Press release FITA 01 June 2018

Press release – FITA – for immediate release

We note with amazement the recent comments and unsubstantiated statistics in connection with the illicit cigarette trade in the media and in public platforms attributed to one Francois van der Merwe of the Tobacco Institute of Southern Africa (“TISA”), which organization primarily represents the interests of 3 large foreign multinationals whilst masquerading as a champion for the South African fiscus and the local tobacco industry although they have been shown to only be serving their own interests and lining their already deep pockets.

The simple reality is that whilst illicit manufacturing and smuggling may be a common, and in our view over-publicised malady in the industry, there are a multitude of other ills that affect economic growth and losses to the fiscus that need to be addressed by the state.

In their research paper titled “Are the tobacco industry’s claims about the size of the illicit cigarette market credible? The case of South Africa[1]leading academics from the University of Cape Town Professor Corne van Walbeek and Lerato Shai found inter alia the following:

The tobacco industry claims that illicit cigarette trade in South Africa is high and rising. This is often used as an argument not to increase the tobacco excise tax or to regulate tobacco products.

To determine how the tobacco industry’s estimates of the size of the illicit cigarette market have changed over time… published media articles were obtained from South African Press Cuttings; published articles and press releases were sourced from the internet. The period of interest is 1990–2012.

The results were as follows:Between 1990 and 2012 we found 90 newspaper articles and press statements that emphasised the tobacco industry’s view on illicit trade. Articles that reported on action taken against illicit trade were excluded.

Between 2006 and early 2011 the Tobacco Institute of Southern Africa, a body representing the interests of large cigarette companies, reported that South Africa’s illicit cigarette market share was 20%. This share increased to 25% in late 2011 and 30% in 2012. In a 2012 presentation by Tobacco Institute of Southern Africa to National Treasury the illicit market share in 2008 was indicated as 7.9%, compared with claims in that year that the illicit market share was 20%. Industry findings that the illicit market decreased in 2007 and 2008 were not reported in the press.

Conclusions: The tobacco industry has adjusted previous estimates of the illicit trade share downwards to create the impression that illicit trade is high and rising. If previous estimates by the tobacco industry were incorrect the credibility of current estimates should be questioned.

We therefore continue to believe that a more holistic approach is required of the state to address losses to the fiscus – of which illicit manufacturing and smuggling form but a part.

Quite clearly the practice of aggressive tax-base erosion and its devastating effects on our economy in other economic sectors have drawn significant interest in the media recently. The term that revenue authorities use to describe this is base erosion and profit shifting (“BEPS“). BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules and treaties of different countries in order to artificially shift profits to low or no-tax locations. The intended consequence of BEPS is that multinationals end up paying little or no corporate income tax in any country.

From an analytical point of view in respect of the tobacco industry, it’s a bit myopic to view the sector from a purely excise perspective. Taxes and duties have a natural interaction and overlap, and this is by design. Excise interacts with VAT. It also interacts with personal and corporate income tax. If you wish to assess to overall gains or losses to the fiscus attributable to the tobacco industry, you need to look at all forms of tax holistically. In other words, excise alone is not a suitable indicator of non-compliance. The real indicator which would show levels of compliance is in fact corporate income tax. Now when you do such an analysis, you need to proportionally compare tobacco manufacturers by size and contribution of corporate income tax. If you do this exercise, you will realise the true extent of losses to the fiscus and the fact that it has been bleeding income tax. You will also find that proportionally, the risk for low income tax revenue points towards multinationals. The reason for this is simple. Multinationals are organised in such a way so as to lend themselves to aggressive tax base erosion practices, whereas local manufacturers are not. Local manufacturers are practically incapable of aggressive tax base erosion practices because of their structure and nature. The world over you will find studies and findings and disputes with revenue authorities which point this out. Multinationals have over many years been litigating with revenue authorities with respect to such practices. Examples of these can be found in Australia, New Zealand, USA, Russia, Pakistan, India, North Korea, Bangladesh to name but a few. It is a lesser known and even lesser understood practice that can only be addressed by revenue authorities. It is so that excise figures do point towards aspects related to illicit practices, but having said that, it likely pales in comparison to aggressive tax base erosion practices and related schemes. It’s just too simplistic to only look at excise as a risk indicator if the question relates to losses to the fiscus. It isn’t that simple. It isn’t just about illicit tobacco. You need a broader and more holistic view and understanding of all manifestations of losses to the fiscus if you are serious about recouping lost taxes.

BEPS schemes are incredibly sophisticated, and very difficult to identify, unmask and take apart. To combat these is notoriously difficult because they require very complicated audits and investigations, rely on difficult legal interpretations, and need close cooperation across multiple jurisdictions.

So there’s BEPS on the one hand, on the other hand is the issue of lobbying, unfair trade practices and undue influence over state officials under the pretext of “assisting to combat crime”. The lines get blurred and the relationships lead to unequal treatment of some. In some cases, this “assisting to combat crime” has led to incidents of criminality. Examples are cases of industrial espionage and sabotage, unduly influencing state officials to direct their powers and efforts towards market competitors, breaking and entering and illegal placement of tracking devices on vehicles, corrupt payments to “informants”, such payments themselves being illegally laundered via travelex money cards, and taxes evaded on such payments. Other examples include unlawful raids, and in some cases employees being assaulted and intimidated and property damaged. On the surface they appear legitimate efforts to assist law enforcement agencies, but when you scratch, you find plenty of acts of criminality. Because these implicate state officials, they are ignored or swept under the carpet.

The leaks on Twitter page @espionageafrica are a treasure trove of evidence implicating multinationals and state officials in bed with each other. Yet, since they’ve been leaked, their contents haven’t received much attention from law enforcement agencies or the media. One has to ask why this is the case? It shows the capturing of units and state officials and is akin to the so-called #GuptaLeaks. So why the lack of attention by law enforcement agencies and the media?

Issued by the Fair-trade Independent Tobacco Association: 1 June 2018

For queries kindly contact Monique Vogel t: 011 044 5355; e: Monique@fita.co.za

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