costs   (Merriman,  
the   price   of   raw   tobacco   purchased   11.5%   of   the   total   market.   The   most   2002).   The   transaction   price/cost  
on  the  market  has  motivated  tobacco   recent   estimate   for   2007   suggests   is  the  amount  of  money  paid  for  the  
growers  to  sell  their  products  to  illegal   that   the   illicit   market   occupied   product   at   the   point   of   sale.   The  
markets   to   increase   their   profit   from   between  7.0%  and  11.2%  of  the  total   inconvenience   price/cost   is   the  
tobacco  growing  (Geis  et  al.,  2003). market  (Blecher,  2010). value   of   the   additional   time   it   takes  
North  and  West  Africa.  According   to   obtain   a   product   illegally   as   well  
to   a   report   of   the   United   Nations   as  the  value  of  discomfort  to  engage  
Office  on  Drugs  and  Crime,  as  much   in   an   illegal   activity.   Although   the  

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price   of   inconvenience   does   not   break  the  law,  and  only  some  of  them   manufactured  in  the  United  Kingdom,  
require   a   monetary   transaction,   it   are   willing   to   use   illegal   products.   was  higher  than  the  locally  produced  
represents   real   costs   since   black   Therefore,   the   observed   reduction   555,   because   the   smuggled  
market   purchasers   may   face   in   the   legal   consumption   after   a   tax   cigarettes   were   perceived   as   being  
potential   legal   sanctions   and   other   increase   is   only   partially   driven   by   of  higher  quality  (Joossens,  2003).
risks.  For  example,  the  location  of  the   substitution  towards  contraband. Several   studies   used   the   gap  
street   sellers   can   be   undependable,   Even  though  the  theory  suggests   between   the   legal   and   illegal  
there   can   be   uncertainty   about   that  the  impact  of  illicit  cigarette  trade   products   and   calculated   the   impact  
the   authenticity   of   the   brand,   or   on   cigarette   prices   is   likely   to   be   of   eliminating   this   price   difference  
consumers  may  fear  embarrassment   small,   the   competition   between   the   on  tobacco  use  and  on  public  health.  
or   legal   penalties   if   caught   buying   legal   and   the   illicit   cigarettes   could   Joossens   and   colleagues   (2009)  
smuggled  cigarettes.  The  sum  of  the   result   in   lower   average   cigarette   used   data   from   84   countries   and  
transaction  price  and  inconvenience   prices   and   therefore   in   higher   estimated   that   the   global   average  
price   represent   the   “effective”   price,   consumption  (Joossens  et  al.,  2000).     cigarette   price   in   2007   was   about  
the   price   that   consumers   consider   The  empirical  evidence  on  prices   3.75%   lower   due   to   the   presence   of  
when   deciding   whether   to   make   of   illicit   tobacco   products   is   mixed,   illegal  trade  in  cigarettes.  If  the  global  
a   purchase   or   not.   In   general,   the   as   the   price   differences   between   illicit  market  were  eliminated  in  2002,  
higher   the   effective   price,   the   lower   legal   and   illegal   cigarettes   vary   by   164  000  premature  deaths  would  be  
the  quantity  of  cigarettes  demanded.   country,   the   location   of   the   selling   averted  a  year  from  the  year  2030  on.  
Illicit   products   often   have   a   lower   point,   and   the   brand   name   and   That  means  that  by  2036,  close  to  a  
transaction  (or  sales)  price  than  legal   the   perceived   quality   of   the   illicit   million   tobacco-­related   premature  
products,   because   consumers   who   cigarettes.   In   general,   the   price   of   deaths  would  not  occur.
purchase   smuggled   cigarettes   pay   the   illicit   cigarettes   is   lower   than   A   similar   study   has   been  
higher   inconvenience   price.   Given   the   retail   price   of   legal   products.   In   conducted   in   the   United   Kingdom,  
that  the  general  theoretical  model  of   the   United   Kingdom,   for   example,   where   in   the   presence   of   smuggling  
smuggling   is   applicable   to   a   broad   smuggled   cigarettes   in   2005   were   the   average   tobacco   product   price  
range   of   societies,   it   is   reasonable   sold  at  50%  of  the  duty-­paid  products   was   found   to   be   about   11.6%  
to  expect  that  conclusions  based  on   (West  et  al.,  2008).  In  Germany,  the   under   the   legal   market   equilibrium.  
empirical  evidence  from  high-­income   price  of  the  smuggled  Chinese  brand   Eliminating   the   illicit   cigarette   trade  
countries  will  be  applicable  to  certain   Jin  Ling  was  40%  of  the  retail  price  of   in  the  United  Kingdom  would  reduce  
degree   to   middle-­   and   low-­income   a  premium  brand  in  2009  (Candea  et   the   cigarette   consumption   by   5.0–
countries  (Merriman  et  al.,  2000). al.,  2009).  The  price  of  illegal  “chop-­ 8.2%   and   lower   the   tobacco   death  
Therefore,   in   theory,   smuggling   chop”   tobacco   in   Australia   ranged   toll  in  the  United  Kingdom  by  4000–
does   not   completely   reduce   the   from   AUS$45   to   AUS$100   per   6500  premature  deaths  a  year  (West  
public   health   benefits   of   cigarette   kilogram   in   2001,   while   a   kilogram   et  al.,  2008)
taxes  (Merriman,  2002). of   legal   roll-­your-­own   tobacco   was   Experience   from   several  
There  is  some  empirical  evidence   AUS$320  in  the  same  year  (Geis  et   European   countries   suggests   that  
that   consumers   are   aware   of   the   al.,  2003). an   increase   in   cigarette   taxes   can  
inconvenience   price.   A   study   in   the   Internet  sites  often  sell  cigarettes   result   in   increased   smuggling,   but  
United   Kingdom   found   that   17%   of   tax-­free   or   with   taxes   from   low-­tax   also   in   the   decline   in   total   cigarette  
adult  smokers  prefer  to  buy  cigarettes   jurisdictions   (Ribisl   et   al.,   2006).   consumption.
