Cigarette manufacturers operating in Africa are creatively fuelling illicit tobacco trade in a bid to evade taxation. This is leading to tax losses for African governments estimated to be in excess of a trillion shillings annually.
The firms, which are subsidiaries of big tobacco multinationals, are reportedly selling cigarettes to their sister companies in markets where tax rates are low, which in turn sneak the now contraband cigarettes into high tax regime markets for sale in black markets.
Thus while the cigarette companies are able to recoup their costs and make margins on the products, tax authorities get significantly low revenues from taxes on tobacco products.
The European Union has also been hit by such tricks by cigarette firms and is estimated to be losing €20 billion (Sh2 trillion) in taxes.
According to a French politician Christophe Madrolle, this rampant illicit trade in tobacco can substantially come down and even be eliminated if African governments and EU member states ratify the World Health Organisation (WHO) Protocol to Eliminate Illicit Trade on Tobacco.
Mr Madrolle, the Secretary-General of the Union of Democrats and Ecologists, said the protocol would enable governments in the region to establish mechanisms to trace origin of products. It also empowers authorities to heavily penalise tobacco firms found to be engaging in illicit trade.
He noted that the amount lost to illicit trade can considerably reduce loans and foreign aid, which Africa depends on to bridge financing deficits in their budgets.
“Nowadays, states suffer from considerable tax losses due to the tobacco illicit trade every year. The annual losses are estimated at €20 billion for the whole European Union and €10 billion for Africa,” he said.
“Contrary to a popular belief, the huge share of this parallel trade is made up of real cigarettes, manufactured and marketed by tobacco manufacturers themselves.”
He added that tobacco manufacturers sell products to intermediaries in countries where taxes are extremely low, then the cigarettes are transported by containers or trucks in high-tax countries.
“They are sold by tobacco manufacturers in countries that practice a low taxation on tobacco products. Tobacco manufacturers then ‘over-supply’ the tobacco retailers to feed customers from surrounding countries with high taxation on tobacco,” he said.
Mr Madrolle suggests that a portion of tax revenues generated by EU countries after ratifying the WHO protocol can be used to subsidise critical projects in Africa and the Mediterranean.
“If tobacco was bought in the country where it is consumed, the states would recover the lost tax revenue, which would enable, as I propose, to fund actions that the Mediterranean and African countries have such a vital need for. The EU State Members would have €20 more billion of tax revenue every year, and the African states €10 billion euros,” he said.
The WHO Protocol to eliminate illicit trade on tobacco by African and European countries was adopted in 2012 by the Conference of the Parties at its fifth session in Seoul. It enables countries to establish mechanisms to trace the origin of tobacco products without interference by tobacco manufacturers.