Article Text

Letter
Lost revenue estimates from the illicit trade of cigarettes: a 12-country analysis
1. Raphael Lencucha1,
2. Cynthia Callard2
1. 1Faculty of Health Sciences, Bachelor of Public Health Program, University of Lethbridge, Lethbridge, Alberta, Canada
1. Correspondence to Raphael Lencucha, Assistant Professor, Faculty of Health Sciences, Bachelor of Public Health Program, University of Lethbridge, 4401 University Drive West, Lethbridge, T1K 3M4 Canada; raphael.lencucha{at}uleth.ca

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The illicit trade of tobacco products, including domestic tax evasion and avoidance and cross-border smuggling, poses a complex and pressing challenge for the health of the global population. This complexity lies in part with the many avenues for the illegal movement of tobacco across borders.1 The complexity of this challenge is heightened by porous borders in a globalised world.2 3 Unconventional means of tobacco sales, such as the internet, have challenged governments to enhance mechanisms for the monitoring and control of the cross-border movement of these products.4 5 Illicit trade not only undermines health protective measures such as taxation,6 which are proven to reduce tobacco consumption and dissuade individuals from becoming consumers, but also undermines the revenue gained by governments from tobacco taxation.

The Protocol on the Illicit Trade of Tobacco Products is the first to be negotiated within the Framework Convention on Tobacco Control.7 There are two points worth noting about this Protocol. First, the cost of developing a system for tracking and tracing tobacco products is substantially borne by the tobacco industry itself.8 Second, a point which is the focus of our study is that the national health and economic gains of supporting and implementing a strong protocol for the control of illicit trade are great.

The greatest benefit of such a protocol is the ability of governments to leverage tobacco taxation as a health protection strategy, whereby the number of new smokers will decrease along with a corresponding increase in tobacco cessation. Subsequently, the stronger the system of regulation and enforcement for illicit trade, the greater the ability of governments to leverage taxation as a tobacco control measure. The primary purpose of this study is to inform countries of the short-term economic consequences of the illicit trade of tobacco products. We chose 12 diverse countries to provide a broad picture of the global challenge of illicit trade.

It is important to note that the number of illicit trade data sources is limited and often the methodology is unclear.9 Our primary source of data for the illicit trade estimates is Euromonitor International. This data set has recently been criticised for its lack of methodological transparency, its overestimation of the illicit trade of cigarettes and a tendency to suggest that illicit trade is increasing from year to year.9 10 We are cognisant of these limitations. It is well established that ‘the net impact of the tax increases is overwhelmingly positive.’9 The paucity of illicit trade estimates should not hinder a global dialogue on this important issue. However, within this dialogue we must remain conscious of the data limitations.

We conducted an analysis of existing data in order to calculate the estimated loss of revenue per country per year.11 We conducted a simple calculation to, first, determine the price of one individual cigarette in each country in order to then calculate the tax revenue per cigarette per country. Cigarette price was calculated based on the Tobacco Atlas data set.12 We then calculated the number of cigarettes traded illicitly per year per country based on the proportion of illicit trade per country, which in turn is based on Euromonitor International data.11 We calculated the excise tax from the total tax as provided by the Tobacco Atlas.12 This calculation involved subtracting the actual value-added tax13 (eg, 12/112=10.7% for Ecuador) from the total tax. Once the excise tax revenue per cigarette was calculated, we calculated the estimated loss of revenue per year by multiplying the number of illicitly traded cigarettes with the tax revenue generated per cigarette. This information provides an estimate of lost revenue for each country. We also calculated the estimated revenue lost for the cheapest and most sold brand in each country based on cost estimates provided in the 2009 WHO report. All estimates are calculated in US dollars (see table 1).

Table 1

Lost revenue due to the illicit trade of cigarettes

The range of excise tax as a proportion of the cigarette price as of 2007 or later was 35.8% in Vietnam to 80% in Bulgaria. The average estimates for the illicit trade of cigarettes between 2003 and 2008 ranged from 4.4% in the Czech Republic to 27% in the UK. Of the 12 countries analysed, 5 demonstrated an increase in illicit trade between 2003 and 2008. Two of them demonstrated a decrease in illicit trade and the remainder demonstrated patterns of fluctuation between 2003 and 2008. The average number of cigarettes traded illegally ranged from 389.55 million in Ecuador to over 20 billion in India. Lost excise tax revenue as an average of the 6-year period for the most sold brand ranged from over $23 million per year in Ecuador to almost$5 billion per year in the UK (see table 1).

The price elasticity of demand is estimated to be between −0.4 and −0.6.14 As such the estimated revenue lost may be lower than our calculated estimates over time as consumption decreases. In conducting this analysis, we recognise that the actual amount of additional tax revenues collected as a result of successfully controlling illicit trade is influenced by both the share of illicit trade (supply) and the size of the market (demand) and would decrease over time. However, the immediate economic gains upon controlling illicit trade are substantial.

Illicit trade compromises health outcomes to the extent that it undermines price strategies, labelling requirements or other policies aimed at reducing the demand for tobacco products. Illicit trade also compromises all government programs to the extent that it deprives communities of revenues that could be put to public purposes. For example, the annual revenue loss to the illicit tobacco market in the 12 countries that we analysed is more than 3 times the entire budget of the WHO15 and almost 4,000 times as large as the cost of convening a session of an Intergovernmental Negotiating Body to develop a multinational response.16 For the countries we studied, lost revenue due to the illicit trade of cigarettes is higher than government investments in tobacco control.17 Despite the data limitations, the lost revenue due to the illicit trade of cigarettes is predictably high. The cost of supporting the development and implementation of protocols to curb the illicit trade of tobacco products is relatively small when compared with the health and economic gains.

## Footnotes

• Competing interests None.

• Provenance and peer review Not commissioned; externally peer reviewed.