from   recognized   outlets   rather   than   The   average   online   site   selling   Two   sizeable   tobacco   tax  
individuals   even   if   the   transaction   cigarettes   in   the   USA   passes   about   increases   in   Sweden   (December  
price   of   the   cigarettes   sold   by   the   90%   of   the   tax   savings   through   to   1996  and  August  1997)  led  to  a  43%  
individuals   is   £1.00   per   pack   lower   the  consumer  (Goolsbee  et  al.,  2007)   increase  in  average  cigarette  prices,  
(DTZ  Pieda  Consulting,  2000). making  cigarettes  available  at  prices   but  also  an  increase  in  the  estimated  
Using  United  Kingdom  data,  Duffy   substantially  lower  than  in  stores. amount  of  cigarette  smuggling  (from  
(2006)   also   suggests   that   smuggled   In   some   markets,   however,   200  million  cigarettes  in  1996  to  500  
and  non-­smuggled  tobacco  products   the   price   of   illicit   cigarettes   can   be   million   in   1998).   However,   smoking  
are   imperfect   substitutes.   The   higher.  In  Viet  Nam,  for  example,  the   prevalence   has   also   declined   (from  
majority  of  smokers  are  not  inclined  to   price   of   the   smuggled   brand   555,   1996   to   1997   there   were   19.1%  

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and   4.4%   declines   among   men   and   an   increase   in   the   consumption   of   free   Canada,   &   Quebec   Coalition  
women,   respectively),   particularly   products  evading  taxes. for   Tobacco   Control,   1999).   As   in  
among   youth   and   young   adults   (in   Merriman  et  al.  (2000)  used  data   Sweden,   the   Canadian   government  
the   age   group   16–24   there   were   from   23   European   countries   during   responded   to   the   political   pressure  
25%   and   17.4%   declines   among   í DQG SUHGLFWHG WKDW D WD[ to   reduce   cigarette   smuggling   and  
men  and  women  from  1996  to  1997).     increase   in   an   individual   country   in   1994   reduced   cigarette   taxes.  
In   addition,   tobacco   tax   revenue   will   increase   small-­scale   cigarette   This   led   to   a   sharp   increase   in   per-­
rose   by   9%   in   1997   compared   to   smuggling,   but   coordinating   these   capita  consumption  (a  27%  increase  
1996   (Wendleby   &   Nordgren,   1998;;   increases  with  neighbouring  countries   between  1993  and  1998)  and  higher  
Joossens,  1999). would   reduce   the   incentives   for   this   smoking   prevalence   among   youth  
After   the   Swedish   government   type   of   tax   avoidance.   For   example,   and   adults   as   well   as   loss   of   tax  
responded   to   pressure   to   reduce   a   unilateral   10%   price   increase   revenue   (Canadian   Cancer   Society,  
cigarette   smuggling   by   reducing   in   Germany   would   reduce   annual   Non-­smokers’   Rights   Association,  
cigarette   tax   in   August   1998,   per-­ sales  by  6  packs  per  capita,  but  total   Physicians  for  a  Smoke-­free  Canada,  
capita   tax   paid   cigarette   sales   consumption   only   by   3   cigarette   &   Quebec   Coalition   for   Tobacco  
increased,   but   tax   revenue   went   packs   per   capita   per   year,   with   3   Control,  1999).
down  (Joossens  et  al.,  2000). packs   per   capita   being   smuggled   Several   empirical   studies   used  
France  nearly  doubled  its  nominal   to   Germany   from   other   countries.   Canadian  data  to  study  the  response  
cigarette   retail   price   between   With   a   multilateral   price   increase,   to   these   cigarette   tax   changes.  
September   1991   and   December   the   consumption   in   Germany   would   Galbraith  and  Kaiserman  (1997)  used  
1996  (74%  increase  in  real  terms)  by   still   drop   by   3   packs   per   capita,   but   monthly  sales  data  from  1980–1994  
increasing  tobacco  taxes.  During  the   domestic   sales   would   drop   by   only   and  found  that  the  total  consumption  
same   time,   cigarette   sales   dropped   4   packs   (with   one   pack   still   being   (taxed   plus   smuggled   sales)   was  
from   97   billion   cigarettes   in   1991   supplied   from   other   countries).   This   less   responsive   to   price   increases  
to   83   billion   in   1997,   adult   smoking   means   that   the   health   impact   of   a   (short-­run   elasticity   of   –0.40)   than  
prevalence   decreased   from   40%   in   tax   increase   will   be   independent   of   taxed   consumption   (short-­run  
1991  to  34%  in  1997  (Baudier,  1997),   the   coordination   of   tax   increases,   elasticity  of  –1.01),  meaning  that  1%  
and   youth   smoking   prevalence   (12– but   the   revenue   impact   will   depend   increase  in  price  due  to  tax  increased  
18   years   old)   dropped   from   30%   in   on   this   coordination.   If   incentives   illicit   cigarette   trade   by   0.5–0.6%.  
