TOBACCO

Tobacco tax and the illicit trade in tobacco products in New Zealand Ali Ajmal,1 Veng Ian U1

T

obacco continues to have a devastating impact on public health and wellbeing in New Zealand (NZ). Smoking accounts for 4,500–5,000 deaths in NZ every year, with a large proportion being Māori and Pacific people.1-3 Furthermore, the tangible and intangible costs of smoking-related morbidity and mortality are immense; a previous estimate put the annual cost of smoking to the NZ economy at NZ$1.7 billion (2005/06).4 Worldwide, tobacco use remains a major health problem. The World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC) provided a focal point for international efforts to reduce global tobacco demand and consumption; NZ ratified the FCTC in 2004 and progress has been made with various measures implemented to limit the marketing and affordability of tobacco products.

Abstract Objectives: To estimate the size of illegal tobacco trade and consumption and assess the impact of tobacco tax on the illicit tobacco market in New Zealand (NZ). Methods: Data on the import and seizure of legal and illegal tobacco in NZ was obtained from NZ Customs. Previous literature was used to calculate interception rates of illegal tobacco being smuggled and grown in NZ. Annual tobacco returns figures, obtained via the NZ Ministry of Health, were analysed to assess the market dynamics of legal tobacco products. Results: This study found that illicit tobacco constituted 1.8–3.9% of total national tobacco consumption in NZ in 2013. This represents a minor increase compared to previous estimates from 2007–09, suggesting that tax increases enacted by the NZ Government since 2010 have had a minimal impact on encouraging the use and procurement of illicit tobacco. Conclusions: The results highlight a slight rise in small-scale tobacco smuggling through ports and mail centres. However, tobacco returns figures show that current tobacco tax policy has forced manufacturers to focus on the production of cheap legal tobacco products, directly competing with and undercutting the demand for illicit tobacco products. At the same time, locally grown illicit tobacco continues to remain a small, isolated problem and, with recent cuts in duty free tobacco allowance, it is expected that overall illicit tobacco will remain a very small proportion of total tobacco consumption in NZ.

In NZ, the government introduced a major tobacco excise tax increase of 24% on loose-leaf tobacco products and 10% on manufactured cigarettes in 2010, followed by an annual 10% increase on all tobacco products until 2016. In addition, tobacco retail displays were banned in 2012. In early 2014, the Smoke-free Environments (Tobacco Plain Packaging) Amendment Bill passed its first reading. However, smoking prevalence in NZ is currently 15.11%, which is some way off from the government’s goal of making NZ smokefree by 2025.5 Tobacco taxation is a reliable and effective measure for reducing tobacco use. Increasing tobacco tax has been consistently linked with higher quit attempts and lower rates of smoking uptake across many developed countries.6,7 In NZ, the price for a packet of 20 manufactured cigarettes will rise to more

Key words: illicit tobacco, tobacco tax, Smoking New Zealand, illegal tobacco, tobacco control than $20 by 2016, one of the highest in the world. This is likely to have a sizeable impact on tobacco consumption, considering that a 10% increase in price has typically led to a 5% decrease in cigarette demand, in other words, a price elasticity of demand of -0.5.4 In response, the tobacco industry has consistently argued that tobacco tax, in combination with proposed tobacco control policies such as plain packaging, will lead to an increasing number of smokers switching to cheap, illegal tobacco products. Illegal tobacco has the potential to undermine tobacco tax use by providing smokers with a steady source of nicotine at a much lower price, representing a loss of revenue to the government, while also acting as a major source of revenue for organised

crime.8,9 However, recent estimates of illicit tobacco trade in NZ are very low, and illicit tobacco is likely to remain a small proportion of the overall tobacco market in the future. Worldwide, 11.6% of all tobacco is sourced from illicit streams; this amounts to around one in every nine cigarettes.10 A recent study in Europe estimated illicit tobacco trade to constitute 7% of total tobacco consumption in the eighteen surveyed countries.11 Action on Smoking and Health (ASH) NZ estimated illegal tobacco to constitute only 0.7–2.0% of total national tobacco consumption in 2010.9 With the planned increases in tobacco tax and deliberations on plain packaging, tobacco control policy in NZ is entering a significant phase. There is a need to understand the potential repercussions of tobacco tax on

1. Action on Smoking and Health (ASH) New Zealand Correspondence to: Mr Ali Ajmal, Action on Smoking and Health (ASH) New Zealand, PO Box 99126, Newmarket, Auckland 1149, New Zealand; e-mail: [email protected] Submitted: November 2014; Revision requested: January 2015; Accepted: January 2015 The authors have stated they have no conflict of interest. Aust NZ J Public Health. 2015; 39:116-20; doi: 10.1111/1753-6405.12389

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illegal tobacco trade and consumption because of the risks it poses to the successful elimination of tobacco from NZ. This study aimed to estimate the amount of illegal tobacco entering NZ or grown in the country as a proportion of total national tobacco consumption in 2013. Furthermore, a brief analysis of sale quantities of legal tobacco products is also presented in the context of current tobacco tax policy in NZ.

