Memorandum submitted by Philip Morris
Philip Morris International
welcomes this opportunity to comment upon current strategies for
tackling tobacco smuggling in the UK. We will address each of
the issues upon which the Committee has invited comment.
1. THE LEVEL
1. By its very nature, the level of excise
duty fraud is incapable of precise definition. Because illegal
tobacco sales take place outside legitimate sales channels, there
is no reliable way to calculate their exact volume. This problem
is exacerbated further in the case of the UK because genuine non-domestic
products found in the UK market but emanating from other EU Member
States may or may not have been imported legally, depending on
where and under what circumstances they were purchased, and by
whom they were ultimately consumed.
2. There are several different methodologies
for attempting to measure the level of illegal tobacco products
in a domestic market.
(1) Market surveys based on the collection
of cigarette packs. These can confirm the existence or non-existence
of genuine non-domestic products or counterfeit products in the
relevant market at a particular point in time. However, it is
only through repeated surveys in the same area and under the same
conditions that trendsupward or downwardcan be detected.
Even then, the level of illegal products cannot be determined
with precision, since it depends upon the extrapolation of data
from a sample and its application to the entire market. In our
experience, depending in part on the underlying methodology and
the collection techniques, these extrapolations can generate unreliable
(2) Consumer surveys are subject to
the obvious and inherent bias that accompanies asking a consumer
whether they have purchased cigarettes illegally. For this reason,
consumer surveys have extremely limited utility in determining
the size of the illegal market.
(3) Seizure statistics. Again, these
statistics can provide an indication of the presence of illegal
products entering the UK. They can also be very useful in ascertaining
trendsfor example, the changing routes that smugglers use
to gain access to the UK marketwhich can then be used to
focus the resources of customs and police authorities more appropriately.
However, absent some reliable ratio for the volume of seized products
versus the volume of illegal products that escape seizurea
ratio that is constantly changingit is impossible to use
seizure statistics to measure the size of the illegal market.
3. In fact, none of these methodologies
can account for the impact of legal intra-EU sales on the UK market.
It is extremely difficult in practice to determine whether genuine
products from other EU Member States that are found in the UK
have been purchased in accordance with the relevant rules on free
movement of intra-EU goods, or have been imported illegally from
other EU Member States for re-sale on a commercial basis. There
are other factors which have the potential to affect the size
of the legitimate market such as declining smoking incidence and
more people purchasing their cigarettes legally abroad, both of
which would account for fewer legitimate sales of UK tax-paid
4. In short, we do not believe that there
is any way of calculating the precise size of the illegal tobacco
market in the UK. Each method suffers from one or more flaws,
although taken together, they can provide information upon which
to base a very general estimate. HMCE's estimate of 18% of the
cigarette market and 51% of the hand rolling tobacco market is
such an estimate, and on that basis we do not disagree with its
5. What we can say with some certainty is
that the UK is one of the most attractive markets in the world
for the illegal cigarette trade. This is the unfortunate consequence
of the high retail price of cigarettes in the UK, which provides
an economic incentive for the diversion of genuine products from
other countries where the price is lower, or for the manufacture
of counterfeit cigarettes for sale in the UK. A pack of cigarettes
can be purchased at retail in some other countries, after the
payment of taxes, for between a tenth and a twentieth of the cost
in the UK. Even within the EU, the price can vary significantly,
from just over
2 a pack in Portugal to over
7 per pack in the UK. In addition, we have seen multiple
examples of our products being counterfeited in China with UK
Duty Paid markings, clearly intended for export to the UK,
and have been notified of such products being seized by HMCE in
Britain. Sadly, so long as these huge price differentials with
other countries remain, there will always be an economic incentive
for the smuggling of cigarettes and other tobacco products into
the UK market.
2. THE STEPS
6. Absent some significant change in tax
policy which would reduce the economic incentive for tobacco smuggling,
we believe it is more constructive for us to discuss other possible
measures to reduce the volume of illegal tobacco products reaching
the UK market.