1991   to   25%   in   1997   (Arènes   et   al.,   for   small-­scale   smuggling   in   Europe   Gruber,   Sen   and   Stabile   (2002)   and  
1998).   Tobacco   tax   revenue   rose   disappeared,   legal   cigarette   sales   Goel   (2004)   confirmed   that   taxed  
from  32  billion  FF  in  1991  to  57  billion   would  increase  by  3%. cigarette   consumption   in   Canada   is  
FF  in  1996  while  illicit  cigarettes  kept   The   European   experience   more   sensitive   to   price   than   is   total  
occupying   a   relatively   unimportant   with   tobacco   tax   increases   and   cigarette  consumption,  meaning  that  
share   of   the   market—around   2%   their   impact   on   tobacco   use   in   the   there   is   a   substitution   between   the  
(Baudier,   1997).   The   relatively   low   presence  of  illicit  cigarette  trade  has   illicit   and   legal   cigarettes,   but   a   tax  
level  of  illicit  cigarette  trade  in  France   been   very   similar   to   what   happened   increase  is  still  an  effective  measure  
has   been   explained   by   its   efficiently   on  the  American  continent. for  reducing  total  cigarette  use.
controlled  retail  environment  in  which   Canada’s   significant   increase   A   similar   conclusion   has   been  
all  tobacco  retailers  must  be  licensed. in   cigarette   prices   due   to   its   tax   reached  in  the  USA.  Baltagi  and  Levin  
A   United   Kingdom   study   found   policy   in   1980s   and   early   1990s   (1986)   showed   that   price   elasticities  
that   higher   taxes   increased   prices   resulted  in  43%  decline  in  per-­capita   of  cigarette  demand  in  the  USA  were  
of   both   legal   and   illegal   tobacco   cigarette   consumption   from   1979   to   lower  after  controlling  for  small-­scale  
products   and   led   to   an   overall   1993   despite   the   presence   of   illicit   smuggling.   Licari   and   Meier   (1997)  
decline   in   tobacco   consumption   cigarettes   on   the   market.   Smoking   used  a  pooled  time  series  of  cigarette  
(Duffy,   2006).   However,   the   price   prevalence   fell   sharply,   particularly   sales   in   all   50   US   states   from   1951  
elasticity   of   duty-­paid   tobacco   has   among   youth   (15–19   years   old):   to   1994   and   found  that  higher  taxes  
also   increased   since   1995   when   from   43%   in   1981   to   23%   in   1991   reduce  consumption,  but  their  effect  
cigarette   smuggling   began   to   grow,   for  this  age  group  (Canadian  Cancer   is   lower   when   controlling   for   cross-­
meaning   that   some   of   the   drop   in   Society,   Non-­smokers’   Rights   state  small-­scale  smuggling.
legal   consumption   was   replaced   by   Association,  Physicians  for  a  Smoke-­

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A  study  from  California  using  data   in  the  sensitivity  of  taxable  cigarette   real   GDP   growth.   This   reduction  
from  the  California  Tobacco  Surveys   sales   that   is   correlated   with   the   rise   would  be  even  larger  if  enforcement  
found   that   a   significant   cigarette   tax   of   internet   use   within   states.   The   of  anti-­smuggling  laws  would  improve  
increase   in   1999   that   resulted   in   growth   of   internet   penetration   in   the   at  the  same  time.
relatively   large   price   difference   with   USA   has   induced   an   elevation   in   The   studies   above   estimate   the  
all   its   bordering   states   (including   the   taxable   sales   elasticity   of   over   impact   of   tax   avoidance   and   tax  
Mexico)   motivated   only   5.1%   of   60%.  Cigarette  tax  evasion  over  the   evasion  on  the  general  public.  There  
all   smokers   to   purchase   tax-­free   internet   has   substantially   reduced   are  also  studies  that  have  examined  
cigarettes.  The  study  concluded  that   the   revenue-­generating   potential   the  impact  of  this  behaviour  on  health  
higher  cigarette  taxes  did  not  pose  a   of   cigarette   tax   increases:   states   disparities,   since   the   availability   of  
threat   to   the   public   health   objective   have  collected  8%  less  cigarette  tax   lower-­priced   smuggled   cigarettes  
of   reducing   smoking   despite   the   revenue   between   2001   and   2005   could  have  a  disproportionate  impact  
presence   of   tax   avoidance/evasion   due   to   tax-­free   cigarette   internet   on   smoking   and   health   among  
(Emery  et  al.,  2002). sales.   This   has   serious   implications   children   and   the   poor   given   their  
One   US   study   using   data   from   for   funding   of   state   programmes,   greater   price   sensitivity   (Townsend  
four   waves   of   the   CPS   Tobacco   including   tobacco   control   and   et   al.,   1994;;   DTZ   Pieda   Consulting,  
Supplement   1992–2002   found   that   other   public   health   programmes.   In   2000;;   Joossens   et   al.,   2000).   In  
the   possibility   to   obtain   cheaper   addition,  unregulated  web  sites  offer   addition,  illicit  cigarettes  are  primarily  
cigarettes  from  another  state  or  Native   various   price   promotions   or   gifts   products  of  the  multinational  tobacco  
American   reservation   could   reduce   with   purchases,   and   many   require   companies,   because   these   are  
the   average   price   responsiveness   a   minimum   purchasing   quantity   easy   marketable   and   have   price  
of   consumers   to   zero,   but   the   price   thus   further   encouraging   cigarette   advantage   over   less-­known   brands  
sensitivity   also   varied   with   the   consumption  (Ribisl   et  al.,  2001).  Of   (Joossens   &   Raw,   1998).   Marlboro,  
distance  of  residence  to  a  lower-­price   88  internet  sites  selling  cigarettes  in   for   example,   represented   66%   of   all  
border:   a   1%   increase   in   distance   the   USA   in   2000,   one   third   featured   seized   cigarettes   worldwide   in   2005  
resulted   in   a   decrease   in   the   home   promotional   programmes   (Ribisl   et   (World  Customs  Organization,  2007).  
state   price   elasticity   by   about   0.2   al.,  2001). International  brands,  and  particularly  
percent  (Lovenheim  2007).The  study   The   evidence   on   the   impact   Marlboro,   are   favoured   by   young  
found   that   cross-­border   purchases   of   higher   prices/taxes   on   the   people   in   low-­income   and   middle-­
increase   consumption   by   4.0–8.2%   substitution  between  legal  and  illegal   income   countries   where   Western  
and   the   smoking   participation   by   cigarettes  outside  Europe  and  North   products   are   especially   attractive  
2.0–4.3%.  The  study  concluded  that   America  is  limited. (Joossens  &  Raw,  1998).
