Study into the illicit trade in excisable products with particular reference to alcohol and tobacco

138 Pages·2012·1.32 MB·English

EU-FUNDED SUPPORT TO THE IMPLEMENTATION OF THE SADC
PROTOCOL ON FINANCE AND INVESTMENT

Contract No: 9 ACP SAD 014
Project Identification No: 9 ACP SAD 014-02

SADC Review – Study into the illicit
trade in excisable products with
particular reference to alcohol and
tobacco products

REPORT

Presented to:
SADC Secretariat in Gaborone, Botswana

By

Anthony Lester
Elizabeth Allen
GFA Consulting Group, Hamburg, Germany

Published on the SADC Website:
November 2012
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Your contact persons
at GFA Consulting Group:
Claudia Martens

Contract No: 9 ACP SAD 014
Project Identification No: 9 ACP SAD 014-02
SADC Review – Study into the illicit trade in excisable products with
particular reference to alcohol and tobacco products

Report

NOTE: THIS STUDY WAS COMMISSIONED BY THE SADC
SECRETARIAT BUT THE REPORT DOES NOT NECESSARILY
REFLECT THE VIEWS OR POLICIES OF THE SADC MEMBER STATES
OR OF THE SECRETARIAT

THE REPORT IS THE PROPERTY OF THE SECRETARIAT AND SHOULD NOT BE
CITED OR PUBLISHED WITHOUT THE PRIOR PERMISSION OF THE SECRETARIAT
OR ACKNOWLEDGEMENT OF ITS SOURCE1

Address:
GFA Consulting Group GmbH
Eulenkrugstraße 82
22359 Hamburg
Germany
Telephone: [phone]
Telefax: [phone]
E-Mail: [email protected]

1 Enquiries to: Head: Public Relations Unit, SADC Headquarters, Private Bag 0095
Gaborone, Botswana, Tel: + 267 395 1863; Email: [email protected]
Website: www.sadc.int
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Table of Contents

