Memorandum submitted by Imperial Tobacco
Group PLC
EXECUTIVE SUMMARY
Imperial Tobacco is the leading manufacturer
for the UK cigarette market, with a market share of around 45%.
The Company is the fourth largest international tobacco company
and employs around 15,000 people worldwide, including 2,600 in
the UK—its principal market. Imperial Tobacco has been and
continues to be committed to reducing the smuggling of tobacco
products into the UK, both through the Company's internal procedures
and its co-operation with HM Customs and Excise and other Customs
Authorities throughout the world. Set out below is a summary of
the main points from the body of this submission—
— Imperial Tobacco believes that smuggling
into the UK is the direct result of the high tax-paid retail price
differentials for both cigarettes and handrolling tobacco that
exist between the UK and other EU Member States and most of the
rest of the world. Following more modest (inflation only) annual
cigarette duty increases in the UK since 2001, there is evidence
that smuggling has been decreasing. However, there is a growing
problem of counterfeit products entering the UK market.
— Imperial Tobacco has evolved and
enhanced the Company's Supply Policy based on experience in the
UK market. This Policy incorporates a number of comprehensive
pre-supply procedures and post-supply checks. In order to reduce
the risk of smuggling into the UK, Imperial Tobacco ceased trading
with almost 30 customers between end-1999 and mid-2001, a period
when UK smuggling escalated.
— Imperial Tobacco continues to invest
considerable resource, expertise, time and money in working to
prevent illicit trade in both genuine and counterfeit products.
To combat this illicit trade, Imperial Tobacco has a team of 25
specialists operating internationally in conjunction with Customs
Authorities. The Company is the only manufacturer with a dedicated
team employed to disrupt the retail sale of illicit product in
the UK.
— Imperial Tobacco has signed six Memoranda
of Understanding (MoUs) with Customs Authorities in Europe, including
the most comprehensive MoU in the UK with HM Customs and Excise.
Discussions are progressing in over one dozen countries to finalise
further MoUs in various parts of the world.
— Seizures of genuine Imperial Tobacco
cigarettes by HM Customs and Excise in the year ended September
2004 show a 92% reduction from the 2001 level. However, this reduction
in seizures of genuine Imperial Tobacco cigarettes has been mirrored
by an increase in counterfeit seizures.
— In the six months ended September
2004, counterfeit versions accounted for 93% of all large seizures
of Imperial Tobacco cigarette brands by HM Customs and Excise.
— In the year ended September 2004,
the cost to Imperial Tobacco of mounting a series of anti-illicit
trade operations was £1.2 million. This produced a potential
profit benefit for Imperial Tobacco in the UK market of £11
million and a revenue benefit to the UK Exchequer of £85
million.
— Imperial Tobacco supports the HM
Customs and Excise opinion, expressed to the Treasury Sub-committee
on 17 November 2004, that licensing of the distribution chain
would do little to combat tobacco smuggling, as smuggled product
is rarely sold through the legitimate distribution chain.
— In order to further improve the effectiveness
of HM Customs and Excise in tackling tobacco smuggling, Imperial
Tobacco advocates:
— Even closer "front-line"
operational co-operation between tobacco manufacturers and HM
Customs and Excise to counter illicit trade.
— In support of recent civil legal
actions taken by Imperial Tobacco in The Netherlands and Belgium,
HM Customs and Excise and overseas Customs Authorities should
be given the power to seize smuggled genuine product, that has
been correctly declared as cigarettes, being diverted through
the legal warehousing regime by third parties who do not own the
trademark rights.
— The requirement for all exporters
of cigarettes to ensure monetary guarantees for the worldwide
supply of cigarettes. If cigarette movements between fiscal regimes
are not covered by a guarantee bond, or are misdeclared, they
would be liable to seizure by Customs Authorities. In essence,
this would extend the existing EU Community Transit Guarantee
system onto a worldwide basis.
— Increased involvement with the suppliers
of the materials necessary for cigarette manufacture in order
to prevent counterfeiters from obtaining these materials.