cigarette   price   increases   would   be   Yurekli   and   Sayginsoy   (2010)   This   evidence   of   the   impact   of  
effective   in   reducing   cigarette   use   if   used   the   market   shares   of   illicit   illicit   trade   on   health   disparities   is  
cigarette  smuggling  was  eliminated. cigarettes   in   110   countries   to   much   more   scarce   compared   to   the  
Making   cheaper   cigarettes   estimate  the  impact  of  a  tax  increase   evidence   on   the   general   population,  
available   via   the   internet   can   on  tax  avoidance/evasion.  Assuming   and   most   of   it   comes   again   from  
undermine   the   public   health   gain   a   perfect   substitution   between   North  America  and  Europe.
from   imposing   higher   tobacco   legal   and   illegal   cigarettes   in   their   A   study   from   Canada  using  data  
taxes.   Kim   et   al.   (2006)   found   that   econometric   and   simulation   models,   from   2006/2007   Youth   Smoking  
New   Jersey   adult   smokers   who   they  found  that  a  global  tax-­induced   Survey   reported   that   over   13%   of  
purchased  cheaper  cigarettes  via  the   increase   in   real   cigarette   prices   daily   teenage   smokers   reported  
internet   significantly   increased   their   would  lead  to  higher  smuggling  if  it  is   usually   consuming   contraband  
consumption   over   time,   compared   not  accompanied  by  an  improvement   cigarette   brands   (Callaghan   et   al.,  
to   smokers   who   reported   paying   full   in   law   enforcement.   Despite   the   tax   2009).   These   smokers   consumed  
price  at  retail  stores. avoidance,   the   overall   cigarette   use   significantly   more   cigarettes  
Goolsbee,   Lovenheim   and   would   be   reduced:   a   10%   increase   compared   to   those   who   smoke  
Slemrod  (2007)  used  US  sales  data,   in   total   tax   (excise   and   VAT)   would   legally   circulating   cigarette   brands.  
smoking   prevalence   and   tax   rates   reduce   total   consumption   by   1.97%   Contraband   cigarettes   represented  
from  1980  to  2005  to  find  that  there   with   no   change   in   Gross   Domestic   17.5%   of   all   youth   daily-­smokers  
has   been   a   considerable   increase   Product   (GDP)   or   by   0.2%   with   5%   cigarette   consumption   in   Canada,  

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but  in  some  regions  such  as  Ontario   smoking  and  perceived  smugglers  as   al.,   2007).   In   addition,   the   presence  
and   Quebec,   the   share   of   illegal   “providing   a   valuable   service”   to   the   of   smuggled   cigarettes   can   result  
cigarettes   were   much   higher—over   community   (Wiltshire   et   al.,   2001).   in   a   competitive   disadvantage   for  
25%   of   the   youth   cigarette   market   The   availability   of   cheaper   illicit   legitimate   retailers,   increasing  
consisted  of  illicit  cigarettes. cigarettes   undermined   the   desire   of   their   motivation   not   to   comply   with  
Another  study  analysing  cigarette   many  smokers  to  quit,  thus  reducing   tobacco-­control   laws   (Joossens   et  
butts   collected   in   2007   at   smoking   the   impact   tobacco   tax   policy   can   al.,  2000).
locations   near   high   schools   in   two   have   on   consumption   (Wiltshire   et   There  is  some  evidence  that  illicit  
Canadian   provinces   found   that   26%   al.,  2001). cigarette   trade   undermines   efforts  
and  36%  of  them  were  contraband  in   One   study   from   Asia,   in   Taiwan,   to   limit   youth   access   to   tobacco  
Ontario  and  in  Quebec,  respectively.   China,   indicated   that   low-­income   products,  since  vendors  of  smuggled  
The   comparison   with   2006   results   and   poorly-­educated   smokers   are   cigarettes   are   less   likely   to   comply  
when   the   share   of   illicit   butts   was   more   likely   to   purchase   smuggled   with   these   restrictions   (Joossens  
24%  and  35%,  respectively,  suggests   cigarettes  (Lee  et  al.,  2009).  Smokers   et   al.,   2000).   Data   from   the   USA  
an  increasing  trend  in  illicit  cigarette   who  had  a  personal  monthly  income   suggest  that  retailers  selling  tax-­free  
use   among   the   teenage   population   of   less   than   NT$10   000   in   2004   cigarettes   via   internet,   phone   or   by  
(Canadian   Convenience   Stores   (US$287)   and   had   the   least   amount   mail  often  fail  to  check  the  age  of  the  
Association,  2007;;    Unknown,  2008). of   education   were   54%   more   likely   buyer.  Of  the  88  internet  sites  selling  
Gruber,   Sen   and   Stabile   (2002)   to   smoke   smuggled   cigarettes   than   cigarettes  in  the  USA  in  2000,  18.2%  
used   data   from   the   Canadian   those  with  just  one  or  none  of  these   did   not   feature   a   minimum   age   of  
Survey   of   Family   Expenditure   characteristics. sale  warning  (Ribisl  et  al.,  2001).  The  
1982   –1998   and   concluded   that   Using   data   from   84   countries,   issue  of  youth  access  to  cigarettes  via  
cigarette  smuggling  disproportionally   Joossens   et   al.   (2009)   found   that   Internet  may  become  more  important  
affects   low-­income   groups:   illicit   the   burden   of   illicit   trade   falls   with   better   retailers’   compliance  
trade   reduces   the   average   price   of   disproportionately   on   lower-­income   with   youth   access   laws,   as   it   may  
tobacco   products,   leading   to   the   countries,   where   the   illicit   cigarettes   drive   youth   to   use   the   internet  
disproportionally  higher  consumption   in  2007  made  up  on  average  16.8%   more   frequently   as   their   source   of  
of  tobacco  among  the  poor,  who  are   of   the   market;;   The   average   market   cigarettes  (Ribisl  et  al.,  2006).