1. EXECUTIVE SUMMARY ........................................................................ 9
2. SUMMARY OF RECOMMENDATIONS ............................................... 18
2.1 SADC “Toolkit” – for implementation by SADC ................................... 18
2.2 “Toolkit” of recommendations for implementation by individual SADC
countries ............................................................................................ 20
3. BACKGROUND AND CONTEXT ......................................................... 22
4. CONDUCT OF THE REVIEW ............................................................... 23
4.1 Chronology ......................................................................................... 23
4.2 Definition of illicit trade ........................................................................ 24
4.3 Responses from SADC Member States .............................................. 24
4.4 Country visits ...................................................................................... 25
4.5 Excise regimes across SADC ............................................................. 26
5. GLOBAL PICTURE .............................................................................. 27
5.1 A global problem ................................................................................. 27
5.2 General background to the problem .................................................... 27
5.3 Globally recognized contributory factors to existence and growth of illicit
trade in alcohol and tobacco products................................................ 28
6. FINDINGS ............................................................................................ 29
6.1 Regional overview .............................................................................. 29
6.2 Tax policy related issues .................................................................... 29
6.2.1 Tax rate increases do not necessarily result in additional
revenue or decreased consumption ................................................. 29
6.2.2 Tax structures, rates and affordability .............................................. 30
6.2.3 Clarity and adequacy of tax legislation and guidance ....................... 32
6.2.4 Working with stakeholders ............................................................... 33
6.2.5 Working with other public sector stakeholders ................................. 34
6.3. Administration policy .......................................................................... 34
6.4 Supply chain control ........................................................................... 35
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6.5 Control of taxpayer compliance .......................................................... 35
6.6 Enforcement ....................................................................................... 36
6.7 Reducing demand .............................................................................. 36
6.8 Modernization and E-Facilities ............................................................ 37
6.9 General ............................................................................................... 37
7. CONCLUSIONS ................................................................................... 37
8. RECOMMENDATIONS ........................................................................ 38
8.1 A SADC Strategic Approach ............................................................... 38
8.1.1 A regional approach to excise taxation ............................................ 41
8.1.3 A regional approach to data quality and its use in monitoring
excise .............................................................................................. 46
8.1.4 Regional partnerships with industry and with trade associations ...... 46
8.1.7 The WHO Global Alcohol Strategy ................................................... 49
8.1.8 The urgent need for a regional community transit system ................ 49
8.1.9 The need for more efficient and effective border controls ................. 50
8.1.10 The need for more robust controls of wholesale and retail
outlets ........................................................................................... 51
8.1.11 The urgent need for an effective mutual assistance process
across the region .......................................................................... 51
8.1.12 Improve excise control and enforcement ....................................... 52
8.1.13 The need for urgent development of excise guidelines to
improve standards of control of excise goods ................................ 52
8.1.14 A long-term plan for harmonisation of taxation on excisable
products ........................................................................................ 53
8.1.15 Capacity building ........................................................................... 53
8.2 “Toolkit” for SADC Member States ...................................................... 55
8.2.1. Developing a strategic approach ..................................................... 57
8.2.2 Anti-corruption strategy .................................................................... 57
8.2.3 Know the “enemy” ............................................................................ 58
8.2.4 National outcome based performance targets .................................. 59
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8.2.5 Develop an enforcement strategy .................................................... 59
8.2.6 Enforcement - Excise goods in transit and for export ....................... 60
8.2.7 Enforcement – A “Track and Trace” system ..................................... 60
8.2.8 Enforcement - Mutual Assistance .................................................... 62
8.2.9 A balanced evidence-based tax policy ............................................. 62
8.2.10 Quality and completeness of data available ................................... 63
8.2.11 Administrative policies ................................................................... 64
8.2.12 Effective modern excise legislation and regulations ....................... 65
8.2.13 Limit warehousing facilities ............................................................ 66
8.2.15 Encourage voluntary compliance ................................................... 67
8.2.16 Fiscal markers versus unique digital identifiers .............................. 68
8.2.17 Offences, penalties and a functioning judiciary .............................. 68
8.2.18 Capacity and capability .................................................................. 69
8.2.19 Embrace ICT modernization .......................................................... 70
8.2.20 Develop national partnerships ........................................................ 70
8.2.22 Tackle demand as well as supply .................................................. 72
8.3 Early actions for both SADC and Member States ............................... 72
8.3.1 Provide an easy electronic cross region checking facility on the
taxpayer details of excise operators including transporters .............. 72
