13A.2.1 Definitions of tax evasion and avoidance
The distinction between legal avoidance and illegal evasion is not a completely clear one, with a considerable area of grey in the middle. Taxes on tobacco products can be circumvented in many different ways. Table 13.2.1 defines different descriptions of tobacco products and purchase types as they relate to tax avoidance and evasion.
13A.2.2 What kind of tobacco is used out of the tax-paid chain?
Taxes on tobacco products can be circumvented in many different ways. It us useful to distinguish between legal and illegal circumvention, products for personal use versus commercial resale, and products in small versus large quantities.2,3,4
Methods of illegal circumvention that have been observed in Australia and internationally include:
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- Illicit growing and rudimentary manufacturing of roughly processed tobacco sold to consumers for use in roll-your-own cigarettes or pre-rolled into cigarettes.5 (This form of illegal circumvention has been a notable problem in both Australia—commonly referred to as ‘chop-chop’5,6— as well as in New Zealand7 and has also been detected in Canada.8)
- Bootlegging by individuals or small-time operators or groups purchasing tobacco products in low-tax jurisdictions in amounts that exceed limits set by customs regulations, and then re-selling them to others in high-tax jurisdictions.
- Large-scale smuggling, that is, illegal transportation across borders of large consignments of products (including illegally grown tobacco, counterfeit cigarettes and genuine cigarettes diverted from the legal market) often involving highly organised criminal groups.
- Importation of counterfeit cigarettes that appear very similar to brands produced by licensed tobacco manufacturers, but which are produced without the permission of the trademark holders. (These are sold to suppliers who make them available either within their own countries or overseas at lower cost than the ‘genuine’ products, and are a concern to government authorities in instances where distributors avoid payment of local duties and taxes.)2
13A.2.3 Other types of tax avoidance and evasion
Legal circumvention occurs frequently in Europe, North America and other parts of the world through:
- Legal cross-border shopping
- Legal tourist shopping
- Legal duty-free sales
- ‘Distance selling’ previously through mail order and in recent years predominantly through the Internet, where cigarette consumers in high-taxing jurisdictions might order cigarettes from vendors in low-taxing jurisdictions including other states, other countries or from tax-free jurisdictions such as Native American reservations where residents are not required to pay duties9
- Efforts by tobacco companies to reformulate or re-brand products so that they are classified in a category or band that attracts a lower level of tax might also be thought of as a form of legal circumvention.2
Joossens, et al.3 use the term ‘quasi-legal circumvention’ to describe behaviours that may not be in breach of any particular legislation as it currently stands, but are not condoned because they are not in line with its purpose and can be deemed as ‘schemes’ designed specifically to avoid taxes. Examples of quasi-legal circumvention in the US include grey-market sales involving export of cigarettes to wholesalers in one country who import them back to the country of origin, exploiting differences in taxes applicable to cigarettes destined for export and those destined for domestic consumption.10 Such activity may be clearly legal or illegal in other countries depending on the way that legislation is drafted.
References
1. Intergovernmental Negotiating Body on a Protocol on Illicit Trade in Tobacco Products Conference of the Parties to the WHO Framework Convention on Tobacco Control. Chairperson’s text for a protocol on illicit trade in tobacco products. Agenda item 5, fifth session Geneva, Switzerland, 29 March – 4 April 2012.Geneva: World Health Organization, 2012. Available from: http://apps.who.int/gb/fctc/PDF/it5/FCTC_COP_INB-IT5_5-en.pdf.
2. IARC. Effectiveness of Tax and Price Policies for Tobacco Control 2011. Available from: https://publications.iarc.fr/Book-And-Report-Series/Iarc-Handbooks-Of-Cancer-Prevention/Effectiveness-Of-Tax-And-Price-Policies-For-Tobacco-Control-2011.
3. Joossens L, Chaloupka F, Merriman D, and Yurekli A. Chapter 16 Issues in tobacco smuggling, in Tobacco control policies in developing countries. Jha P and Chaloupka F, Editors. London: Oxford University Press; 2000. p Available from: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTHEALTHNUTRITIONANDPOPULATION/EXTETC/0,,contentMDK:20226973~menuPK:478900~pagePK:148956~piPK:216618~theSitePK:376601,00.html.
4. International Agency for Research on Cancer. Methods for evaluating tobacco control policies Handbooks of Cancer Prevention, Tobacco Control, 12.Lyon, France: International Agency for Research on Cancer, 2008. Available from: http://apps.who.int/bookorders/anglais/detart1.jsp?sesslan=1&codlan=1&codcol=76&codcch=28#.
5. World Customs Organization. World Customs Organization annual report, 2011, tobacco extracts. Brussels: WCO, 2012. Available from: http://www.wcoomd.org/files/1.%20Public%20files/PDFandDocuments/Press%20releases/Extract_Customs_Tobacco_2011.pdf.
6. Walsh R, Paul C, and Stojanovski E. Illegal tobacco use in Australia: how big is the problem of chop-chop? Australian and New Zealand Journal of Public Health, 2006; 30(5):484-5. Available from: http://www.ncbi.nlm.nih.gov/pubmed/17073235
7. Ernst & Young. Out of the shadows: an independent report of New Zealand’s illicit tobacco market. Auckland: British American Tobacco, 2010. Available from: http://202.68.89.83/NR/rdonlyres/D4A2B469-A94B-44D5-9F17-BB0F0820ADFC/132464/49SCMA_EVI_00DBSCH_INQ_9591_1_A38235_BritishAmeric.pdf.
8. Pipe A. Illicit tobacco: governments continue to blow smoke. Canadian Medical Association Journal 2009; 181(9):652. Available from: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2764771/?tool=pubmed
9. Luk R, Cohen J, Ferrence R, McDonald P, Schwartz R, et al. Prevalence and correlates of purchasing contraband cigarettes on First Nations reserves in Ontario, Canada. Addiction, 2009; 104(3):488–95. Available from: http://www.ncbi.nlm.nih.gov/pubmed/19207360
10. FIA International Research Ltd. The gray market in cigarettes in the United States: a primer., Washington DC: FIA International Research Ltd., 1999.