more   price   sensitive   compared   to   share   of   illicit   cigarettes   in   high-­ A  US  study  found  that  only  28.4%  
the   general   population.   Therefore,   income   countries   was   about   9.8%   of   internet   sites   selling   cigarettes  
cigarette   smuggling   increases   in  that  year.  The  tax  loss  associated   featured   the   legally   required   health  
smoking-­related  disparities. with   illicit   cigarette   trade   was   warning   (Ribisl   et   al.,   2001).   Only  
Cantreill  et  al.  (2008)  interviewed   estimated   at   US$18.3   and   US$13   3.5%   (5   sites)   of   internet   cigar  
614   Chinese-­American   smokers   billion   in   low-­   and   high-­income   vendors  had  health  warning  on  their  
living   in   New   York   City   between   countries,  respectively.  If  the  problem   web   sites   (Malone   &   Bero,   2000).  
September  2002  and  February  2003   of   illicit   cigarettes   were   solved,   low-­   Internet  sites  selling  cigarettes  often  
and   found   that   younger   smokers   and   middle-­income   countries   would   failed   to   comply   with   advertising  
were   most   likely   to   engage   in   tax   experience  132  000  fewer  premature   ban   and,   instead   promote   specific  
avoidance   behaviour   and   were   also   tobacco-­related  deaths  per  year  from   tobacco   brands   and   use   of   other  
less   likely   to   change   their   smoking   2030   on.   In   high-­income   countries,   tobacco   products   such   as   cigars  
behaviour   in   response   to   the   tax   the   toll   attributable   to   illicit   cigarette   and  loose  tobacco,  and  feature  links  
increase.   Close   to   55%   of   male   trade  is  lower,  about  32  000  per  year. to   pro-­smoking   or   smoker’s   rights  
Chinese  smokers  engaged  in  at  least   In   addition   to   the   impact   on   the   organizations  (Ribisl  et  al.,  2001).
one   low-­   or   no-­tax   strategy   after   a   average  tobacco  price,  the  presence   Illicit   tobacco   trade   can   affect  
substantial   increase   of   tobacco   tax   of   illegal   cigarettes   on   the   market   public  safety  by  attracting  organized  
in  2002. can   interfere   with   other   tobacco   crime  and  by  increasing  the  general  
Smokers   in   socioeconomically   control   regulations,   such   as   those   level   of   corruption   (FIA   International  
deprived   areas   of   Edinburgh   in   the   related   to   youth   access   to   tobacco   Research   Ltd,   1999a).   In   New   York  
United   Kingdom   admitted   buying   and  requirements  of  tobacco  product   City,   cigarette   smuggling   has   been  
contraband   products   as   a   way   to   contents   and   labelling   of   products   associated   with   organized   crime   as  
deal  with  the  rising  financial  costs  of   (Stephens   et   al.,   2005;;   Pappas   et   well  as  activities  of  small-­time  crooks,  

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 Tax  avoidance  and  tax  evasion

and  has  led  to  murders,  kidnappings   governments   and   international   neighbouring  or  overseas  jurisdictions.  
and   armed   robberies   to   earn   and   organizations.   Key   informants   Inter-­agency   cooperation   (both  
protect   illicit   profits.   Such   crime   has   were   chosen   for   their   overall   domestic  and  international)  emerges  
exposed   average   citizens,   such   as   knowledge  of  tobacco  smuggling   as  a  vital  component  of  all  successful  
truck   drivers   and   retail   store   clerks,   or   their   intimate   knowledge   of   a   anti-­contraband   strategies.   The  
to  violence  (Fleenor,  2003). specific   anti-­contraband   policy   dynamic  nature  of  contraband  supply  
Money  gained  from  illicit  tobacco   measure. requires   a   comprehensive   approach  
trade  is  used  for  other  serious  criminal   3.   Four   expert   focus   panels   that  focuses  on  both  immediate  and  
enterprises,   including   terrorist   were   convened   to   validate,   future   threats.   Policies   designed  
operations   (United   States   General   enrich   understanding   of,   and   to   ensure   that   contraband   tobacco  
Accounting   Office,   2003).   In   2002,   further   assess   the   feasibility   of   products   do   not   appear   in   the  
a   US   federal   court   found   Mohamad   implementing   the   various   policy   legitimate   retail   sector   (such   as  
Hammoud  guilty  of  providing  material   measures. tax-­paid   markings,   licensing   and  
support   for   terrorists   in   his   role   as   In   its   conclusions,   the   report   record-­keeping)   and   measures   to  
leader  of  a  Charlotte,  North  Carolina– identifies   and   defines   the   different   ensure   that   counterfeit   products   are  
based  cell  that  raised  money  for  the   forms   of   contraband   tobacco,   easily   identified   (such   as   enhanced  
Lebanese   terrorist   group   Hezbollah   including   casual   small-­scale   taxation  stamps)  are  vital  resources.  
by   smuggling   cigarettes   within   smuggling,   organized   international   Adequate  investment  in  enforcement  
the   United   States   (Fleenor,   2003).   smuggling,   illicit   manufacturing,   tax   is   also   essential   to   the   success   of  
Thus,   illicit   tobacco   trade   can   have   avoidance   from   duty-­free   sources,   anti-­contraband   measures.   Given  
implications  for  the  overall  welfare  of   and   counterfeit   cigarettes.   The   the  global  scope  of  the  phenomenon,  
the   country   (Bhagwati   and   Hansen,   effectiveness   of   ten   anti-­contraband   greater  international  cooperation  and  
1973;;  Ray,  1978)  including  the  overall   policy   measures   are   explored:   information  sharing  is  paramount.
