Global Illicit Trade Forum addresses the issue in GCC countries
At the beginning of 2018 Saudi Arabia and the United Arab Emirates introduced VAT for the first time, set at a rate of 5%. This was part of an effort to diversify government revenue with other Gulf Cooperation Council (GCC) countries set to impose a similar tax in due course. In addition to this, certain products classed as ‘harmful’, such as tobacco and energy drinks, are being singled out to face a huge 100% tax levy in these countries.
While generating additional revenue is good for the government and public spending, and reducing affordability for the consumer can have significant health benefits, increasing the tax on products such as cigarettes can come with problems. In an ideal world, customers who find themselves priced out of purchasing tobacco through mainstream channels would give up the habit; the reality, however, is that many will turn instead to the black market in an attempt to source these products cheaper.
At a recent conference, Brendan LeMoult, Fiscal Affairs and Anti-Illicit Trade VP at JTI (Japan Tobacco International), took to the podium to issue a stark warning about the current state of counterfeit tobacco products, particularly in the countries which make up the GCC.
LeMoult argued that increased taxation leads to increased illicit trade activity and the higher the tax rises, the greater the lure of counterfeit products becomes to consumers. This is because increased taxation means the price difference between genuine and counterfeit products becomes so marked that consumers feel the saving they are making is worth partaking in such an activity; when the price difference is negligible, the incentive to purchase illegally produced goods is lessened.
While not arguing against taxation full stop, he asked for a long-term approach to be considered to ensure the taxes imposed on such products are moderate and stable. LeMoult said: “When the tax goes up, the illicit trade will go up – it boils down to making sure to let the market settle, letting harmonization become part of the GCC so every market is similar, and develop a long-term tax calendar that will benefit revenue and consumption in achievable goals. Regulators, law enforcement experts and the private sector need to work together on the issue.”
Keen to acknowledge this is not an issue confined to the GCC, but instead a worldwide problem, LeMoult pointed to countries including Russia and areas of the United States, such as New York, which have seen significant increases in taxation on tobacco followed by a similarly big uplift in the prevalence of counterfeit cigarettes.
Moving away from tobacco, attention was then turned to the pros and cons of Free Trade Zones (FTZs) and the role they have to play in illicit trade activity. Although FTZs can be great for generating income and providing employment for a huge number of people, they can also be a perilous blind spot which can encourage and facilitate illegal activity. Restricted access for law enforcement agencies and casual inspection procedures, coupled with a lack of transparency from some businesses operating in these areas, make FTZs a perfect breeding ground for this type of behaviour. LeMoult commented: “You are seeing a lot of cigarettes imported through free zones, buried behind milk, or mis-declared as furniture, for example… one truck can contain 10 million illicit cigarettes.”
Counterfeit goods and other illicit trade activities are a huge problem the world over, however, the very nature of these underground activities makes quantifying the scale of the issue extremely difficult, if not impossible. Estimates vary wildly from $650 billion to over $3 trillion worldwide and growing. What came out of the recent Global Illicit Trade Forum was the message that combatting this problem is a global challenge, and any solution likewise needs to be a collaborative effort involving bodies from around the world.