7. To date, the main thrust of the effort
to reduce excise fraud has been enforcement action by HMCE, consisting
of seizures in ports and in the domestic market, combined with
aggressive prosecution of offenders. HM Customs has also expanded
its efforts to include communications campaigns, aimed at educating
consumers about the consequences of purchasing tobacco products
in the illegal market. We welcome these initiatives, which we
believe will go at least some way towards reducing the demand
for these products. However, while HMCE's efforts have met with
success in the past several years, with increased seizures and
prosecutions, the sheer scale of the problem means that, by HMCE's
own admission, the majority of smuggled and counterfeit products
are still reaching the UK domestic market, and the price differentials
mean that demand for these products will continue to exist. Thus,
while we agree that increased resources will help HMCE to stem
the tide of illegal products even further (in particular, for
equipment such as fixed and mobile container scanners which have
quickly proved self-financing in many European ports), we also
believe that action on a policy level is necessary.
A. A Secure Distribution Network for Tobacco
8. Philip Morris International believes
that the first step in preventing illegal tobacco products reaching
the market is the creation of a secure distribution network. That
is why we support the licensing of tobacco product manufacturers,
importers, exporters, warehouse proprietors, transporters, distributors,
and retailers. Any person trading in (or storing or transporting)
cigarettes without a license would be subject to severe penalties.
Any licensed person trading in genuine non-domestic or counterfeit
cigarettes upon which UK taxes have not been paid should be subject
to the same penalties, as well as forfeiture of their license.
9. Such a system, properly enforced, would
see the elimination of the "unofficial" outletsthe
street corners, the pubs, the flea markets, etcthrough
which contraband and counterfeit cigarettes are sold, and would
ensure that the legitimate distribution channel is the only place
where cigarettes can be purchased. A more detailed version of
our proposal for securing the legitimate distribution channel
is available on our website at: www.pmintl.com/global/downloads/OBE/Confronting_contraband.pdf.
B. Intra-EU Sales of Tobacco Products
10. We also feel it would be helpful, in
the context of the Committee's inquiry, to examine the EU Commission's
recent proposals amending Directive 92/12, published in COM(2004)227
on April 2, 2004, which deal with the very complex issue of cross
11. We believe that these proposals have
to be viewed from two different perspectives that are readily
distinguished in addressing the internal market for excise goods,
particularly cigarettes. Directive 92/12 and the proposals made
by the Commission address two distinct aspects of the internal
market: (1) rules applicable to manufacturers and traders on
the holding and movement of excise goods for commercial purposes;
and (2) rules applicable to consumers purchasing goods
within the European Community. In assessing the effectiveness
and efficiency of the current directive and the Commission's proposals
in relation to tobacco products, we come to very different conclusions
with respect to those measures applicable to manufacturers and
traders and those applicable to consumers. We think it is appropriate
to view these distinct aspects of the market differently because
of the unique nature of tobacco products and the tensions that
need to be accommodated between public health goals pursued by
the Commission and Member States in relation to these products
and the desire to promote a single internal market.
12. Philip Morris International believes
that the rules on the internal market for tobacco goods cannot
be viewed in isolation, but must be seen in the larger context
of regulations that exist and are being developed to achieve Government
policy objectives to protect and grow excise revenues, to fight
against fraud, and to reduce the harm caused by tobacco consumption.
Indeed, we note that the Commission has acknowledged this reality
in making proposals that treat cigarettes differently in relation
to distance selling "on public health grounds".
We believe it is appropriate to review Directive 92/12 and the
Commission's proposals from the perspective not only of the internal
market, but also in the broader context of achieving appropriate
policy goals in relation to revenue protection, fraud prevention
and the promotion of public health. We also believe that Directive
92/12 cannot be viewed in isolation in the framework of the Excise
Duty Directives. On the contrary, we think that the discussion
on, for example, indicative limits is intrinsically linked to
the discussion on structures and rates (for which a review is
planned for 2006). Our views seek to build a bridge to those important
policy considerations and the EU Tobacco Excise Review 2006.
