1 Frank J. Chaloupka Distinguished Professor, UIC Director, WHO Collaborating Centre on the Economics of Tobacco and Tobacco Control Tax Avoidance & Evasion An Overview Effective Implementation of FCTC Policies Pre-Conference Workshop, 15 th World Conference on Tobacco or Health, Singapore, 19 March 2012

2 Overview Types of tax avoidance & evasion Types of tax avoidance & evasion Measuring tax avoidance & evasion Measuring tax avoidance & evasion Determinants of tax avoidance & evasion Determinants of tax avoidance & evasion Impact of tax avoidance & evasion Impact of tax avoidance & evasion

3 Definitions

4 Tax Avoidance & Evasion Many terms used:Many terms used: Illicit trade, contraband, smuggling, bootlegging, counterfeit, etc. Illicit trade, contraband, smuggling, bootlegging, counterfeit, etc. Tax AvoidanceTax Avoidance Legal methods for avoiding tobacco taxes Legal methods for avoiding tobacco taxes Tax EvasionTax Evasion Illegal methods for avoiding tobacco taxes Illegal methods for avoiding tobacco taxes

5 Tax Avoidance & Evasion Individual tax avoidanceIndividual tax avoidance Reservation, Internet and other direct, duty- free, and cross-border purchases Reservation, Internet and other direct, duty- free, and cross-border purchases Generally not illegal, but states require local taxes to be paidGenerally not illegal, but states require local taxes to be paid Brand/product switching, carton purchases, use of cheaper outlets Brand/product switching, carton purchases, use of cheaper outlets BootleggingBootlegging Small scale purchasing of cigarettes in low- tax/price jurisdictions for resale in high tax/price jurisdictions Small scale purchasing of cigarettes in low- tax/price jurisdictions for resale in high tax/price jurisdictions

6 Tax Avoidance & Evasion Large scale, organized smugglingLarge scale, organized smuggling Illegal transportation, distribution and sale of large consignments of tobacco products Illegal transportation, distribution and sale of large consignments of tobacco products Generally avoids all taxes Generally avoids all taxes CounterfeitCounterfeit products bearing a trademark without the approval of the trademark owner products bearing a trademark without the approval of the trademark owner Often involved in organized smuggling Often involved in organized smuggling

7 Tax Avoidance & Evasion Illegal ManufacturingIllegal Manufacturing Unreported or under-reported manufacturing, distribution and sale of large consignments of tobacco products Unreported or under-reported manufacturing, distribution and sale of large consignments of tobacco products Generally avoids all taxes Generally avoids all taxes Often involved in organized smuggling Often involved in organized smuggling Brand RepositioningBrand Repositioning Industry changes in pricing, packaging, product design, etc. that change tax rate applied to product Industry changes in pricing, packaging, product design, etc. that change tax rate applied to product

8 Measurement

9 Measuring Avoidance & Evasion Difficult to measure given illegality Variety of approaches used Each captures different pieces None fully captures all tax avoidance and evasion

10 Measuring Avoidance & Evasion Comparing recorded exports of tobacco products to recorded imports Difference reflects leakage into black markets Recent estimates suggest percent of exports do not appear as imports 4-10 percent of global consumption Will be largely organized smuggling

11 Extent of Illicit Trade Source: ECOSOC Trade Database: Ayda Yurekli

12 Measuring Avoidance & Evasion “Expert Opinions”“Expert Opinions” Customs officials, tobacco industry representatives, tax authorities, and others Customs officials, tobacco industry representatives, tax authorities, and others Potential bias in some sourcesPotential bias in some sources Widely varying estimates across countries Widely varying estimates across countries Recent estimates 10-12% Recent estimates 10-12% Again, largely reflecting organized smuggling Again, largely reflecting organized smuggling

13 Tax Avoidance and Evasion Source: Tobacco Atlas, 3 rd edition

14 Measuring Avoidance & Evasion Individual tax avoidance a bit easier to assessIndividual tax avoidance a bit easier to assess Econometric analyses of tax paid sales that account for various factors, including: Econometric analyses of tax paid sales that account for various factors, including: tax/price differencestax/price differences population densitypopulation density travel patternstravel patterns DistanceDistance US estimates suggest up to 12.5% of total consumption in early 2000s US estimates suggest up to 12.5% of total consumption in early 2000s

15 Measuring Avoidance & Evasion Individual tax avoidance – self- reported dataIndividual tax avoidance – self- reported data International Tobacco Control Policy Evaluation Study International Tobacco Control Policy Evaluation Study Tobacco Use Supplement to the Current Population Survey Tobacco Use Supplement to the Current Population Survey European Survey on Economic Aspects of Tobacco Use European Survey on Economic Aspects of Tobacco Use Others Others

16 Measuring Avoidance & Evasion Individual tax avoidance – self-reported dataIndividual tax avoidance – self-reported data Tobacco Use Supplement to the Current Population Survey Tobacco Use Supplement to the Current Population Survey Periodic state representative, cross-sectional samplesPeriodic state representative, cross-sectional samples Includes questions on price paid, whether or not purchased in own state, other state or through other channels (e.g. Internet or phone) – 2003 and 2006/07 surveys onlyIncludes questions on price paid, whether or not purchased in own state, other state or through other channels (e.g. Internet or phone) – 2003 and 2006/07 surveys only Does not pick up in-state tax avoidance (e.g. reservation purchases)Does not pick up in-state tax avoidance (e.g. reservation purchases) 2003: 5.63% 2006/07: 5.19%2003: 5.63% 2006/07: 5.19%