— It should be recognised that the
root cause of tobacco smuggling into the UK is the excessively
high rates of UK tobacco taxation. Therefore both UK cigarette
and handrolling tobacco taxation should be reduced to nearer the
levels in other EU Member States. In particular, a reduction in
UK handrolling tobacco taxation is required in order to prevent
the influx of non-UK duty paid consumption, sourced almost entirely
from other EU Member States. Imperial Tobacco believes that tax
reductions would be more effective in reducing the illicit trade
in tobacco products than adopting strict cross-border volume limits
which, in any event, may be unenforceable under EU legislation.
1. BACKGROUND
1.1 Imperial Tobacco is the leading manufacturer
for the UK cigarette market with a share of around 45%. The Company
is the world's fourth largest international tobacco company and
manufactures its products in 33 factories worldwide. Imperial
Tobacco employs a total of around 15,000 people, including 2,600
in the UK—its principal market.
1.2 Imperial Tobacco endorses the Tobacco
Manufacturers' Association submission to the Treasury Sub-committee
in November 2004, and welcomes this additional initiative to examine,
together with the other leading UK tobacco companies, HM Customs
and Excise strategies in relation to the following areas:
— The level of excise duty fraud and
how this has been estimated.
— The steps taken and proposed to reduce
the level of excise duty fraud.
— The impact these steps have had on
the level of excise duty fraud and on compliance costs.
2. THE ESTIMATED
LEVEL OF
EXCISE DUTY
FRAUD
2.1 Large scale cigarette smuggling into
the UK is a relatively new phenomenon. It commenced in 1997, with
product coming almost entirely from lower-taxed EU Member States,
and grew significantly in 1999 and 2000, as smugglers scoured
the world to obtain brands which would appeal to British consumers.
Smuggling continues today, and now also involves counterfeit product.
2.2 The growth in cigarette smuggling into
the UK is a direct result of successive cigarette excise tax increases
during the 1990s at a level of 3% above inflation, greatly exacerbated
in 1997 by the introduction of a policy of excise tax increases
at 5% above inflation. Following more modest, inflation only,
cigarette excise tax increases over the past four years since
2001, there is evidence to show that smuggling has been decreasing.
2.3 From pack collections undertaken by
manufacturers, it is not possible to differentiate between the
volumes of non-UK duty paid cigarettes that are smuggled and those
that have been legally purchased through cross-border shopping.
However, if we accept HM Customs and Excise estimates of the proportion
of the UK cigarette market that is accounted for by legal cross-border
shopping then, from Imperial Tobacco estimates of the total non-UK
duty paid market, the implied proportion of total UK cigarette
consumption that is smuggled, has moved as follows since 1996:
TABLE 1—ESTIMATED NON-UK DUTY PAID
SHARE OF TOTAL UK CIGARETTE CONSUMPTION
| All Non-UK Duty Paid
| Legal Cross-Border Shopping | Smuggling
|
| % | %
| % |
| 1996 | 7 | 6*
| 1 |
| 1997 | 8 | 7*
| 1 |
| 1998 | 16 | 7*
| 9 |
| 1999 | 25 | 5
| 20 |
| 2000 | 31 | 6
| 25 |
| 2001 | 30 | 8
| 22 |
| 2002 | 26 | 9
| 17 |
| 2003 | 27 | 9
| 18 |
| 2004 | 27 | n/a**
| ? |
* Imperial Tobacco estimates of the market share held by legal
duty-free purchases. HM Customs and Excise estimates of legal
cross-border shopping are unavailable for these years.
** Estimate not yet available from HM Customs and Excise.
2.4Imperial Tobacco is concerned that smuggling may have increased
slightly in 2003 to 18% of the total market. This estimate compares
with the HM Customs and Excise figure of 15% for the year ended
March 2004, although both parties agree that there has been a
downward trend in smuggling since its peak in 2000.
2.5The huge tax differentials that exist between the UK, the rest
of the EU and most of the world creates the situation whereby—
—There is a strong economic incentive for smugglers
to smuggle.
