Presentation to Standing Committee on Finance The Tobacco Institute of Southern Africa ______________________________________________________________________________ Presentation to Standing Committee on Finance 02 May 2018 DISCLAIMER: Figures and statistics referred to in this presentation, represents an industry view based on external research and publicly available market information. The definition of “illicit trade” for purposes of this document includes any product sold to consumers below R17,85, and/or being non-compliant to the Tobacco Products Control Act, No 83 of 1993 (as amended). The various brands referred to herein are assumed to be manufactured and /or distributed by the corporate entities who publicly claim to do so.  TISA accepts no responsibility or liability whatsoever with regard to the information or statistics quoted incorrectly or out of context from this presentation by any person.

TISA Scope & Mandate TISA is the industry body for the legal tobacco sector in SA; mandate extends into the South Africa Customs Union (SACU) region. TISA represents farmers, leaf processors, leaf merchants, manufacturers, importers and exporters of all tobacco products; in the legally compliant industry. Clear distinction between legal and illegal industry Strategic objectives: Regulation (secure a reasonable regulatory framework for the sector) Illicit Trade (strategy to bring down illicit rates in cooperation with Govt) To ensure the sustainability of tobacco sector, including farmers. TISA believes in public/private partnerships to achieve objectives for the Govt (NDP), the sector and SA pty ltd, on the basis of trust, mutual respect and good relationships.

The impact of TISA members’ total interests on the South African economy 2014 TISA Members stimulate economy-wide production of amounting to more than R54.3 billion Supported 108,475 jobs in SA Combined contribution of R22.4 billion in government tax revenue Combined contribution of R23.0 billion to SA’s GDP For every R100 of tobacco product sales, the SA economy realises a GDP gain of R121 A 1% increase in the output or production of the tobacco sector results in a 0.7% increase in aggregate GDP

The tobacco sector’s contribution to the economy Directly supports 8,000 - 10,000 in the agricultural sector Generates returns of more than R568 million annually for tobacco farmers Has a market valuation of R28.8 billion Pays over R17.2 billion annually to the government in the form of excise and value- added tax Exports tobacco products to the value of R 2.6 billion annually to various countries Supports 179,532 wholesalers and retailers

Overview – TISA / SARS Engagement 2005 Strat sessions around a SARS / TISA (Tobacco Industry) Forum commenced. 2006 SARS/TISA Forum officially launched in August 2006. Non-TISA players from the industry were also invited to attend these meetings. SARS developed an internal Tobacco Strategy in 2006 which was presented to the SARS / TISA Forum. Part of this strategy included a proposal to replace the current SA diamond stamp: 2009 On 13 October 2009 the SARS Forum mandated TISA to run a pilot based on new technology to replace the diamond stamp.

2010 - 2011 The pilot ran in 2010. Transparent project overseen by TISA and SARS. Results were presented to various SARS delegations 2010/2011 at the factory and at SARS, including Exco. Budget Speech 2011, Finance Minister, Pravin Gordhan: “We are also, in conjunction with the tobacco industry, investigating a new method of marking and authenticating legal cigarettes with a counterfeit-proof digital system to replace the current “diamond mark”. The technology was mostly accepted by SARS. Then, Ministry of Health intervened – a solution from industry was not acceptable.

2013 TISA received a Merit Award from World Customs Organisation in 2013. “For rendering exceptional service to the international customs community” SARS referred many times to TISA as setting an example of how public/private partnership should be conducted. Over the years, TISA assisted SARS with: Independent research and market information Inspection of alleged illicit product / affidavits Information sessions / training manual Destruction of illicit tobacco products Cross-border liaison / MoUs Operational: Customs ops meetings

2013 - “Project Honey Badger” SARS was preparing to seriously take action on the illicit traders. SARS letters to Industry, November 2013, announcing Project “Honey Badger”. (JvL) 2014 “Rogue unit” allegations in 2014. Sept 2014 – New SARS Commissioner appointed. Oct 2014 – SARS specialised unit closed down. All cases the specialised unit were working on seemed to come to a grinding halt. From outside, it seemed if not much happened in SARS in dealing with illicit cigarette trade from 2014 to 2017. Role of certain tobacco companies well documented in book by JvL.

2017 TISA initiated efforts to re-establish working relationship with SARS. Jacques Pauw book published end of 2017: “The President’s Keepers” – sheds further light on certain cigarette manufacturing companies’ close involvement in alleged state capture. November - TISA Submission to Treasury / SARS: Digital Tax Verification System with T&T capabilities: A digital solution based on open standards. 2018 Further meetings and discussions between TISA and SARS. First formal, broader SARS/TISA meeting today, 14 March 2018.