9. RAISING AWARENESS ...................................................................... 73
10. VALIDATION AND WAY FORWARD ................................................ 73
10.2 Way forward – Member States’ Toolkit ............................................. 74
10.2.1 Develop a national strategic approach to tackling illicit trade.......... 74
10.2.2 Tackle corruption ........................................................................... 74
10. 2.3 Data quality ................................................................................... 74
10.2.4 Excise modernization ..................................................................... 74
10.2.5 Capacity Building ........................................................................... 75
10.2.6 Partnerships .................................................................................. 75
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10.2.7 Political and senior management commitment ............................... 75
10.2.8 Improved tools including infrastructure ........................................... 75
10.2.9 Modernizing excise legislation ....................................................... 75
10.3 Key Issues/Challenges for Member States ....................................... 76
10.3.1 Excise legislative change ............................................................... 76
10.3.2 Policy and process change ............................................................ 76
10.3.3 Measuring illicit trade ..................................................................... 76
10.3.4 Resource constraints ..................................................................... 76
10.3.5 Co-operation and co-ordination ...................................................... 76
10.4 Implementation – Member States ..................................................... 77
10.5 Way forward - SADC Level Recommendations ................................. 77
10.5.1 Set up a Specialist Excise Group ................................................... 77
10.5.2 Capacity Building ........................................................................... 77
10.5.3 Improvement in quality and availability of data in the region .......... 78
10.5.4 SADC Excise Transit System......................................................... 78
10.5.5 AATM ............................................................................................ 78
10.5.6 Supply chain controls ..................................................................... 78
10.5.7 One-Stop-border facilities .............................................................. 78
11. ACKNOWLEDGEMENTS .................................................................. 79
12. GLOSSARY AND ABBREVIATIONS................................................. 80
13. LITERATURE/DOCUMENTS PROVIDED .......................................... 81
ANNEXE 1: TERMS OF REFERENCE FOR A STUDY INTO THE
ILLICIT TRADE IN EXCISABLE PRODUCTS IN THE SADC REGION .... 84
ANNEXE 2: COUNTRIES VISITED AND PEOPLE INTERVIEWED ......... 91
ANNEXE 3 TABLE 1A EXCISE TAX RATES 2010 /11: BEER AND
SPIRITS* .................................................................................................. 97
ANNEXE 3 TABLE 1B* EXCISE TAX RATES 2010/2011: WINE and
OTHER FERMENTED BEVERAGES ....................................................... 98
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ANNEXE 3 TABLE 2 EXCISE TAX RATES 2010/2011: NON –
ALCOHOLIC DRINKS AND CONTAINERS FOR ALCOHOL AND SOFT
DRINKS .................................................................................................... 99
ANNEXE 3 TABLE 3 EXCISE TAX RATES 2010/2011: CIGARETTES
AND TOBACCO PRODUCTS ................................................................ 100
ANNEXE 3 TABLE 4 EXCISE TAX RATES 2010/2011: FUEL -
PETROLEUM PRODUCTS AND ELECTRICITY .................................... 101
ANNEXE 3 TABLE 5 EXCISE TAX RATES 2010 / 2011: MOTOR
VEHICLES AND MOTORCYCLES ......................................................... 102
ANNEXE 3 TABLE 6 EXCISE TAX RATES 2010 / 2011: BEAUTY
PRODUCTS AND PERFUMES .............................................................. 103
ANNEXE 3 TABLE 7 EXCISE TAX RATES 2010 / 2011: TEXTILES,
CLOTHING, ACCESSORIES AND JEWELLERY ................................... 104
ANNEXE 3 TABLE 8 EXCISE TAX RATES 2010/2011: FOODSTUFFS
AND PET FOOD..................................................................................... 105
ANNEXE 3 TABLE 9 EXCISE TAX RATES 2010 / 2011: TV, VIDEO
AND AUDIO ........................................................................................... 106
ANNEXE 3 TABLE 10 EXCISE TAX RATES 2010 / 2011:
TELECOMS AND RELATED SERVICES ............................................... 107
ANNEXE 3 TABLE 11 EXCISE TAX RATES 2010 / 2011: OTHER
MISCELLANEOUS EXCISE PRODUCTS .............................................. 108
ANNEX 4: SUMMARY OF TAX RATES, STRUCTURES AND
AFFORDABILITY IN COUNTRIES VISITED .......................................... 109
ANNEXE 5: KPMG METHODOLOGY FOR MEASURING ILLICIT
TRADE IN CIGARETTES IN THE EU ..................................................... 114
ANNEXE 6: CORRUPTION PERCEPTIONS (TRANSPARENCY)
INDEX .................................................................................................... 116
ANNEXE 7: FRAMEWORK CONVENTION ON TOBACCO
CONTROL .............................................................................................. 117
ANNEXE 8: SPECIFIC AND AD VALOREM TAXATION OF EXCISE
PRODUCTS .......................................................................................... 122
ANNEXE 9: MAP SHOWING REGIONAL INCIDENCE OF THE
ILLICIT CIGARETTE TRADE ................................................................. 127
ANNEXE 10: MAP OF ROUTES USED FOR CONTRABAND
CIGARETTES ........................................................................................ 128
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ANNEXE 11: MAP SHOWING MAIN PROBLEMATIC PORTS
OF ENTRY FOR CONTRABAND CIGARETTES .................................... 128
ANNEXE 12 TABLE 1 SADC COUNTRIES EXCISE TAX RATES FOR
ALCOHOL PRODUCTS – 2010* ............................................................ 130
ANNEXE 12 TABLE 2 SADC COUNTRIES EXCISE TAX RATES ON
TOBACCO PRODUCTS – 2010* ............................................................ 131
ANNEXE 12 TABLE 3 EXCISE PER PACK OF 20 CIGARETTES
IN SADC COUNTRIES – 2010 ............................................................... 132
ANNEXE 12 TABLE 4 INDIRECT TAX BURDEN ON ALCOHOL AND
CIGARETTES 2010 ................................................................................ 133
ANNEXE 12 TABLE 5 AFFORDABILITY OF ALCOHOL AND
CIGARETTES IN SADC COUNTRIES 2010 ........................................... 134
ANNEXE 12 TABLE 6 LICENSED MANUFACTURERS OF ALCOHOL
AND CIGARETTES, BONDED STORAGE WAREHOUSES AND
TRANSPORTERS OF EXCISE GOODS UNDER BOND ....................... 135
ANNEXE 12 TABLE 7 ILLICIT ALCOHOL AND CIGARETTES: SEIZURES
AND INVESTIGATIONS 2010 ................................................................ 136

