Tobacco Taxation and Illicit Trade; Are they connected? Kenya’s Experience Washington DC April 18th-19th 2017 Caxton Masudi Ngeywo, Chief Manager and Head of Market Surveillance, Kenya Revenue Authority

methods of evasion In 1993 tax audit revealed that all tobacco manufacturers were engaging in one form of tax evasion. Illicit trade in Kenya largely involves formal production facilities or importers Undeclared production or imports and under declaration of excise values account for more than 90% of illicit trade, the rest being counterfeited products. Illicit trade involves formal brands being traded in the parallel market Smokeless and electronic tobacco is an emerging challenge

Tobacco Companies and illicit trade TC uses illicit trade as a scare against increased taxation presents itself as a champion against illicit trade by offering training that always exaggerate illicit trade. periodically organised anti illicit trade workshops to share “their story”

Tax Rates Vs Illicit Trade Before up to 2003 130% (Purely ad vaorem) Limited controls Industry highly trusted Effective rates less than 30% of price Audit estimated illicit trade at more than 70% 2003 - 2013 Introduced stamps Attempted various tax models models (specific on bands) Increased controls increased effective rate to 52% of the price Reports estimate illicit trade at 15% 2013 - 2017 Reformed tax structure further (Specific rate) enhanced controls by introducing track and trace reviewed the law to enhance enforcement Tax increased by 100% in 2015 for low priced cigarettes (towards WHO FCTC requirements) Illicit trade estimated at 5%

Opportunities for Illicit Trade complicated tax structure (ad valorem and weak enforcement provisions limited controls (industry cant self regulate effectively) differences in tax rates in regional countries porous borders lack of independent trade and tax analysis by governments

Reforms aimed at enhancing tax compliance Simplification of the tax structure (2003, 2008, 2011, 2015) Licensing of manufacturers and importers Use of tax stamps (2003, 2013) Use of supply chain technology (ECTS, T&T, SCANNERS) enhancing enforcement capacity (Creation of Market Surveillance function) (2013) Regional Integration (Single Customs Territory) (2014) Stakeholder partnerships (Inter agency and Industry collaboration)

Outcomes These initiatives have led to the following; good revenue performance reduction in illicit trade Closure of 3 factories that couldn’t compete after effective tax regime reduction of importers of tobacco products Through Ease of determination of tax payable effective production controls Easy detection and seizure of illegal cigarettes. In 2013- 15 a total of 20 million cigarettes were seized,

Thank You caxton.ngeywo@kra.go.ke