Tobacco Industry Tactics to Evade Tax

From TobaccoUnmasked

Background

Tobacco related harm is a major factor that affects country’s economy. Framework Convention on Tobacco Control (FCTC) recommends that tobacco tax should be increased regularly and scientifically to reduce affordability, to delay initiation and to motivate users to quit. [1]

Image 1: World Bank Group advocating for increased tobacco tax, stating it is a Win-Win situation for the governments.[2]

Whenever the tobacco tax is raised by a government, the tobacco industry attempts to interfere using a diverse range of tactics. This post aimed to summarise some of those tactics documented in the global literature.

Tobacco Industry Tactics to Evade Tax

  • Research tactics: Sponsoring research that leads to invalid conclusions likely to leave the public and the policy makers confused. As a result of this, many myths get established stemming from issues such as exaggerated economic importance of the tobacco industry, overestimation of the smuggling rates and misrepresentation of the impact on the livelihoods. Disregard of the subsatantial tobacco related costs to a government in the final equation is commonly seen.[3]
  • Law related tactics: Hijacking or attempting to hijack the law making and interpretation processes; and intimidating governments with litigation or threats of litigation.[3]
  • Public relations tactics: Using front groups to fabricate support for the industry and the industry-friendly arguments and to influence public opinion in a way beneficial for the industry; using ‘Cooperate Social Responsibility’ activities to promote their image and to justify their trade and existence; confusing the public by generating media hype to oppose tobacco tax and its increase.[3]
  • Stockpiling/Forestalling: Over manufacture and over-supply to the distribution network prior to a tax hike so that they can have a higher profit margin by selling the stockpiled cigarettes at the new increased price, without paying the increased tax.[4]
  • Obtaining loans: Some tobacco companies obtain loans from banks without a real need just to be eligible for tax concessions and exemptions.[5]
  • Use of royalty payments methods: A subsidiary of a tobacco company pays a “royalty price” for trading a brand to another subsidiary of the same company so that it will be counted as an expenditure and thus not included in tax calculations.[5]
  • Changing the attributes of tobacco products or their production processes: When tobacco tax is based on different characteristics of tobacco products such as length and weight of the cigarette, type of the product and characteristics of production process, they change the attributes to be excluded from the tax portion specific for the attribute. (For example, shorten the cigarette, reduce its weight etc.)[4]
  • Increasing prices more than the tax increase: They use this tactic to compensate for profit loss when the tax increase is not adequate to reduce affordability considerably. They will then put the blame on the government to lessen the public support for further tax increases and other tobacco control actions.[4]
  • Timing of price increase: They increase the price before tax increase so the increase in the price is gradual in a stepwise manner. This allows the customers to adjust to the price, reducing the impact on affordability.[4]
  • Creating a price discrimination: They maintain a price discrimination: pricing cigarettes in two or more tiers. The lower priced cigarettes will remain cheap and affordable for the customers sensitive to high price and the higher priced cigarette will have an increased price hike, as their customers will still be able to afford it. This discrimination compensates for their profit losses and maintains affordability.[4]
  • Changing the number of cigarettes in a pack: This will keep the price of a pack constant, but not the number of sticks. This way, it will not impact the purchasing power of the consumer, especially when selling loose cigarettes are banned and there is no standard pack size.[4]
  • Exploiting complex tax structures: They lobby for simultaneous changes to other features of the tax law, confusing the policymakers and the public, resulting in ineffective implementation of the tax modifications.[4]

Examples of Tactics related to Tobacco Tax in Sri Lanka

Following Tobacco Unmasked pages have details on tobacco tax related industry interference in Sri Lanka we have reported previously.

Tobacco Unmasked Resources

Other TobaccoUnmasked pages related to tobacco tax issues:

Notes

  1. ↑ World Health Organization. Article 6, WHO Framework Convention on Tobacco Control, 2005, accessed January 2021
  2. ↑ World Bank Group. Taxing Tobacco: A win-win for public health outcomes and mobilizing domestic resources, 30 March 2018, Accessed February 2021
  3. ↑ 3.0 3.1 3.2 World Health Organization. Tobacco industry tactics, WHO report on the Global Tobacco Epidemic, 2015, accessed January 2021
  4. ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 Tobacco Free Kids. Common strategies employed by the tobacco industry in response to tobacco tax increases, WHO Undermining Government Tax Policies, April 2016, accessed January 2021
  5. ↑ 5.0 5.1 Tobacco Control Research Group, University of Bath. Big Tobacco, Big Tax Avoidance, Stopping Tobacco Organizations and Products (STOP), November 2020, accessed January 2021
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