Methods Literature searches using Google Scholar, Google and Pubmed were conducted to identify previous research on illicit tobacco smuggling. Search terms included ‘tobacco’, ‘smuggling’, ‘illicit tobacco’, ‘drugs’, ‘contraband tobacco’ and ‘illicit tobacco in New Zealand’. Phone interviews were conducted with senior staff members from NZ Customs. Information on the NZ Customs’ detection and screening protocols, interception of local and international illicit tobacco products and recent trends in international illicit tobacco smuggling was obtained. Based on the information provided by NZ Customs, major import streams for illicit tobacco products were identified: airports, seaports and commercial premises, and mail centres and other custom-controlled areas. A framework previously developed by ASH NZ was used to estimate the interception of illicit tobacco products at each import stream.9 For misused duty free tobacco products, a separate framework commissioned by British American Tobacco and developed by Ernst and Young was used.12 The basic assumptions underlying each framework were analysed and detailed as part of the calculation process. Tobacco return figures submitted to the NZ Ministry of Health were also analysed to consider trends in tobacco sales over the previous four years.

Results Illicit trade is defined in Article 1 of the WHO FCTC as any practice or conduct prohibited by law and which relates to production, shipment, receipt, possession, distribution, sale or purchase including any practice or conduct intended to facilitate such activity.13 Illicit tobacco trade refers to all non-legal activities related to the tobacco trade and

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includes both tobacco smuggling and illicit tobacco manufacturing.9,13

Amount of contraband detained and smuggled into NZ

There are two main types of smuggling: large-scale and small-scale. Large-scale smuggling involves illegal transportation, distribution and sale of tobacco products, usually in large consignments. It is often arranged by transnational organised crime networks with well-established routes and networks to transfer and distribute the smuggled goods.10,14 Legal amounts of duty-unpaid tobacco products are diverted from the wholesale chain in one jurisdiction during international transportation to the contraband market of a different country.9,15

Smuggled illegal tobacco was estimated based on the amount of illicit tobacco detained at the border and other Customs Controlled Areas (CCAs) (Table 1). These are places where imported goods are inspected and duty free or excisable goods are manufactured, sold or stored.18 The rate of interception of illicit tobacco by NZ Customs was calculated based on the screening processes in place at major import streams including airports, sea ports, commercial and residential premises, and mail centres and other CCAs. NZ Custom’s detection protocols (for illicit goods) are relatively robust and there have been no major changes in practice since 2010 (S. Panettiere, personal communication, April 2014).

In the past, it was usually popular legal cigarettes brands such as Marlboro that were smuggled across international borders.10 However, the last decade has seen a dramatic growth in illicit trade of counterfeit tobacco products that are produced solely for large-scale smuggling. These products are commonly referred to as ‘cheap whites’; they comply with the similar manufacturing requirements as legal cigarettes. Brands in this category include Jin Ling, produced in Russia for distribution in other European countries, and Manchester, which is distributed in Australia.10 Bootlegging or small-scale smuggling involves the purchase of tobacco products that exceed the allowance set by customs regulations from a low-tax country, and then smuggled and resold in a country with a higher tobacco tax. Small-scale smuggling is usually conducted by individual travellers or small tourist groups.15 China is a major source of contraband and counterfeit tobacco. The most common destinations for counterfeit cigarettes from China are North America, Europe and Africa.12,16 Illicit cigarette consumption in NZ was estimated to be 1.3% of total cigarette consumption in 2012 by Euromonitor International.17 The market intelligence firm, whose clients includes the tobacco industry and other governments, based their calculation on the 2010 Ernst & Young report commissioned by British American Tobacco.12 A more accurate estimate of illicit tobacco in NZ was calculated by ASH NZ, which used a combination of previous research, interviews with NZ Customs personnel and empirical modelling of tobacco sale and consumption figures to calculate that illicit tobacco formed 0.7–2.0% of total consumption in 2010.9

• At airports, all luggage is screened by X-ray and drug detection dogs in the baggage claim area. We assumed a 50% interception rate for contraband tobacco entering through airports.9 • At cargo streams, we used previous estimates by Ernst & Young, which reported a 6–15% interception for shipped contraband.12 • At mail centres, parcels are examined manually and are also screened by X-ray, therefore we assumed a 50% interception rate for this import stream as well.18 The amount of released contraband (or the amount of tobacco detained) and the estimated illegal tobacco entering NZ is shown in Table 1.