public  health. licensing,   tax-­markings/stamping,   A  central  theme  in  the  research  
tracking  and  tracing,  record-­keeping/ findings   is   the   multifaceted   nature  
Policies  to  curb  tax  avoidance/ control   measures,   enhanced   of   successful   anti-­contraband  
evasion;;  new  policies/ enforcement,   export   taxation,   tax   tobacco   policies,   which   require  
technologies   harmonization,   tax   agreements/ combinations   of   regulation,   fiscal/
compacts,   legally   binding   taxation   policy,   enforcement,   and  
Sweeting,   Johnson   and   Schwartz   agreements  with  the  tobacco  industry,   public  awareness  campaigns.
made   an   extensive   review   of   the   memoranda   of   understanding   and   The  literature  on  the  effectiveness  
effectiveness   of   policy   measures   to   public  awareness  campaigns. of   anti-­contraband   policies   is   rather  
combat  cigarette  contraband  in  2009.   According   to   the   authors,   the   limited,   and   even   less   evidence   is  
While   focusing   on   the   Canadian   analysis   suggests   that   both   the   available   for   measures   to   reduce  
situation,  the  report  provides  updated   type   of   contraband   and   means   tax   avoidance.   The   methodology  
information   on   anti-­contraband   of   distribution   influence   the   of   the   illicit   trade   estimates   is   often  
policies  in  different  parts  of  the  world.   effectiveness   of   different   policies   poorly   described,   and   the   research  
Case   studies   in   Brazil,   Canada,   and  the  unintended  consequences  of   is   underfunded   for   an   area   which   is  
Australia,  United  Kingdom,  Spain  and   action.  For  example,  policy  measures   described   as   difficult.   For   evident  
the  EU  are  discussed  in  detail  in  the   that   were   effective   in   the   1990s   for   reasons,   smugglers   do   not   keep  
report  (Sweeting  et  al.,  2009). legally   manufactured   cigarettes   records   and   are   not   interested  
Their  research  methods  consisted   smuggled   across   borders   are   less   in   research   on   their   activities.  
of  three  elements: effective  for  the  illicitly  manufactured   Enforcement   agencies   are   often  
1.   A   systematic   literature   review   and   counterfeit   cigarettes   that   reluctant  to  make  their  findings  public  
was   undertaken,   collecting   both   dominate   contraband   activity   today   for  confidentiality  reasons.  One  of  the  
academic   and   non-­academic   in  many  countries. major  recommendations  of  Sweeting  
publications   on   contraband   Case   studies   indicate   that   and   colleagues   (2009)   is   to   make  
tobacco  and  relevant  policies. while   contraband   sources   often   statistics   and   information   regarding  
2.  Interviews  were  conducted  with   emerge   domestically,   given   the   the   tobacco   trade   and   contraband  
representatives   from   academia,   ease   of   transport   and   manufacture,   tobacco   much   more   available   to   the  
nongovernmental   organizations,   sources   can   be   easily   displaced   to   public,   to   assist   with   research   and  

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IARC  Handbooks  of  Cancer  Prevention

debate  on  this  subject.  For  example,   Under   the   new   system,   retailers   Case  study:  Washington  State
many  jurisdictions  (including  Canada)   and   distributors   can   easily   detect  
do   not   provide   official   estimates   counterfeit   cigarettes   by   using   Cigarette   tax   evasion   from   Internet  
of   the   size   of   the   illicit   market   or   specific   hand-­held   scanners.   Law   sales   motivated   the   state   of  
comprehensive   data   on   contraband   enforcement   field   inspectors   are   Washington  to  apply  the  Jenkins  Act  
tobacco   seizures   made   by   federal   equipped   with   more   sophisticated   (15  USC  376a),  a  US  federal  statute  
and   provincial   agencies,   making   it   scanners  which  give  them  access  to   originally  intended  to  curb  tax  evasion  
extremely   difficult   to   evaluate   and   a  whole  range  of  data  for  compliance   resulting   from   the   interstate   sale   of  
assess   approaches   in   this   area   verification.   The   legislation   mail-­order   cigarettes   (Chaloupka  
(Sweeting  et  al.,  2009). imposes   fines   of   up   to   US   $25   000   et   al.,   in   press).   The   Act   requires  
There   are   many   forms   of   illicit   for   possessing,   selling   or   buying   vendors  who  market  or  ship  cigarettes  
trade,  and  illicit  activities  may  change   counterfeit   cigarettes   or   fraudulent   across   state   lines   to   register   with  
over  time  as  illicit  traders  adapt  their   cigarette  tax  stamps. the   tobacco   tax   administrator   of   the  
business  as  a  result  of  the  measures   The   results   of   the   Californian   destination   states,   and   to   send   that  
taken   by   governments.   Some   system   have   been   evaluated   office   monthly   statements   or   copies  
examples   of   the   changing   nature   of   positively.   The   costs   have   been   of   invoices   documenting   the   names  
the   illicit   trade   of   tobacco   products   calculated  to  be  US$9  million  per  year   and   addresses   of   recipients   and  
and  the  effectiveness  of  the  anti-­illicit   in  return  for  significant  additional  tax   the   quantities   of   cigarettes   shipped.  
trade   policies   are   described   below   revenue  on  cigarettes—an  additional   This   information   should   aid   states  
in   the   case   studies   of   California,   US$75  million  was  collected  between   with   collecting   excise   taxes   from  
Washington  state,  Brazil  and  Europe. January  2004  and  March  2006  as  a   recipients   of   cross-­state   shipments.  