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1. EXECUTIVE SUMMARY
1.1 Context
Our findings are based on research and information obtained during the
inception research phase in Gaborone, including evaluation of the
information provided to us by the 14 Member States in the questionnaire.
This was followed by visits to 6 countries selected on the basis of
information available at the start of the review. These were a 10 day visit to
South Africa and 5 day visits to Zimbabwe, Namibia, Swaziland, Zambia
and Mozambique. In such a short time in each country and without the
opportunity to interview all key senior stakeholders in all the countries
visited, our findings should be regarded as a snapshot of what we found
rather than the complete picture of what was happening in each country.
1.2 Definition of Illicit Trade
For simplicity we have adopted the definition of illicit trade set out in Article
1 of the World Health Organization (WHO) Framework Convention of
Tobacco Control (FCTC) as “any practice or conduct prohibited by law and
which relates to production, shipment, receipt, possession, distribution, sale
or purchase including any practice intended to facilitate such activity.”
1.3 Key Findings
1.3.1 Effect of tax increases on revenue and consumption
The evidence we found in Zambia and Mozambique has served to illustrate
that tax increases, either by increasing excise or VAT rates or by a levy
(such as recently introduced in Botswana for alcohol), do not increase
revenue unless accompanied by robust control and enforcement. Nor do
increases in taxation result in decreases in consumption to any significant
degree.
The impact of tax increases drives a switch to consumption of lower quality
or illicit products. Research has shown that the best way to achieve
reduced consumption e.g. of cigarettes has been through a long term
campaign of raising awareness of the health implications and providing
support to those who wish to stop smoking. High tax rates encourage some
smokers to try to give up smoking and may discourage some from starting
to smoke but the impact of high taxes on actual consumption has been
found to be marginal. Smoking is no longer culturally as acceptable as it
was and education has played a large part.
1.3.2 Size of illicit trade in alcohol and tobacco products
We are satisfied that there is a significant loss of excise revenue (and VAT)
across the region as a result of illicit trade in alcohol and tobacco products.
There has been little official effort devoted to estimating the size of this illicit
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trade but many of the members of industry we consulted in the countries
visited were able to provide us with estimates based on their knowledge of
retail sales through contact with distributors and retailers. Only in South
Africa did we find academic and independent private sector statistically
robust research based on actual purchases by consumers. The Universities
of Cape Town and Stellenbosch had both been working on methodologies
for estimating consumption and thus the size of illicit trade. The private
sector estimate of illicit trade based on purchases by consumers arrived at
a similar conclusion to one of the academic studies based on consumption.
(a) Cigarettes
The size of the estimated illicit cigarette trade in South Africa, estimated
through academic or private sector research, was:
 23 % of total consumption in South Africa (about 6.3 billion sticks –
estimated revenue loss US$ 323 million).
In the other countries visited, the estimates below of the size of illicit trade
were provided by industry:
 12% to 15% of total consumption in Namibia (50 million sticks:
estimated revenue loss of US$ 4 million);
 10% to 13% of total consumption in Zambia (estimated revenue loss of
US$2 million);
 10% to 12% of total consumption in Swaziland (10 million sticks:
estimated revenue loss of US$ 0.8 million);
 1% to 2% of total consumption in Mozambique (estimated revenue loss
of US$ 250,000); and
 Minimal proportion in Zimbabwe.
(b) Alcohol
There has been some limited and incomplete academic and private sector
research in this sector in South Africa. We found few estimates available
from industry in any country visited but we heard that:
 For 2009, about 160,000 hectolitres of spirits and about 400,000
hectolitres of wine were estimated by industry as illicit in South Africa
(estimated revenue loss of US$ 96 million );
 No estimate available for Swaziland but one importer estimated that
legitimate sales of spirits had reduced by 40% in 2010 (estimated
revenue loss of US$ 3 million);
 Mozambique is experiencing significant illicit consumption of imported
and national products. One rough estimate from an interviewee was
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