—Tobacco smuggling is an international activity and
it appears that, as smugglers are unable to obtain supplies from
one overseas market, they switch to another.
—The supply policies introduced by all UK manufacturers
in order to assist HM Customs and Excise to combat smuggling,
including the stringent supply policy implemented by Imperial
Tobacco, have not prevented cigarette smuggling, as smugglers
have:
—increasingly turned to the smuggling of counterfeit
versions of preferred UK brands (an activity favoured by organised
criminal gangs);
—smuggled other brands from overseas which they consider
would be acceptable to UK smokers;
—bootlegged supplies of preferred UK brands from much
lower-taxed EU Member States.
2.6Imperial Tobacco estimates that for the calendar year 2004,
total UK cigarette consumption was around 72 billion. This comprises
a UK duty paid market of 52 billion, with a further 20 billion
(27%) accounted for by both legal and illegal imports on which
no UK excise tax has been paid. Imperial Tobacco's pack collection
data indicate that almost 70% of non-UK duty paid consumption
originates from other EU Member States, or is purchased in duty
free outlets. The remaining 30% of non-UK duty paid consumption
comes into the UK from the rest of the world.
2.7Counterfeit products account for an increasing share of total
non-UK duty paid cigarette consumption. Imperial Tobacco estimates
that at least 2 billion counterfeit cigarettes (3% of total consumption)
were smoked in the UK in 2004, and the figure could be as high
as the HM Customs and Excise "mid-range" estimate of
4 billion (5.5% of total consumption).
2.8Counterfeit cigarettes bear no excise tax and therefore represent
the cheapest source of supply for smugglers. However, even within
the EU there are significant tax-paid retail price variations
between the same brands (see Chart 1). These retail price differentials
reflect the wide variation in cigarette taxation between EU Member
States (see Chart 2). In many countries outside the EU, tax-paid
retail prices are substantially lower than the cheapest EU retail
prices.
2.9Within the EU, tax-paid retail price differentials
for handrolling tobacco are even more marked than for cigarettes.
These significant retail price differentials already existed when
the Single European Market was established in January 1993. The
combination of these tax-paid retail price differentials and the
opening of the Single Market resulted in the rapid growth of cross-border
shopping and bootlegging of handrolling tobacco into the UK from
1993 onwards. The latest figure from HM Customs and Excise indicates
that non-UK duty paid handrolling tobacco accounted for 71% of
total UK consumption in 2003-04, which is broadly in line with
Imperial Tobacco's estimates.
3.STEPS TAKEN
AND PROPOSED
TO REDUCE
THE LEVEL
OF EXCISE
DUTY FRAUD
3.1Imperial Tobacco commends and supports the efforts made by
HM Customs and Excise through their Tackling Tobacco Smuggling
strategy, in what is a very difficult environment. We can only
agree with the sentiments expressed by HM Customs and Excise to
the Treasury Sub-committee on 17 November 2004 that—
"Obviously the UK is an attractive place for fraudsters
because of our relatively high tax rates. Inevitably that makes
us a target to exploit."
3.2In addition to the "front-line" activities undertaken
by HM Customs and Excise, Imperial Tobacco has undertaken a number
of initiatives in order to help combat the level of tobacco smuggling,
and is continuing to build upon and develop these initiatives.
Working relationship with HM Customs and Excise
3.3It is the policy and practice of Imperial Tobacco to co-operate
with Customs Authorities worldwide, since if Customs and the tobacco
industry do not work together, the only winners will be the smugglers.
In order to further this co-operation, regular meetings to discuss
strategy and exchange information are held with HM Customs and
Excise to combat all forms of illicit trade, although the issue
of counterfeit products now predominates.
3.4Imperial Tobacco's commitment to reducing smuggling into the
UK through both its internal controls and through working with
HM Customs and Excise has been demonstrated by the Company terminating
supplies of its brands to distributors in countries where international
brands are widely available and that have been targeted by smugglers.
This was possible by internal tracking and tracing procedures
linked to seizure information provided by HM Customs and Excise.