17 Tax Avoidance – United States Source: Tax Burden on Tobacco, 2008 and TUS-CPS

18 Tax Avoidance – United States Source: Tax Burden on Tobacco, 2008 and TUS-CPS

19 Pack Inspection B10) Please, could you show me the latest pack of cigarettes or hand rolling tobacco that you bought? No1 Yes2 INTERVIEWER: COLLECT ALL THE FOLLOWING INFORMATION FROM THE PACK. IF IT IS NOT POSSIBLE TO SEE THE LATEST PACK BOUGHT, THEN ASK THE INTERVIEWEE TO PROVIDE THE INFORMATION REQUIRED If you do not have it with you, could you remember the following information on your last pack of cigarettes or hand rolling tobacco? b) Health warnings Health warnings in [country specific] language1 Health warnings in foreign language2 Lack of health warnings3 EU Tobacco/Economics Survey

20 EU Tobacco/Economics Survey

21 Pack Inspection B10) Please, could you show me the latest pack of cigarettes or hand rolling tobacco that you bought? No1 Yes2 INTERVIEWER: COLLECT ALL THE FOLLOWING INFORMATION FROM THE PACK. IF IT IS NOT POSSIBLE TO SEE THE LATEST PACK BOUGHT, THEN ASK THE INTERVIEWEE TO PROVIDE THE INFORMATION REQUIRED If you do not have it with you, could you remember the following information on your last pack of cigarettes or hand rolling tobacco? c) Tax stamp (banderole) [Country specific] stamp1 Foreign stamp2 Stamp removed or destroyed3 Lack of stamp/Duty-free pack4 EU Tobacco/Economics Survey

22 EU Tobacco/Economics Survey

23 Measuring Avoidance & Evasion Combining methodsCombining methods Expert Opinions Expert Opinions Potentially most comprehensivePotentially most comprehensive Econometric modeling Econometric modeling Cross-border shopping, bootleggingCross-border shopping, bootlegging Self-report and pack inspection Self-report and pack inspection Mix of individual avoidance and bootlegging/smugglingMix of individual avoidance and bootlegging/smuggling Littered pack collection Littered pack collection Mix of all activities, but may overstate problemMix of all activities, but may overstate problem

24 Determinants

25 Determinants of Avoidance & Evasion Tax and price differentialsTax and price differentials More important for individual tax avoidance and bootlegging More important for individual tax avoidance and bootlegging Larger scale efforts avoid all taxes Larger scale efforts avoid all taxes

26 Tax Avoidance – United States Source: Tax Burden on Tobacco, 2008 and TUS-CPS

The illicit cigarette market share (%) and the average cigarette pack price($) in high, middle and low income countries in Source: WHO & IUATLD, 2009

28 CorruptionCorruption Weak tax administrationWeak tax administration Absence of tax stamps; weak or non-existent physical controls; unlicensed manufacturers, distributors, retailers; weak customs authorities Absence of tax stamps; weak or non-existent physical controls; unlicensed manufacturers, distributors, retailers; weak customs authorities Poor enforcementPoor enforcement Limited resources for border patrols, customs authorities, etc; low penalties Limited resources for border patrols, customs authorities, etc; low penalties Determinants of Avoidance & Evasion

29 Smuggling and Corruption

30 Presence of informal distribution channelsPresence of informal distribution channels e.g. Street vendors, unlicensed distributors e.g. Street vendors, unlicensed distributors Presence of criminal networksPresence of criminal networks e.g. Organized crime, terrorist organizations e.g. Organized crime, terrorist organizations Determinants of Avoidance & Evasion

31 Policy Options

32 Impact of Avoidance & Evasion IARC Handbook 14: IARC Handbook 14: Sufficient Evidence that tax avoidance and tax evasion reduce, but do not eliminate, the public health and revenue impact of tobacco tax increasesSufficient Evidence that tax avoidance and tax evasion reduce, but do not eliminate, the public health and revenue impact of tobacco tax increases

33 Does NOT Eliminate Health Impact of Taxes Source: Tax Burden on Tobacco, 2008 and TUS-CPS

34 Does NOT Eliminate Revenue Impact of Taxes

35 Impact of Avoidance & Evasion World Bank Policy Report: World Bank Policy Report: Rather than forego tax increases, appropriate response is to crack down on illicit tradeRather than forego tax increases, appropriate response is to crack down on illicit trade IARC Handbook 14: IARC Handbook 14: Strong evidence that a coordinated set of interventions that includes international collaborations, strengthened tax administration, increased enforcement, and swift, severe penalties reduces illicit trade in tobacco productsStrong evidence that a coordinated set of interventions that includes international collaborations, strengthened tax administration, increased enforcement, and swift, severe penalties reduces illicit trade in tobacco products