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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

1 Frank J. Chaloupka Distinguished Professor, UIC Director, WHO Collaborating Centre on the Economics of Tobacco and Tobacco Control Tax Avoidance & Evasion

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Frank J. ChaloupkaDistinguished Professor, UIC

Director, WHO Collaborating Centre on the Economics of Tobacco and Tobacco Control

Tax Avoidance & Evasion

An Overview

Effective Implementation of FCTC PoliciesPre-Conference Workshop, 15th World Conference on

Tobacco or Health, Singapore, 19 March 2012

2

Overview

Types of tax avoidance & evasion

Measuring tax avoidance & evasion

Determinants of tax avoidance & evasion

Impact of tax avoidance & evasion

3

Definitions

4

Tax Avoidance & Evasion

• Many terms used: Illicit trade, contraband, smuggling,

bootlegging, counterfeit, etc.

• Tax Avoidance Legal methods for avoiding tobacco taxes

• Tax Evasion Illegal methods for avoiding tobacco taxes

5

Tax Avoidance & Evasion

• Individual tax avoidance Reservation, Internet and other direct, duty-

free, and cross-border purchases• Generally not illegal, but states require local taxes

to be paid Brand/product switching, carton purchases,

use of cheaper outlets

• Bootlegging Small scale purchasing of cigarettes in low-

tax/price jurisdictions for resale in high tax/price jurisdictions

6

Tax Avoidance & Evasion

• Large scale, organized smuggling Illegal transportation, distribution and sale of

large consignments of tobacco products Generally avoids all taxes

• Counterfeit products bearing a trademark without the

approval of the trademark owner Often involved in organized smuggling

7

Tax Avoidance & Evasion

• Illegal Manufacturing Unreported or under-reported

manufacturing, distribution and sale of large consignments of tobacco products

Generally avoids all taxes Often involved in organized smuggling

• Brand Repositioning 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 20-30 percent of exports do not appear as imports

4-10 percent of global consumption Will be largely organized smuggling

11

Extent of Illicit Trade

Increasing Gap in Quantity of Global Cigarette Trade (Export minus Import) 1960-2003

0

200000

400000

600000

800000

1000000

1200000

1400000

Imp

ort

an

d E

xp

ort

s (

Mil

lio

n p

iec

es

)

Import Export

Quantity of Export & Import Gap Widening

Highest gap in 1996 399.6 billion pieces36% of global exports

2000: 14% trade gap121 billion pieces

Source: ECOSOC Trade Database: Ayda Yurekli

12

Measuring Avoidance & Evasion• “Expert Opinions”

Customs officials, tobacco industry representatives, tax authorities, and others

• Potential bias in some sources

Widely varying estimates across countries

Recent estimates 10-12% Again, largely reflecting organized

smuggling

13

Tax Avoidance and Evasion

Source: Tobacco Atlas, 3rd edition

14

Measuring Avoidance & Evasion• Individual tax avoidance a bit

easier to assess Econometric analyses of tax paid sales

that account for various factors, including:

• tax/price differences• population density • travel patterns• Distance

US estimates suggest up to 12.5% of total consumption in early 2000s

15

Measuring Avoidance & Evasion• Individual tax avoidance – self-

reported data International Tobacco Control Policy

Evaluation Study Tobacco Use Supplement to the

Current Population Survey European Survey on Economic Aspects

of Tobacco Use Others

16

Measuring Avoidance & Evasion• Individual tax avoidance – self-reported

data Tobacco Use Supplement to the Current

Population Survey• Periodic 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 only

• Does not pick up in-state tax avoidance (e.g. reservation purchases)

• 2003: 5.63% 2006/07: 5.19%

17

Tax Avoidance – United States

Source: Tax Burden on Tobacco, 2008 and TUS-CPS

% Tax Avoiders, 2006/07

5.88%

0.00%

5.00%

10.00%

15.00%

20.00%

18

Tax Avoidance – United States

Source: Tax Burden on Tobacco, 2008 and TUS-CPS

% Other Tax Avoiders, 2006/07

0.86%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

19

Pack Inspection

B10) Please, could you show me the latest pack of cigarettes or hand rolling tobacco that you bought?

No 1Yes 2 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 REQUIREDIf 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 warningsHealth warnings in [country specific] language 1Health warnings in foreign language 2Lack of health warnings 3

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?

No 1Yes 2 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 REQUIREDIf 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] stamp 1Foreign stamp 2Stamp removed or destroyed 3Lack of stamp/Duty-free pack 4

EU Tobacco/Economics Survey

22

EU Tobacco/Economics Survey

23

Measuring Avoidance & Evasion• Combining methods

Expert Opinions• Potentially most comprehensive

Econometric modeling• Cross-border shopping, bootlegging

Self-report and pack inspection• Mix of individual avoidance and

bootlegging/smuggling

Littered pack collection• Mix of all activities, but may overstate problem

24

Determinants

25

Determinants of Avoidance & Evasion

• Tax and price differentials More important for individual tax avoidance

and bootlegging Larger scale efforts avoid all taxes

26

Tax Avoidance – United States

Source: Tax Burden on Tobacco, 2008 and TUS-CPS

Cross Border Tax Avoidance and State Cigarette Taxes, 2006/07

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50

State Tax per Pack

% T

ax A

void

ers

k

The illicit cigarette market share (%) and the average cigarette pack price($) in high, middle and low income

countries in 2007.

high income middle income low income 0

1

2

3

4

5

6

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

5$ 2$ 1$

10% 12% 17%

cigarette pack price

Source: WHO & IUATLD, 2009

28

• Corruption

• Weak tax administration Absence of tax stamps; weak or non-existent

physical controls; unlicensed manufacturers, distributors, retailers; weak customs authorities

• Poor enforcement Limited resources for border patrols, customs

authorities, etc; low penalties

Determinants of Avoidance & Evasion

29

Smuggling and Corruption

30

• Presence of informal distribution channels

e.g. Street vendors, unlicensed distributors

• Presence of criminal networks e.g. Organized crime, terrorist organizations

Determinants of Avoidance & Evasion

31

Policy Options

32

Impact of Avoidance & Evasion

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 increases

33

Does NOT Eliminate Health Impact of Taxes

Source: Tax Burden on Tobacco, 2008 and TUS-CPS

Cigarette Prices and Adult Prevalence, New York, 1995-2007

18

19

20

21

22

23

24

25

1995 1997 1999 2001 2003 2005 2007

Pre

vale

nce

$2.75

$3.25

$3.75

$4.25

$4.75

$5.25

$5.75

$6.25

$6.75

Pri

c

Prevalence Price (2008 dollars)

34

Cook County Cigarette Tax and Tax Revenues - FY01-FY06

$0.15

$0.35

$0.55

$0.75

$0.95

$1.15

$1.35

$1.55

$1.75

2001 2002 2003 2004 2005 2006

Fiscal Year

Tax

per P

ack

$25,000,000

$45,000,000

$65,000,000

$85,000,000

$105,000,000

$125,000,000

$145,000,000

$165,000,000

$185,000,000

$205,000,000

$225,000,000

Tax

Reve

nues

Tax Revenues

Chicago tax risesfrom 16 to 48 cents

Chicago tax upto 68 cents, 1/1/06Chicago smoking ban, 1/16/06

Does NOT Eliminate Revenue Impact of Taxes

35

Impact of Avoidance & Evasion

World Bank Policy Report:• Rather than forego tax increases,

appropriate response is to crack down on illicit trade

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 products