Between end—1999 and mid—2001, a period when cigarette
smuggling escalated, the Company ceased trading with almost 30
customers, the vast majority at Imperial Tobacco's own initiative
and before concerns about certain distributors were expressed
to Imperial Tobacco by HM Customs and Excise.
3.5As part of Imperial Tobacco's continued commitment to assist
HM Customs and Excise, the Company has provided Customs with witness
statements to support the prosecution of tobacco smugglers. These
have numbered over 400 statements in the last two years alone.
Imperial Tobacco has also provided expert witnesses to appear
in court on behalf of HM Customs and Excise in high profile smuggling
cases, often resulting in jail sentences for smugglers.
3.6Imperial Tobacco has initiated unilateral court proceedings
in both The Netherlands and Belgium which have been supported
by HM Customs and Excise. These court proceedings involve the
diversion of genuine product by third parties from their original
tax-paid destination market. These are civil actions based on
trade mark infringement, funded entirely by Imperial Tobacco,
and represent the first such actions taken by a tobacco manufacturer
to prevent the diversion of genuine product, that has been correctly
declared as cigarettes, being transported through the legal warehousing
regime. The court proceedings taken by Imperial Tobacco have enabled
the cigarettes to be held in both The Netherlands and Belgium
and, if successful, the cigarettes will be destroyed by the Customs
Authorities in these countries. HM Customs and Excise are keen
to promote similar actions by other tobacco manufacturers.
3.7In addition, Imperial Tobacco has recently provided HM Customs
and Excise with comments and information in support of the launch
in December 2004 of the HM Customs and Excise Media Handbook on
Counterfeit Tobacco Products.
Stringent supply policy
3.8With the growth of cigarette smuggling into the UK, Imperial
Tobacco has further developed control criteria and parameters
relating to the supply of tobacco goods from the UK.
3.9The Company's Supply Policy has evolved and been enhanced over
time and, based on experience in the UK, is now applied worldwide
across Imperial Tobacco.
3.10Embedded within the Supply Policy, Imperial Tobacco has developed
a number of pre-supply procedures, together with post-supply checks.
3.11Pre-supply procedures are in place to ensure:
—Validation and verification of a customer's good standing—bona
fide in both reputation and performance;
—The destination market is clearly specified;
—Product supplied conforms to mandatory health warnings
and any tax stamp requirements for that market;
—Product identification records are established including
coding on individual retail packs, 200s cartons of cigarettes
and 10,000 cigarette mastercases;
—Shipment arrangements are secure;
—Payment/settlement arrangements satisfy credit-worthiness
checks;
—The product is appropriate for the destination market
and that the quantities requested/ordered by the customer are
commensurate with anticipated sales in that market;
—Establishment of arrangements for the orderly conduct
of business, all of which are recorded on a masterfile;
—A sign-off policy across Company functions before supply;
—Customs Authorities are informed before supply to a
new customer is commenced.
3.12Post-supply checks include:
—Evidence (in the form of delivery documents, market
visits etc) that the goods have been exported to and entered into
the intended destination market;
—Confirmation that the product is present and supported
in the market by permissible promotional activity and that future
deliveries are justified;
—Review of seizure records to ensure that there is no
material evidence of the product being diverted into other markets;
—Ongoing market/customer monitoring checks.
3.13 Through these measures, Imperial Tobacco ensures that its
products are supplied directly into the intended destination market
for retail sale. Diversion fraud for tobacco products is virtually
unknown, unless the goods are stolen whilst being moved from the
manufacturing location to the intended destination market.
Anti-Illicit Trade Strategy
3.14Imperial Tobacco continues to invest considerable resource,
expertise, time and money in working to prevent illicit trade
in its products and the counterfeiting of its products. This is
a pro-active approach, often in conjunction with other tobacco
manufacturers, and always with the support of Customs Authorities.