Estimated duty free misused It is illegal for duty free tobacco to be exchanged, gifted or sold without the relevant excise and duty and GST being paid in NZ. In 2013, the duty free tobacco allowance was 200 manufactured cigarettes or 250g of loose tobacco or 50 cigars (or a combination thereof weighing less than 250g). Based on previous research, we assumed for this study that the volume of duty free tobacco imported into NZ by individuals was equal to the volume of duty free purchased in NZ and exported.12 According to this premise, the sales quantities of duty free products provided by tobacco companies from their annual returns in 2013 indicate that duty free consumption in NZ for the year was 75.8 million cigarettes and 30.2 tonnes of tobacco.

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Total illegal tobacco consumption NZ 2010–2013

In 2013, 4.97 million air passengers and 55,000 sea passengers entered NZ. We used the following assumptions: • 72% of the passengers were 19 years or older (based on data from the NZ Census)19 • of the passengers aged 19 and over, 12– 13% were smokers (less than the national average smoking rate of 15% based on the assumed higher-than-average socioeconomic status of international passengers) • 80% of those smokers chose to purchase their full allowance of duty free tobacco • 70% purchased manufactured cigarettes and 30% loose tobacco (based on previous research by ASH NZ and Ernst and Young)22,23 • passengers did not exceed their duty free allowance

Based on these assumptions, we estimate the amount of duty free tobacco illegally sold or exchanged in NZ in 2013 was 24.5–28.5 million cigarettes and 2.8–4.9 tonnes of loose tobacco (Table 2).

NZ grown and manufactured illicit tobacco

The number of cigarettes, both manufactured and from loose-leaf tobacco, consumed in NZ annually from 2010 to 2013 was estimated at between 3,406 and 3,479 million sticks. Of these, 61.2–134.7 million cigarettes were illegal, forming 1.8–3.9% of total annual cigarette consumption for that period.

Tobacco sales in NZ The NZ tobacco market is dominated by three major companies: British American Tobacco

Table 1: Overview of illegal tobacco detained by NZ Customs and undetected illegal tobacco entering into NZ 2010 - 2013. Detained contraband Average annual amount of tobacco detained 2010-2013* Cigarettes (000’s) Airport

Interception rate

Undetected Contraband Average annual amount of illegal tobacco entering NZ 2010-2013

Loose leaf tobacco (kg)

Cigarettes (000’s)

Loose leaf tobacco (kg)

441

180

50%

441

180

50

1,548

6-15%

285-787

8,770-24,248

Mail centre & customs controlled areas

471

591

50%

471

591

Total

962

2,319

1,197-1,699

9,541-25,019

Sea ports, commercial and residential premises

*Note: Tobacco detained by NZ Customs is only released for public consumption once excise duty on it has been paid

Table 2: Legal and estimated illegal amounts of tobacco consumed in NZ. Cigarettes (million sticks)

Commercial tobacco growing is illegal in NZ. The current personal allowance for tobacco growing in NZ is 15 kilogram per person per year.

Legal tobacco sale volume

Loose tobacco (tonnes)

Min.

Max.

Min.

Max.

2,057

2,057

641

641

1

1

2.3

2.3

Illicit tobacco smuggling

NZ Customs confirm that there have been no large-scale (>0.5 tonnes of loose tobacco) seizures of illegally grown tobacco since 2010 (S. Panettiere, personal communication, April 2014). The most recent seizure of illicit grown tobacco reported in the media was the highprofile seizure case in Motueka in 2010.20,21 Consequently, the previous estimate by ASH NZ of illicit grown tobacco, amounting to 5.7 to 22 tonne per year, is still valid. This minimum estimate was based on the amount of tobacco detained by NZ Customs. The maximum estimate was based on the land areas (20 acres) found in Motueka for illegal tobacco growing and the commercial yield (1.1 tonnes/acre) of tobacco grown in NZ between 1988 and 1994.9

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The average annual consumption of tobacco in NZ from 2010 to 2013 is shown in Table 2. The amount of loose-leaf tobacco products has been converted to cigarette sticks based on an average weight of 0.5 grams per looseleaf tobacco stick.22

Streams

• the duty free tobacco that wasn’t purchased and consumed by these smoking travellers was purchased by nonsmoking travellers who sold, exchanged or gifted their allocation to family, friends or acquaintances.

