1. Sofia, 3 June 2011 Illicit tobacco: tax policies and the risks of organised crime

2. Steep increase in excise taxes and lagging personal incomes  EU excise tax rates reflect Old MS incomes  Leveling excise tax rates across the EU creates unequal pressure on consumer spending  Spending on cigarettes in Bulgaria increased from 5% of monthly income in 2002 to 16% in 2010  For low-income families spending on cigarettes theoretically should have reached 30% of monthly incomes Average monthly Salary (BGN)

3. Affordability ratio and levels of tobacco use (2010)  High level of tobacco consumption in countries with high affordability ration  Demand for illegal cigarettes and pressures on consumers to quite smoking is 3 times higher in Bulgaria than in ES, EL, DE EU average: 1,7%

4. STATE BUDGET OVER-DEPENDENCY ON EXCISE TAXES  Growing dependency: from 4.75% budgeted state income in 2001 to 9.84% in 2010 (12% with VAT).  Without the illegal market, cigarettes excise tax would constitute 18% of present budgeted state income  In other EU countries lower proportions: FR - 1.1%, AU and BE - 1.2%, DE -1.3%, UK - 1,4%, ES - 2.0%, Greece - 3.6%  Over certain excise tax levels collection is problematic  Reduced tobacco consumption would lead to significant state budget deficit. 2000 г.2001 г.2002 г.2003 г.2004 г.2005 г.2006 г.2007 г.2008 г.2009 г.2010 г. 4,754,926,496,317,236,998,559,359,8910,769,84 Excise tax levels Income from excise taxes

5. Low priced legitimate cigarettes as a barrier to the illegal market 1 euro

7. Legal – Illegal market (billion sticks) 2008 vs. 2010 19,1 20082010 10,510,5 1,91,9 6,56,5 1,01,0 3,0 Legal market Illegal cigarettes Quitted smoking Illegal leaf tobacco Illegal cigarettes

8. Illegal market size and participants 6,5 billion sticks annually 54 containers per month ~ 25% ‘ant’ / bootleggers; illegal manufacturing 650 000 packs / day ~15 000 retailers, guards, couriers etc. retailer ~ 50 packs / day ~1300 low mid-level wholesalers ~ 40 containers / month smuggled by organised crime = ~ €300 million illegal annual turnover (€1.25 per pack)

9. Smuggling illegal tobacco in the EU Bulgaria distribution levels: Greek contraband hub : 200 containers sold per month; €700 million in annual profits; Profits from sale of 5 containers breaks even with the seizure of 2  40 containers sold per month; €25-45 million in annual profits; Profits from sale of 3 containers breaks even with the seizure of 1; 5-7 large importers  30-50 wholesalers (‘van level’): 200-300 master box / per van; 3-5 vans per month; €45-70 million annual profit; (€ 0.5- € 2 million per person)  150-300 mid-level wholesaler (20-30 master box per month 3-5 per month )

10. Illegal tobacco impact in Bulgaria  Other big EU markets: Germany ($7.2 billion) и UK ($5.5 billion ) = 0.2% of GDP  €300 million illegal annual turnover for organised crime / 0.85% of GDP  Social impact: criminal behaviour of ordinary citizens (consumers and retailers)  Corruption impact of public institutions: police, customs, community leaders in minority neighbourhoods  Scale of illegal trade close to the 1990s: long-term influence