Illicit Trade: Understanding the Problem Counterfeit, non-compliant, Duty not Paid Is the product compliant with National Health Regulations? Yes R 17-85/20 Is the product sold below the MCT (minimum collectable tax) No Yes, requires investigation

Illicit Trade in Tobacco Products in SA Independent Research shows that at least ¼ of the market is illicit, in certain channels of the market 50%-100% is illicit, flooded with cheap products selling below R10 and as low as R5/pack Until 5-6 years ago, cross-border smuggling was the main contributor to illicit trade, but currently almost 90% of the illicit trade in SA is due to excise manipulation / part-declaration by local manufacturers. (honesty based system in SA, duty at source) For 2018/19, the MCT is R 17.85 (R 15.52 excise plus R 2.33 VAT): Up 8.5% on previous year. TISA cigarette volumes declined by 20.6% from 2012-2017 OTP (other tobacco products) experiencing decline and illegal competition due to illicit operators.

Some cigarette brands found in the informal sector Counterfeit matches Source: Sustainable Livelihoods Foundation R10.00 Above and below: Examples of brands members of the public report to TISA selling at below MCT. R14.50 Some cigarette brands found in the informal sector Source: Sustainable Livelihoods Foundation http://livelihoods.org.za/projects/competition-in-the-informal-grocery-retail-sector

Illicit cigarette volumes (million sticks) and incidence Illicit tobacco in SA Illicit cigarette volumes (million sticks) and incidence This illicit market undermines the legal tobacco value chain’s investment, and significantly deprives the government of revenue.

The cost to SA Fiscus of illicit tobacco Estimated loss to the Fiscus (Excise and VAT, Rand millions) Between 2010 and 2016, the loss amounts to over R27 billion.

Impact of the Illicit Trade in Tobacco Products Fiscal Impact Between 2010 and 2016, the fiscus lost R27 billion due to the illicit trade in tobacco products. At least R5bn pa, or 10% of Govt shortfall of R50bn Apart from Excise, also VAT, company tax, personal income tax etc etc. Social impact Compromises the government’s health agenda: Market flooded with cheap, non-duty paid cigarettes; Non-compliant with tar & nicotine regulations, etc.; no quality control Threat to jobs, especially in deep rural areas, e.g. 8000 – 10 000 tobacco farm workers with 30 000 to 35 000 dependants 155 emerging tobacco farmers planting tobacco and food crops, promoting food security Fuelling Organised Crime and Corruption Interpol has found that the illicit cigarette trade funds criminal networks of human trafficking, weapons and drug smuggling or terrorist activities.

TISA Expectations and Offer of Assistance to combat illicit trade in tobacco products TISA cannot act against illicit traders – this is the mandate of SARS and other law enforcement agencies. Partnership between TISA and Govt only way to eradicate illicit trade. Currently, almost 90% of illicit cigarettes sold in SA are manufactured locally. The mandate to act therefore lies squarely in the domain of SARS. Proposals: Short-term: Place customs officials in all cigarette manufacturing plants to monitor inputs (e.g. RIP cigarette paper; filter tow; packaging material; tobacco) vs output (total cigarettes produced and declared). Urgent attention to Minimum pricing and stronger enforcement proposed by the Minister of Finance in budget speech. Stable Excise regime – higher excise stimulates illicit directly

TISA Expectations and Offer of Assistance to combat illicit trade in tobacco products Prioritise the process of replacing the diamond stamp by new technology. Requirements from TISA re new technology: Digital marker (not paper-based) Based on open standards, interoperable, cross sectoral, non-proprietal, Capability to perform digital volume verification, authentication and track & trace. Must be under SARS control Must be affordable Participation by industry Independent 3rd Party Illicit Trade Research – Commissioned by TISA: New read of the illicit market expected around June/July 2018. TISA will share this information with SARS and other law enforcement agencies. TISA Training offer to SARS: Training manual plus farm to factory visits/sessions. Custom-made mobile hammer mills for the destruction of illicit cigarettes. TISA continues to receive requests for destructions.

Closing Remarks Political will from Govt to establish the fight against illicit trade as a national government priority. Oversight role by parliament. Report to Committee about actions on illicit tobacco trade. Partnership between legal industry and Government only way to address illicit trade activities.

Closing Remarks Administrative Controls - SARS Excise controls – Digital Product Marking/Verification and end to end Audits. Enforcement Increased cross-discipline resourcing and / or dedicated law enforcement. Increased product seizure, asset forfeiture and investigations leading to kingpins. Prosecutions Bringing greater urgency and resourcing to registration and completion of investigations and prosecution of major role players. Greater alignment from interdependent functions to drive prosecutions to effective completion.

Closing Remarks Cabinet has on 25 April 2018 approved a new tobacco control bill for public comment. From statements made in the media by the Honourable Minister of Health, the legislative proposals are extreme and may even exacerbate the current high levels of illicit trade. Our appeal to Government and Parliament is to first deal with the illicit trade in tobacco products before imposing further tobacco control legislation. If illicit trade is not dealt with decisively, there may soon be no legal industry to regulate.

of our country and its people. We thank Honourable Members for this opportunity and wish you well with your very important work in the interest of our country and its people.