A range of scenarios were examined for amounts of local-grown tobacco, interception rates and amount of tobacco per loose-leaf tobacco stick. Changing the home-grown tobacco estimate by 20–30 acres changed the illicit consumption estimate by 1–1.5%. Varying the amount of tobacco per loose-leaf stick to 0.7 grams tobacco per cigarette had a very small impact on the estimate (0.11%– 0.46%) while varying the airport and mail centre interception rates by ±25% changed the estimate by 0.03%.

-Detained Contraband -Contraband -Misused duty free

1.2

1.7

9.5

25

24.5

28.5

2.8

4.9

5

22

661

695

Illegal manufacturing -Locally grown illegal Total

2,084

2,088

Conversion of loose tobacco from tonnes to cigarette sticks (0.5g tobacco per loose tobacco stick) (million stick) Total loose tobacco available for consumption Total illegal loose tobacco available for consumption

Min.

Max.

1,322

1,391

35

104

Estimated total consumption (cigarette and loose leaf tobacco) (million stick) Estimated total illegal tobacco consumption

Min.

Max.

61.2

134.7

Estimated total tobacco consumption

3,406

3,479

Illegal tobacco as proportion of total consumption

1.79%

3.87%

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NZ (BATNZ), Imperial Tobacco NZ (ITNZ) and Phillip Morris NZ (PMNZ). Combined, these three companies account for 98% of total annual tobacco sales in NZ.23 There has been a steady decline in tobacco sales volume in NZ over the past four years. From 2009 to 2013, cigarette and loose tobacco sales have fallen by 19.18% and 29.33%, respectively (Table 3). This decline has been more rapid from 2010, driven in part by the increased tobacco tax and tobacco control policies such as prohibitions on the display of tobacco products for sale.24 Analysis from ASH NZ shows that over the same time period, budget cigarettes ($0.92 per cigarette stick) cigarette sales went down by 4.11%; mid-price ($0.85– 0.92 per cigarette stick) by 3.43%; and value ($0.87–0.79 per cigarette stick) by 25.3%.23 Consequently, while the overall volume of tobacco being sold in NZ has seen a steady decline since 2010, a rapidly increasing proportion of sales for tobacco manufacturers now results from lower-priced, budget tobacco products.

products for smuggling activities.10,15,25 As a result, organised movement of large shipments of illicit tobacco to NZ are becoming increasingly uncommon, and are replaced by an increasing number of smaller consignments arriving in the country through air and seaports and international mail centres.26 In contrast, with commercial tobacco growing having been outlawed since 1999 and a number of high-profile seizures by NZ Customs having followed, there are few people remaining in NZ who have the necessary land or specialist knowledge to manufacture tobacco for illicit sale (S. Panettiere, personal communication, April 2014). The misuse of duty free tobacco is also expected to remain a relatively minor problem, with the NZ government recently announcing a reduction in the duty free tobacco allowance, down from 200 cigarettes to 50 cigarettes or 50g of tobacco or cigars.27 The NZ Government has pursued an aggressive tobacco taxation policy since 2010, with 10% annual increases in tobacco tax planned until 2016. This has led to a reduction in the demand for tobacco, forcing tobacco manufacturers into even tighter competition for a share of the shrinking market.23

The current estimate of illicit tobacco consumption as a proportion of total tobacco consumption in NZ shows an increase of 1.1–1.9% compared to previous reports.9

With large proportions of smokers attempting to quit due to the rising cost of tobacco and concerns about the dangers of smoking, price and packaging are the only viable avenues for competition left for tobacco companies.28 As a result, tobacco manufacturers are driving down the costs of their products in an effort to maintain their market share, making them almost as cheap as counterfeit products.26,27

This is partly explained by the distinct increase in the volume of small-scale illicit tobacco shipments entering NZ, usually carried by individual passengers or sent by mail (S. Panettiere, personal communication, April 2014). This shift from large-scale tobacco smuggling to small-scale bootlegging is due mainly to tighter regulation of export practices by numerous countries, and legal action against tobacco companies for their role as suppliers of contraband tobacco

However, illicit tobacco products are usually of low quality and taste, are difficult to obtain in NZ and carry heavy legal penalties.29 With the sharp increase in sales of budget cigarettes since 2010, it is evident that many smokers are mitigating the financial burden of the increasing tax by switching to cheaper brands of legal tobacco products.23 This suggests that tobacco tax has had a minimal impact in encouraging illicit tobacco trade and consumption in NZ. Rather, it has

Conclusion

Table 3: Sales quantities of legal tobacco in NZ: 2009 – 2013. Sale quantity (kg) All cigarette brands All loose tobacco brands Total NZ market