3.15The anti-illicit trade initiatives favoured by Imperial Tobacco
for their proven effectiveness and the fact that they are predominantly
pro-active, rather than merely being re-active to seizures after
smuggling has occurred, are as follows:
—Memoranda of Understanding (MoUs): A programme of developing
and signing MoUs with Customs Authorities is ongoing both at an
industry and individual Company level. Imperial Tobacco has signed
six MoUs with Customs Authorities in Europe, including the most
comprehensive MoU in the UK with HM Customs and Excise. Discussions
are progressing with Customs Authorities in over one dozen other
countries to finalise further MoUs in various parts of the world.
—Supply Policy: Imperial Tobacco considers a robust
Supply Policy is essential for the controlled distribution and
sale of its products. As such, Imperial Tobacco continually vets,
monitors and re-assesses its customers to ensure the tightest
possible control of distribution in the intended destination market.
Market-based employees continue to be fully briefed and trained
in all aspects of the Supply Policy and are actively involved
to ensure compliance.
—Tracking and Tracing: Pack and carton coding procedures
are in place to identify the precise time, machine and location
of manufacture and the final destination market. Database procedures
capture and record the first distributor/customer for the Company's
products and the volume and date of supply to that customer.
—Cigarette Component Materials: Initiatives are being
explored, in conjunction with other tobacco manufacturers, with
the suppliers of the materials necessary for cigarette manufacturing
to prevent counterfeiters from obtaining these materials. In addition,
Imperial Tobacco scraps any surplus machinery it may have arising
from factory reorganisation, unless the machinery can be sold
back to the original supplier, rather than sell it onto the second
hand market.
—Export Bonds: This initiative is being discussed with
Customs Authorities as an industry proposal. The onus would be
on all exporters of cigarettes worldwide to ensure that monetary
guarantees are in place and the goods are correctly declared for
the movement of cigarettes between fiscal regimes. If cigarette
movements between fiscal regimes are not covered by a guarantee
bond, or are misdeclared, they would be liable to seizure by Customs
Authorities. In essence, this would extend the existing EU Community
Transit Guarantee system onto a global basis.
Imperial Tobacco's Anti-Illicit Trade Operations
3.16To enable Imperial Tobacco to combat illicit trade, the
Company has a team of 25 specialists operating internationally,
in conjunction with Customs Authorities and outside agencies employed
by Imperial Tobacco.
3.17This team operates a co-ordinated strategy to disrupt tobacco
smuggling by:
—Identifying and attacking the source of manufacture
of counterfeit products, either acting on a unilateral or industry
basis, in partnership with regulatory authorities. For example,
in China, Imperial Tobacco works closely with Customs and the
Chinese State Monopoly, in conjunction with British American Tobacco,
Philip Morris and Japan Tobacco, to disrupt counterfeit production.
—Seizing containers of both genuine and counterfeit
smuggled product en route to markets, and liaising with Customs
Authorities, including HM Customs overseas fiscal liaison officers,
to share intelligence on illegal distribution networks.
—Investigating retail sales of illicit product in the
UK market and working with HM Customs, Trading Standards and the
Police Authorities to seize such product.
3.18Imperial Tobacco is the only tobacco manufacturer which has
a dedicated team employed to disrupt the retail sale of illegal
product within the UK market. The work of this team clearly demonstrates
that smuggled product is rarely being sold through the legal distribution
chain but is virtually all sold through informal channels, such
as car boot sales, street markets, on street corners or from private
homes. Therefore, Imperial Tobacco supports HM Customs and Excise
opinion, as expressed to the Treasury Sub-committee on 17 November
2004, that licensing of the distribution chain would do little
to combat smuggling.
4.IMPACT OF
THESE STEPS
ON THE
LEVEL OF
EXCISE DUTY
FRAUD AND
COMPLIANCE COSTS
4.1From HM Customs and Excise seizure data, it is clear that their
activities, together with the efforts of the manufacturers, have
resulted in a dramatic reduction in seizures of genuine product
in recent years. However, this has been partly offset by the growth
of counterfeit product.
4.2 HM Customs and Excise began providing Imperial Tobacco with
detailed seizure information for its cigarettes from mid-2000.