result  of  the  licensing  act  and  the  tax   However,   the   effort   to   apply   the  
Case  study:  California stamps.   Investigators   have   tracked   Jenkins   Act   met   resistance   from  
retailers’   tax   compliance   since   the   internet   cigarette   vendors   and  
The  Californian  Board  of  Equalization   provisions   of   the   Act   commenced   received   little   support   from   the   US  
estimated   in   2001–2002   that   25%   operation.   Their   reports   suggest   federal   government.   However,   in  
of   the   state’s   retailers   were   selling   that   after   implementation,   the   2002  the  state  of  Washington  filed  a  
counterfeit   cigarettes   (California   seizures   of   counterfeit   products   at   complaint   against   an   online   vendor  
State   Auditor,   2006).   To   reduce   the   retail   locations   and   the   percentage   who   failed   to   provide   information  
losses   in   revenue,   the   authorities   of   retailers   carrying   counterfeit   on   Internet   sales   to   Washington  
introduced  licensing  obligations,  high-­ products  decreased  (California  State   residents.   A   federal   court   decided  
tech   tax   stamps   and   investigative   Auditor,  2006). that  the  state  has  the  right  to  enforce  
authority   to   better   control   the   In   combating   illicit   trade,   no   one   the   Jenkins   Act   to   crack   down   on  
distribution   chain.   In   January   2004,   measure  is  likely  to  be  effective  when   cigarette   tax   avoidance,   and   the  
the   Cigarette   and   Tobacco   Products   implemented  in  isolation.  Tax  stamps   online   vendor   agreed   to   provide   the  
Licensing  Act  was  introduced,  which   and   coded   information   should   be   information   required   by   the   Jenkins  
required   all   entities   engaged   in   the   implemented   in   combination   with   Act   (Banthin,   2004).   Washington’s  
sale   of   tobacco   products   within   the   other   measures   such   as   licensing.   success   in   applying   the   Jenkins  
state   to   be   licensed.   In   January   California   had   a   problem   with   the   Act   led   to   similar   efforts   in   many  
2005,   the   attachment   of   tax   stamps   retail  selling  of  counterfeit  cigarettes;;   other   US   states.   Comprehensive  
to  tobacco  products  containing  coded   the   solution   was   easy   detection   of   information   on   the   extent   of   these  
information  that  was  more  difficult  to   the   counterfeit   cigarettes   combined   efforts,  their  costs,  and  the  revenues  
counterfeit  than  the  stamps  previously   with   the   introduction   of   high-­tech   generated   from   them   is   not   publicly  
used   was   required.   The   stamping   tax   stamps,   better   control   over   the   available,   but   newspaper   articles  
machines   applied   a   new   generation   distribution  chain  by  the  enforcement   suggest   that   these   efforts   are   cost-­
of   tax   stamps   using   invisible   ink,   officers   and   the   withdrawal   of   the   effective.   For   example,   Michigan  
featuring   a   unique   covert   code   licence   for   those   retailers   who   sell   reported   collecting   US$5.9   million  
containing   product   data   relating   to   illicit  cigarettes. from  about  9000  residents  based  on  
each  cigarette  pack  and  uploaded  to   lists   provided   by   13   online   vendors  
a  central  Data  Management  System. (Christoff  2006).

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 Tax  avoidance  and  tax  evasion

Case  study:  Brazil manufacturers   on   the   cigarette   and  enforcement)  that  led  to  positive  
packs  (Fisch,  2006,  2009). results.
The   illicit   tobacco   trade   has   been   a   The  high-­tech  tax  stamps  contain  
concern   for   the   Brazilian   authorities   a   unique   code   using   invisible   ink   Case  Study:  United  Kingdom
since   the   mid-­1990s.   In   1998,   for   each   cigarette   pack.   The   codes  
Brazilian   manufacturers   were   on   the   tax   stamps   include   product   In   the   United   Kingdom,   the   main  
exporting   34   billion   cigarettes   to   data   relating   to   each   cigarette   problem   was   genuine   cigarettes  
neighbouring   countries,   many   of   pack,   which   is   uploaded   to   a   Data   produced  in  the  United  Kingdom  that  
which   returned   illegally   to   Brazil   Manager  Server  under  the  control  of   were   exported   in   large   numbers   to  
as   contraband.   To   deal   with   this   the  Ministry  of  Finance.  Besides  the   dubious  export  markets,  then  illegally  
problem,   the   government   imposed   possibility   of   verifying   whether   the   imported  though  smuggling  networks  
an  export  tax  of  150%  on  cigarettes   products  are  authentic  or  counterfeit,   back   into   the   United   Kingdom  
to   neighbouring   countries.   After   the   the   stamps   are   encrypted   with   the   (Joossens  and  Raw,  2008).
