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Illegal tobacco consumption rising in Portugal as cheap whites dominate EU illicit market

By April 26, 2018 No Comments

The Observador reports this week that consumption of contraband tobacco is increasing in Portugal. The Portuguese state loses an estimated €100 million annually in tobacco tax revenue due to smuggling. The second-in-command of Portugal’s anti-tax unit, Lieutenant Colonel Paulo Messias, told reporters that seizures and infractions are increasing, and Portugal is evolving from a mainly production and transit route for illegal tobacco to a market for consumption.

The article notes that the EU is introducing a track and trace system to help fight the growth in illegal trade in Europe. The latest evidence from Portugal shows that a system which can effectively fight illicit tobacco trade is sorely needed. The EU law, however, does not fit this brief. Instead of introducing a sensible system to prevent illegal trade, the European Commission is instead pressing forward with an overly complex, unworkable system, the only effect of which will be to create unnecessary costs and inefficiencies and further consolidate the tobacco market in Europe. The European Commission Anti-Fraud Office (OLAF) stated this week that “illicit whites” are steadily dominating the illicit market noting the influx of cheap whites from outside the EU. An important share of the illicit tobacco market in the EU remains composed of contraband and counterfeit cigarettes.

ESTA Secretary General Peter van der Mark said: “The latest data from Portugal provides further undeniable evidence that illegal tobacco is a serious and growing problem in Europe. Rather than proposing sensible, evidence-based policies to prevent this, the European Commission is stubbornly pushing forward with an incredibly ill-conceived track and trace system for tobacco costing billions. As the deadline for implementation of the system in Member States comes ever closer, it has become abundantly clear to all involved that the Commission’s system is literally unworkable. This will only force smaller producers out of business, consolidating the market even more in the hands of a few players, whilst leaving illicit products untouched.

Read more about ESTA’s position on track and trace.


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ESTA members manufacture fine‑cut tobacco, pipe tobacco, traditional European nasal snuff and chewing tobaccos in 10 Member States and export their products across the entire world. Skilled craftspeople expertly apply age old techniques, perfecting the mixture of dozens of varieties, tastes, smells and flavours, continuing a centuries‑old tradition of fine European heritage. Up to the end of the last century, the manufacture of tobacco in Europe encompassed hundreds of small producers creating thousands of signature products. Over the past 30 years, smaller firms have been acquired by larger multinational companies or have ceased activities altogether, leading to employment reductions and the disappearance of traditional brands. In the manufacturing countries, tobacco production is often rooted in less advantaged regions and plays locally a key economic and social role. It deserves protection and at the minimum should be considered when developing regulation.

Read more about the European tobacco industry

Between 2008 and 2012, consumption of  fine-cut tobacco in the EU28 increased by 37%, even though the increase varies heavily per Member State. Because of the severe economic crisis, consumer disposable income was under pressure, impacting the growth of  fine-cut tobacco consumption. This increase demonstrates the price sensitivity of  fine-cut tobacco smokers. 
As the economic crisis subsided between 2012 and 2015, fine-cut tobacco consumption declined in the EU and the market adjusted, returning to its pre-crisis normal order. 
In 2016, sales of  fine-cut tobacco kept declining by 1.09% in the EU28. This long=term downward trend follows to an extent industry consolidation. 
Seemingly out of step, several eastern countries still experience percentage increases in fine-cut tobacco sales whilst starting at very low sales levels. This demonstrates the buffer function of fine-cut tobacco: cigarette consumers who can no longer afford this product find in  fine-cut tobacco a legal alternative to illegal cigarettes that are often smuggled from neighbouring countries outside the EU (see London Economics Study, June 2015). 
Sometimes fine-cut tobacco is mistakenly presented as a “hook” to smoking because of its relatively higher affordability when compared to cigarettes. 
The reality of the market shows a very different picture. In most European countries,  fine-cut tobacco was and still is a niche tobacco product enjoyed by “specialist” consumers and traditional tobacco enthusiasts who enjoy fine European craftsmanship. 
Few exceptions exist with high market shares in countries where fine-cut tobacco has a long history and forms part of the cultural heritage. In these specialised tobacco markets, the significance of fine-cut tobacco stems from its century-old local manufacturing. 
Read more about fine-cut tobacco
Every year, taxes on tobacco products raise more than €100 billion for EU governments. Tobacco tax policy must be delicately balanced to safeguard government revenues, protect fair competition, jobs and public health, whilst also deterring trade in illegal tobacco. Tobacco smuggling and sales of illegal tobacco products threaten this income and society at large. The fight against illegally traded tobacco is part of a wider effort to protect EU citizens. 
A successful implementation of Track & Trace will be of crucial importance, and requires workable standards that fit business and trading practices, making them likely to be internationally shared.
Read more about tobacco track & trace

The EU is characterised by a very diverse and flexible excise structure, which allows each Member State to set a balanced taxation of tobacco products respecting its national circumstances, interests and objectives.  Last year, excise revenues from smoking tobacco increased across the EU, even though sales declined. This clearly demonstrates the efficiency of the current flexibility left to national governments and that a “one size fits all” approach should not be considered. The few Member States (e.g. France, Netherlands) casting economic theory and the tax-bearing capacity of smoking tobacco aside had adverse effects with declining revenues whilst sales increased.

Read more about tobacco taxation

An obvious correlation exists between the highest levels of illegal and non-­domestic consumption (e.g. France, UK, Ireland, Poland and Finland) and the highest taxation rates applied to fine-cut toconsbacco, in comparison with cigarettes.  The figures clearly show that any alignment of tobacco taxation, regardless of the products’ specificities, will prevent  fine-cut tobacco from fulfilling its buffer function, leading to increased illegal trade of cigarettes and driving down government revenues.

Read more about the relationship between tax and illegal trade