13. In our experience, the internal market
for manufacturers is generally working well. We are able to
manufacture cigarettes in any of our EU factories for any of the
EU Member States, using the duty suspension procedures prescribed
by the Directive, ensuring payment of the excise tax where due
under EU principles. The procedures designed by the EU need to
balance security and control of excise revenues with efficient
and practicable operating procedures. We believe that such balance
is best achieved by setting very high standards for licensed operators,
whilst introducing new technologysuch as the Excise Movement
and Control System (EMCS)such that these reliable operators
are able to work in an efficient way. We believe that Directive
92/12 accomplished that objective and we see the proposed technical
improvements to articles 7 and 10 of the Directive as sound measures
to further secure that balance and to enhance the efficiency and
security of the internal market and we thus fully support this
part of the Commission proposals.
14. On the other hand, we believe that the
internal market for consumers is not yet functioning as
originally intended by the EU because the original goal of excise
duty harmonization has not yet been achieved. For consumers able
and willing to travel abroad, there is, depending on their country
of residence, an imperfect internal market that is hampered by
the inconsistency of rules and procedures applying indicative
limits and the uncertainty and confusion for consumers that results
from the concept of indicative limits.
15. In short, we feel that the EU rules
for consumers are confusing and discriminatory. For policy makers
we believe that it is appropriate today to decide, in relation
to tobacco products:
whether the promise of the internal
market can be achieved at this moment in time, consistent with
the necessity of preserving the policy goals in those other areas
we have referenced (ie, revenue protection, fraud prevention and
the promotion of public health); or
whether the objective of an internal
market for consumers of tobacco products should be temporarily
suspended until the duty levels on tobacco products within the
EU-25 have reached a sufficient level of harmonization.
16. A truly functioning internal market
requires abolishing the indicative limitsas is proposed
by the EU Commissionbut in all respects. In such case,
the internal market should enable mail order and distance selling
with payment of excise duties in the country of origin as was
proposed for alcohol. However, until tobacco duty harmonization
is achieved, such an approach for tobacco products could have
very significant consequences that are likely to raise grave concerns
for the UK in relation to its desire to protect revenue, prevent
fraud and promote the reduction of tobacco consumption. If history
is any guide, it will likely lead to further displacement of duty
paid sales towards those countries with the lowest excise rates.
Such inevitable displacement of duty paid sales within the EU
has very significant implications for individual Member States:
1. Countries with high excise taxes
would suffer substantial revenue losses as consumers could legallyand
not hampered by current restrictionsbuy their cigarettes
where taxes are lowest.
2. Illegal cross-border sales, where
a resale of product occurs in the country of destination without
payment of the appropriate excise tax, would become difficult
to detect and fight.
3. It would become difficult for individual
Member States to achieve public health objectives, as national
excise tax policyas a key tool for revenue generation and
harm reductionwould be significantly undermined.
17. Therefore, we recommend changing the
current unsatisfactory situation by proposing measures aimed at
substantially reducing cross-border shopping of tobacco products
in the European Union until the tax levels (excise and VAT) have
come to a reasonable degree of harmonization.
18. We believe that an array of technical
solutions and legal measures could be developed, which, taken
as package as opposed to being used in isolation, could enable
Governments to achieve effective enforcement in their objective
of significantly reducing cross-border sales of tobacco products.
In our view, the package of measures should cover the following
Introduce clear rules for consumers
The current system of indicative
limits is not clear for consumers. Some EU Ministries of Finance
have indicated to us thatin their opinionthe existence
of clear, simple rules, adequately communicated to consumers,
in itself would help to reduce cross-border sales. Their view
is that the large majority of consumers will follow unambiguous
and mandatory rules, without any active enforcement in place.
This view has for instance been expressed in several Nordic countries.
Changing the indicative limit into a fixed limituntil duty
harmonization takes place within the EUseems also to be
the position of France's Minister of Finance.
