1. 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

2. 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

3. 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”

4. 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%
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%
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%

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

6. 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)

7. 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 a total of 20 million cigarettes were seized,

8. Thank You