Tax Avoidance Evasion An Overview Frank J Chaloupka

Tax Avoidance & Evasion An Overview Frank J. Chaloupka Distinguished Professor, UIC Director, WHO Collaborating Centre on the Economics of Tobacco and Tobacco Control Effective Implementation of FCTC Policies Pre-Conference Workshop, 15 th World Conference on Tobacco or Health, Singapore, 19 March 2012 1

Overview n Types of tax avoidance & evasion n Measuring tax avoidance & evasion n n Determinants of tax avoidance & evasion Impact of tax avoidance & evasion 2

Definitions 3

Tax Avoidance & Evasion • Many terms used: n Illicit trade, contraband, smuggling, bootlegging, counterfeit, etc. • Tax Avoidance n Legal methods for avoiding tobacco taxes • Tax Evasion n Illegal methods for avoiding tobacco taxes 4

Tax Avoidance & Evasion • Individual tax avoidance n Reservation, Internet and other direct, dutyfree, and cross-border purchases • Generally not illegal, but states require local taxes to be paid n Brand/product switching, carton purchases, use of cheaper outlets • Bootlegging n Small scale purchasing of cigarettes in lowtax/price jurisdictions for resale in high tax/price jurisdictions 5

Tax Avoidance & Evasion • Large scale, organized smuggling Illegal transportation, distribution and sale of large consignments of tobacco products n Generally avoids all taxes n • Counterfeit products bearing a trademark without the approval of the trademark owner n Often involved in organized smuggling n 6

Tax Avoidance & Evasion • Illegal Manufacturing Unreported or under-reported manufacturing, distribution and sale of large consignments of tobacco products n Generally avoids all taxes n Often involved in organized smuggling n • Brand Repositioning n Industry changes in pricing, packaging, product design, etc. that change tax rate applied to product 7

Measurement 8

Measuring Avoidance & Evasion • Difficult to measure given illegality • Variety of approaches used Each captures different pieces n None fully captures all tax avoidance and evasion n 9

Measuring Avoidance & Evasion • Comparing recorded exports of tobacco products to recorded imports Difference reflects leakage into black markets n Recent estimates suggest 20 -30 percent of exports do not appear as imports n 4 -10 percent of global consumption n Will be largely organized smuggling n 10

Extent of Illicit Trade Source: ECOSOC Trade Database: Ayda Yurekli 11

Measuring Avoidance & Evasion • “Expert Opinions” n Customs officials, tobacco industry representatives, tax authorities, and others • Potential bias in some sources n n n Widely varying estimates across countries Recent estimates 10 -12% Again, largely reflecting organized smuggling 12

Tax Avoidance and Evasion 13 Source: Tobacco Atlas, 3 rd edition

Measuring Avoidance & Evasion • Individual tax avoidance a bit easier to assess n Econometric analyses of tax paid sales that account for various factors, including: • tax/price differences • population density • travel patterns • Distance n US estimates suggest up to 12. 5% of total consumption in early 2000 s 14

Measuring Avoidance & Evasion • Individual tax avoidance – selfreported data International Tobacco Control Policy Evaluation Study n Tobacco Use Supplement to the Current Population Survey n European Survey on Economic Aspects of Tobacco Use n Others n 15

Measuring Avoidance & Evasion • Individual tax avoidance – self-reported data n Tobacco Use Supplement to the Current Population Survey • Periodic state representative, cross-sectional samples • Includes questions on price paid, whether or not purchased in own state, other state or through other channels (e. g. Internet or phone) – 2003 and 2006/07 surveys only • Does not pick up in-state tax avoidance (e. g. reservation purchases) • 2003: 5. 63% 2006/07: 5. 19% 16

Tax Avoidance – United States Source: Tax Burden on Tobacco, 2008 and TUS-CPS 17

Tax Avoidance – United States Source: Tax Burden on Tobacco, 2008 and TUS-CPS 18

EU Tobacco/Economics Survey Pack Inspection B 10) Please, could you show me the latest pack of cigarettes or hand rolling tobacco that you bought? No 1 Yes 2 INTERVIEWER: COLLECT ALL THE FOLLOWING INFORMATION FROM THE PACK. IF IT IS NOT POSSIBLE TO SEE THE LATEST PACK BOUGHT, THEN ASK THE INTERVIEWEE TO PROVIDE THE INFORMATION REQUIRED If you do not have it with you, could you remember the following information on your last pack of cigarettes or hand rolling tobacco? b) Health warnings in [country specific] language 1 Health warnings in foreign language Lack of health warnings 2 3 19

EU Tobacco/Economics Survey 20

EU Tobacco/Economics Survey Pack Inspection B 10) Please, could you show me the latest pack of cigarettes or hand rolling tobacco that you bought? No 1 Yes 2 INTERVIEWER: COLLECT ALL THE FOLLOWING INFORMATION FROM THE PACK. IF IT IS NOT POSSIBLE TO SEE THE LATEST PACK BOUGHT, THEN ASK THE INTERVIEWEE TO PROVIDE THE INFORMATION REQUIRED If you do not have it with you, could you remember the following information on your last pack of cigarettes or hand rolling tobacco? c) Tax stamp (banderole) [Country specific] stamp Foreign stamp Stamp removed or destroyed Lack of stamp/Duty-free pack 1 2 3 4 21

EU Tobacco/Economics Survey 22

Measuring Avoidance & Evasion • Combining methods n Expert Opinions • Potentially most comprehensive n Econometric modeling • Cross-border shopping, bootlegging n Self-report and pack inspection • Mix of individual avoidance and bootlegging/smuggling n Littered pack collection • Mix of all activities, but may overstate problem 23

Determinants 24

Determinants of Avoidance & Evasion • Tax and price differentials More important for individual tax avoidance and bootlegging n Larger scale efforts avoid all taxes n 25

Tax Avoidance – United States Source: Tax Burden on Tobacco, 2008 and TUS-CPS 26

The illicit cigarette market share (%) and the average cigarette pack price($) in high, middle and low income countries in 2007. 6 10% 12% 18, 00% 17% 16, 00% 5 14, 00% 4 12, 00% 10, 00% 3 8, 00% 2 6, 00% 4, 00% 1 5$ 2$ high income middle income 2, 00% 1$ 0 0, 00% Source: WHO & IUATLD, 2009 low income cigarette pack price

Determinants of Avoidance & Evasion • Corruption • Weak tax administration n Absence of tax stamps; weak or non-existent physical controls; unlicensed manufacturers, distributors, retailers; weak customs authorities • Poor enforcement n Limited resources for border patrols, customs authorities, etc; low penalties 28

Smuggling and Corruption 29

Determinants of Avoidance & Evasion • Presence of informal distribution channels n e. g. Street vendors, unlicensed distributors • Presence of criminal networks n e. g. Organized crime, terrorist organizations 30

Policy Options 31

Impact of Avoidance & Evasion n IARC Handbook 14: • Sufficient Evidence that tax avoidance and tax evasion reduce, but do not eliminate, the public health and revenue impact of tobacco tax increases 32

Does NOT Eliminate Health Impact of Taxes Source: Tax Burden on Tobacco, 2008 and TUS-CPS 33

Does NOT Eliminate Revenue Impact of Taxes 34

Impact of Avoidance & Evasion n World Bank Policy Report: • Rather than forego tax increases, appropriate response is to crack down on illicit trade n IARC Handbook 14: • Strong evidence that a coordinated set of interventions that includes international collaborations, strengthened tax administration, increased enforcement, and swift, severe penalties reduces illicit trade in tobacco products 35