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2009

2010

2011

1,634,056

1,589,296

1,459,295

2012 1,454,131

2013 1,320,594

767,908

736,010

660,775

613,451

563,862

2,431,964

2,325,306

2,120,070

2,067,582

1,884,456

forced the legal tobacco market to compete aggressively on price, thereby undermining the economic draw of illicit tobacco products. Within a broader context, raising the price of legal tobacco products may also increase the use of legal home-grown tobacco and electronic cigarettes. Current legislation in NZ has provisions for individuals to grow and process 15 kg of tobacco per year for personal use. This equates to around 59–82 cigarettes per day for about a year – a generous limit, considering the average number of rollyour-own cigarettes smoked per day is 10 for females and 15 for males.30 While this may encourage some individuals to switch to home-grown tobacco to reduce the cost of sustaining their habit, home-grown tobacco has a harsh, bitter taste that compares unfavourably to commercially available tobacco. Moreover, growing and processing tobacco is a lengthy and complicated process that serves as a significant barrier to entry for the majority of smokers.31 Electronic nicotine devices (ENDs), of which electronic cigarettes (e-cigarettes) are the most common type, are small devices that vaporise a nicotine aerosol the user then inhales. E-cigarettes have rapidly increased in popularity since their launch in 2004, with many smokers using them as quitting aids.32 Dual use is also very common, as e-cigarettes produce a similar effect to that of traditional tobacco products while being easier to use and generally cheaper than cigarettes.33 NZ has made it illegal to locally sell e-cigarettes that contain nicotine, but smokers can legally import the devices and their nicotine aerosols for personal use through the internet from international markets in Asia and Europe. In many countries, e-cigarettes have not been subjected to the tight regulatory control that is applied to tobacco products.34,35 Consequently, the rising cost of legal tobacco in NZ may lead to a growing number of smokers using e-cigarettes as both an alternative and complement to conventional tobacco products. This is a concerning prospect given the increasing investment of the tobacco industry in the ENDs market and our own lack of understanding of the product’s full health effects.36,37 Overall, both legal home-grown tobacco and ENDs offer credible alternatives to smokers to mitigate the rising cost of commercial tobacco products without resorting to the illicit tobacco market in NZ. While the harsh tasting tobacco and labour intensive process might dissuade the majority of smokers from

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growing their own tobacco, e-cigarettes and other ENDs offer a much easier, cost-effective way to obtain nicotine. Consequently, the rising popularity of these devices requires an urgent consideration of how they fit within the larger tobacco control landscape and their future implications on tobacco control policy in NZ. The paucity of reliable data from credible sources makes it difficult and challenging to assess the actual scale of illicit tobacco smuggling. Often, there is a lack of clear methodological design in academic studies, while data from the tobacco industry tends to overstate the problem altogether.17 The intricacies of navigating conflicting jurisdictions across international borders also adds to the complexity of the problem.10,15 The strength of this study is based on its use of credible data sources for its estimation models. All of the information included in the study was obtained directly from NZ Customs and the Ministry of Health and, to the best possible extent, we accounted for all illegal sources of tobacco that contribute to the NZ illicit tobacco market. This study used a number of key assumptions as part of its framework, the rationale behind each of which is clearly outlined. When estimating the amount of misused duty free tobacco, it was assumed that total duty free tobacco imports equalled the volume of duty free tobacco purchased in NZ and exported. However, rising tobacco prices mean higher profit margins for misused duty free tobacco. With annual increases in tax driving the price of tobacco up since 2010, the actual amount of duty free tobacco imported into NZ was probably higher than what was assumed, leading to a potential underestimation of the volume of misused duty free tobacco. Furthermore, the current estimate of illicit home-grown tobacco was based on figures that have not been updated due to a lack of recent, reliable data. Accordingly, the results of our calculations are, at best, an approximation of the size of the problem. In conclusion, this study found that illicit tobacco consumption continues to form a very small proportion of total tobacco consumption in NZ. In addition, tobacco tax increases since 2010 have not led to a sizeable increase in the usage or supply of illicit tobacco. With no land borders and a highly competent customs force, it is likely that illicit tobacco will continue to constitute a very small proportion of total tobacco consumption in NZ for the foreseeable future.

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Acknowledgements We thank Dr El-Shadan Tautolo and Dr Janine Paynter for their helpful comments on the earlier drafts of this manuscript.

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2015 vol. 39 no. 2

Tobacco tax and the illicit trade in tobacco products in New Zealand.

To estimate the size of illegal tobacco trade and consumption and assess the impact of tobacco tax on the illicit tobacco market in New Zealand (NZ)...
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