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Price and tax drive illicit tobacco trade

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The working-class Harehills neighbourhood in Leeds is an unlikely crossroads for global criminality – a jumble of down-market stores, pungent take-aways and immigrant-owned mini-marts featuring adverts in Arabic and Polish. But behind a false wall in one local shop, past the halal meat counter, lies a stash of some 10,000 untaxed cigarettes from eastern Europe – a modest slice of the illicit tobacco market flourishing throughout Britain and the EU.

“I’d guess that over half the cigarettes smoked in Harehills are illegal,” said an officer from HM Revenue & Customs, which recently conducted several raids in the area. “Sometimes, after a bust, all we have to do is drive round the block, come back and they’ve already re-supplied.”

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One shop owner, a stout man in his thirties with gelled, jet-black hair, is part of the local tobacco underworld. Originally from northern Iraq, he is on first-name terms with some of the officers from HMRC’s local Inland Enforcement team. During the past year his modest convenience store has been targeted many times.

“Here the duty is so much – if I buy British Marlboros I may sell five or 10 packets a day,” he said. “People here have no money, they’re not working, so we get Marlboro for £3 from Poland – it is not just here, it is the whole area.”

The trade in illicit – untaxed – tobacco has recently become the fourth-largest global tobacco business by volume.

“If taken in its entirety the illicit trade is only behind BAT, Philip Morris and Japan Tobacco worldwide,” said Michael Prideaux, director of corporate affairs at British American Tobacco. “It represents anything between 6-12 per cent of global volume, so between 330bn-660bn cigarettes a year.”

Although tobacco companies do not disclose how much they lose from the illicit trade, Philip Morris International, the world’s largest tobacco company by sales, said it is “significant”.

“Illegal tobacco broadly is now a large portion of the global market,” said Peter Nixon, vice-president of communications at PMI. “Our price structure varies country by country based on local tax levels, so the losses to us are a significant concern.”

A combination of government duty increases and economic depression is set to make the problem worse, according to the industry, depriving companies and national exchequers of billions of dollars in revenue.

“The drivers are price and taxes. Before the 1990s you didn’t see that much globally, but since then we’ve seen tobacco taxes around the world go up so there’s more incentive for smugglers,” said Mr Nixon.

The EU, with its porous borders and large, varied markets, has seen some of the steepest growth in illicit trade. In 2010, according to PMI, one in 10 European cigarettes smoked – 64.2bn – were either untaxed or made of counterfeit tobacco, a rise of nearly 2 per cent, or 8bn illicit cigarettes, since 2006.

While the UK average for consumption of illicit cigarettes is about 10 per cent of the total, in London it has risen to one in five and in cities such as Nottingham and Ipswich one in three. As for roll-up cigarettes, PMI estimates that half of all loose tobacco in the UK is illicit.

Part of the problem is stigma, or the lack of it. The steady increase in the cost of smoking has seen young professionals increasingly buying under the counter.

“If you look at price differentials between Ukraine, Russia and Belarus, which have packs in some cases below one euro, and then the UK where a pack of Dunhill or Kent is around £8, the profits that can be made are just so vast,” said Pat Heneghan, BAT’s global head of anti-illicit trade. “Given the differentials of tax and price [the problem] will get worse before it gets better.”

Back in Harehills, the HMRC squad found some 24,000 illicit cigarettes during a day’s work, equating to a tax loss of more than £9,000. It is a fraction of the estimated £2bn lost every year to tobacco smuggling, according to the government.

The convenience store owner, however, appears undeterred. Planning his next trip to Poland, he said he is selling the van he previously used: “I want a truck.”

By Christopher Thompson

ft.com

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