Based on large cigarette seizures by HM Customs and Excise (defined
by them as over 0.5 million), seizure volumes of both genuine
and counterfeit versions of Imperial Tobacco's cigarettes have
moved as follows:
4.3Seizures of genuine Imperial Tobacco cigarettes have fallen
markedly and the latest annual figure of 66 million for the year
ended September 2004 shows a 92% reduction from the level of seizures
in 2001. The Company believes that the reason there is still the
occasional large seizure of genuine Imperial Tobacco cigarettes
is that it is mainly old stock still circulating. For example,
the largest seizure in the last year, some 20 million in January
2004, was originally sold by Imperial Tobacco in October 1999,
over four years previously.
4.4The decline in large seizures of genuine Imperial Tobacco cigarettes
is so marked that in the four months to September 2004 (the latest
period for which data is available from HM Customs and Excise)
total large seizures of the Company's cigarettes have amounted
to under 3 million.
4.5The latest reported HM Customs and Excise seizure data of all
cigarettes for the year ended March 2004 indicate that seizures
of genuine UK brands accounted for only 28% of total large seizures,
as the following chart published by HM Customs and Excise in December
2004 illustrates:
4.6The above chart shows that, within the seizures of genuine
UK brands, Imperial Tobacco's Superkings accounted for only 9%
of total seizures. This compares with Imperial Tobacco's overall
UK cigarette market share of 45%.
4.7HM Customs and Excise have reported that the percentage of
seizures of all manufacturers' brands accounted for by counterfeit
product has risen from 15% in the year ended March 2002 to 54%
in the year ended March 2004. During this period, for Imperial
Tobacco seizures, the proportion accounted for by counterfeit
versions of the Company's cigarettes increased from 12% to 79%.
More recently, in the six months to September 2004, this figure
has risen to 93%.
4.8In view of the extremely low level of seizures of genuine Imperial
Tobacco product, the Company's ongoing anti-illicit trade activity
is increasingly directed against counterfeit product. Imperial
Tobacco's anti-counterfeiting operations, against criminals with
the UK as the target market, were successful in achieving the
following results during the year ended September 2004:
—Thirty one counterfeit factory closures.
—Twenty printer/packing house closures.
—Forty-five containers of counterfeit cigarettes seized.
—Total seizures of 473 million cigarettes. This is comparable
with the total volume of large seizures of Imperial Tobacco cigarettes
notified to the Company by HM Customs and Excise in the same period.
4.9The cost to Imperial Tobacco of mounting the above series of
anti-illicit trade operations in the year ended September 2004
was £1.2 million. This produced a potential profit benefit
for Imperial Tobacco in the UK market of £11 million and
a revenue benefit to the UK Exchequer of £85 million.
5.CONCLUSION AND
RECOMMENDATIONS
5.1In the UK, the co-operation between Imperial Tobacco and HM
Customs and Excise has been particularly successful, resulting
in a 92% reduction in large seizures of genuine Imperial Tobacco
cigarettes between 2001 and 2004, although the smuggling of counterfeit
versions of the Company's cigarettes are a growing concern.
5.2Imperial Tobacco and HM Customs and Excise continue to build
on this co-operation and hold regular meetings to exchange ideas
and information on how tobacco smuggling into the UK could be
further reduced. The latest Imperial Tobacco proposals to assist
in the reduction of tobacco smuggling into the UK include:
—Closer "front-line" co-operation with HM
Customs and Excise to counter the illicit trade in tobacco products.
—Increased involvement with the suppliers of the materials
necessary to manufacture cigarettes to prevent counterfeiters
from obtaining these materials.
—A worldwide export bond system to assist in detecting
the diversion of smuggled cigarettes.
—Enhanced powers for HM Customs and Excise to seize
genuine as well as counterfeit product.
—UK cigarette and handrolling tobacco tax reductions
to nearer the levels in other EU Member States.
5.3This submission demonstrates the commitment and effectiveness
of Imperial Tobacco's work with Customs Authorities worldwide
to combat the illicit trade in tobacco products.
December 2004
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