export   tax   was   introduced,   exports   following   information,   such   as   name   Over   the   last   decade,   illicit  
of   cigarettes   declined   rapidly,   but   of   the   manufacturing   site,     the   date   cigarette   trade   fell   from   about   21%  
cigarette   smuggling   continued,   as   the  stamp  was  validated,  and  the  tax   to   13%   in   the   United   Kingdom   (HM  
newly   established   factories   in   a   category  of  the  stamp. Revenue   &   Customs,   2008).   Anti-­
neighbouring   country   were   fuelling   If  a  manufacturer  uses  tax  stamps   smuggling   measures   in   the   United  
the  contraband  market.  In  addition  to   whose   electronic   codes   are   not   Kingdom   included   scanners   for  
the  smuggling  problem,  14  domestic   detected,  not  allocated  to  that  specific   container   detection,   prominent  
cigarette  companies  were  not  paying   manufacturer,   or   not   in   accordance   fiscal   marks   on   packs,   increased  
the   taxes   on   cigarettes.   According   with   the   fiscal   category   of   the   pack,   punishment   for   offenders,   more  
to   the   Brazilian   Ministry   of   Finance,   the   Data   Manager   Server   will   issue   customs   officers,   and   parliamentary  
the   illicit   cigarette   trade   represented   an  alert  to  the  Secretariat  of  Federal   hearings,   which   exposed   tobacco  
35%  of  the  market  in  Brazil  in  2006:   Revenues  to  start  an  investigation. industry  export  practices.  The  United  
20%   smuggling   from   neighbouring   Inspectors,   retailers   and   Kingdom   strategy   to   tackle   illicit  
countries   and   15%   illicit   domestic   distributors   can   easily   detect   trade   was   continuously   updated  
manufacturing  (Fisch,  2006,  2009). counterfeit   cigarettes   by   using   and   included   a   strong   cooperation  
To   tackle   illicit   domestic   specific   hand-­held   scanners.   Law   between   different   agencies.   The  
manufacturing,   the   licensing   enforcement   field   inspectors   can   approach   includes   improved  
of   manufacturers   was   made   have   access   online   to   package   intelligence,  risk  profiling,  tasking  and  
mandatory.   Noncompliance   with   related   data   available   on   the   Data   coordination  to  detect  and  disrupt  the  
the  legislation  or  failure  to  pay  taxes   Manager   Server   by   scanning   the   supply  of  illicit  tobacco  products  (HM  
could   lead   to   the   withdrawal   of   the   code. Revenue  &  Customs,  2008).
manufacturer’s   license   and   the   According  to  the  Brazilian  Ministry  
closure   of   the   factory.   In   addition   to   of   Finance,   the   implementation   of   Case  study:  Italy  and  Spain
the   licensing   obligations,   a   national   the   programme   led   to   the   closure  
integrated   control   and   monitoring   of   several   companies   that   did   not   In   the   1990s,   cigarette   smuggling  
system   for   cigarette   production   comply   with   the   licensing   rules   and   was  a  significant  problem  in  the  EU.  
was  fully  implemented  in  2008.  The   to  US$100  million  less  tax  evasion  at   In   1996,   US   cigarette   companies  
system   included   the   installation   of   the  domestic  market  in  2008  (Fisch,   were   exporting   billions   of   cigarettes  
automatic   production   counters   at   2009). to   Europe,   under   the   transit   regime,  
each   production   line   and   mandated   The  new  policy  was  not  intended   many   of   which   disappeared   during  
the   implementation   of   a   digital   to  have  an  impact  on  the  smuggling   transport  and  ended  up  in  the  illegal  
tax   stamp,   with   capabilities   for   of   cigarettes   from   the   neighbouring   markets  of  Italy,  Spain,  Germany  and  
identifying  each  individual  pack.  The   countries,   and   its   impact   on   this   other  EU  markets.  However,  over  the  
purpose   of   the   new   legislation   was   type   of   illicit   trade   is   probably   minor   last   decade   illicit   cigarette   trade   fell  
to   ensure   that   all   due   taxes   were   or   non-­existent.   As   in   the   case   of   from  about  15%  to  1–2%  in  Italy  and  
collected   on   cigarettes   produced   in   California,  it  was  only  a  combination   Spain  (Joosens  &  Raw,  2008).
Brazil   and   to   verify   the   authenticity   of   policies   (control   and   monitoring   In   Italy,   following   Italian   and  
of   the   tax   stamps   applied   by   the   system,   licensing   of   manufacturers   European   investigations   which   led  

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to   legal   action   against   the   tobacco   dramatic  fall  in  US  exports  to  Europe   1989–95   sales   data   suggests   that  
industry,  and  subsequently  to  a  legally   (Joossens  and  Raw,  2008). coordinated   multilateral   increases  
binding  agreement  with  Phillip  Morris,   The   European   examples   have   in   cigarette   taxes   would   result   in  
there  was  a  dramatic  fall  in  customs   common   factors.   Smuggling   was   significantly   less   tax   avoidance  
seizures   and   corresponding   rise   in   reduced   by   interrupting   the   supply   and   tax   evasion   than   unilateral   tax  
legal  sales.  The  supply  of  smuggled   chain   from   the   manufacturers   to   increases.
cigarettes  into  Spain  was  reduced  by   the   illicit   market,   and   the   evidence   Combating   tax   evasion   remains  
a  combination  of  measures,  including   suggests   that   the   supply   chain   is   difficult,  but  empirical  evidence  from  
intelligence,   customs   activity   in   to   a   great   extent   controlled   by   the   around   the   world   suggests   that   a  
border   areas,   and   international   tobacco   industry.   International   combination   of   measures   such   as  
cooperation,  both  within  Europe  and   cooperation   was   also   crucial.   more  investment  in  enforcement  and  
with   US   authorities   over   the   supply   Enforceable   measures   to   control   dissuasive   penalties,   international  
of  seized  US  brands.  The  European   the   supply   chain,   and   international   cooperation,   including   information  
Fraud   Office   (OLAF)   investigation   cooperative   measures   including   sharing   and   cooperation   in   the  
of  the  tobacco  companies  in  the  US   information  sharing  and  cooperation   investigation   and   prosecution   of  
in   1998   and   the   Spanish   and   Italian   in   the   investigation   and   prosecution   offences,   legislative   measures   to  
customs   activities   and   ensuing   of  offences  are  essential  to  deal  with   control  the  supply  chain  and  the  legal  
lawsuit   against   American   tobacco   the  cross  border  illicit  cigarette  trade. business  can  lead  to  positive  results.  
companies   also   appear   to   have   had   One  study  (Merriman  et  al.,  2000)  
a  significant  impact.  Over  the  period   on  small-­scale  smuggling  and  cross-­
covered  by  these  actions  there  was  a   border   shopping   in   Europe   using  

322
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