Introduce measures at retail level
The idea is to prevent retailers from
selling to "unlicensed" private individuals quantities
of cigarettes that cannot normally be assumed to be for private
local consumption but are more likely to be used for cross-border
supply. In practice it could mean that retailers can not sell
more than, for example, 200/400/800 cigarettes in a single time
period (eg day) to a consumerand not following this rule
could lead to withdrawal of the retail license. Such a rule already
exists today in Spainalbeit for a higher limit.
Introduce rules on unlicensed
possession of excessive quantities
The idea is to introduce a simple rule
that makes it unlawful for private ("unlicensed") individuals
to possess cigarettes in excess of a certain quantity. The relevant
quantity may differ near the border or elsewhere. Such rule already
exists in some EU Member States requiring certain fiscal documents
to transport or hold cigarettes in excess of 2,000 cigarettes
(within 30 km of the State border) and 10,000 cigarettes elsewhere.
Introduce measures to address
mail-order, including mail-order by digital means
The idea is to require a license for sending
cigarettes by mail from one country to another. As part of such
license, a number of administrative measures should be implemented
as part of the conditions for the license (eg financial bond for
any applicable taxes; a quarterly tax return, etc). Any cigarettes
sent by a non-licensed retailer would be seized. In addition,
it could be made unlawful for any post office or courier service
to accept for "mailing" any cigarettes shipped by any
person who has not registered in the country of deposit and the
country of destination.
19. The quantities of the specific limits,
ie number of cigarettes, applicable for measures in these different
areas need to be determined by the ECOFIN Council of Ministers,
but should depend on the particular behavior sought to be affected.
Obviously, Governments are most interested in regulating commercial,
as opposed to truly individual, behaviour; and, accordingly, the
rules should focus on that type of behaviour, whether undertaken
by individuals or entities.
20. We feel that our proposals could clarify
for consumers and the retail trade what is allowed and what not.
These rules are also easier to interpret for customs officials
or other law enforcement agents, who today are forced to judge
whether cigarettes are carried "for own use" or "for
commercial purposes"often not a clear-cut matter.
With the disappearance of borders in the Schengen area, cross-border
sales are anyway difficult to monitor, indicating that a new and
comprehensive approach such as the one we suggest, may be preferable.
This will gain further importance after the entry into Schengen
of the new EU member states.
21. We should stress that these ideas require
further thought and refinement, but we hope that sharing them
with the Committee now may help to highlight some areas in which
progress can be made, and move the debate forward in line with
key Government policy objectives to protect and grow excise revenues,
to fight against fraud, as well as to improve public health.
3. THE IMPACT
22. HMCE estimates suggest that the level
of illegal products entering into the UK has stopped increasing,
which represents a significant success in itself for which HMCE
should be commended. However, as noted previously, the sheer scale
of the problem mandates additional action. The proposals we make
here are not without cost in terms of compliance. For example,
our proposed licensing system would impose some additional administrative
burdens on the appropriate government agency and members of the
legitimate trade. However, we believe that these incremental burdens
are minimal when compared to the threat posed by the smuggled
and counterfeit cigarettes. In our view, the benefits for all
concernedthe Government, legitimate traders and consumersfar
outweigh any possible disadvantages.
Thank you for the opportunity to comment on
these important issues. We would be happy to provide further input
or clarification concerning our positions on the issues should
the Committee deem it necessary.
9 November 2004
15 Philip Morris International Management S.A. is
responsible for the administrative functions of the tobacco businesses
of affiliates of Philip Morris International Inc. including in
the United Kingdom. Back
European Commission Press Release, IP/04/452, 2 April 2004. Back
Although such displacement could be prevented through a full
EU harmonization of tobacco excise rates, we do not believe that
this is economically and politically feasible in the next decade.
Just to illustrate our point: today the excise duty level per
thousand cigarettes varies between Euro 16 in Latvia and Euro
268 in the UK. Although taxes in Latvia are to increase significantly
over time to meet EU minimum rates of Euro 64 level by the year
2010, this will still leave a significant gap between different
EU Member States. Back