Dubai: Abrupt tax spikes on tobacco products will stimulate the illicit counterfeited tobacco trade which, in turn, is linked to other activities of organised crime and terrorism, speakers of the fifth Middle East and North Africa conference on ‘Combating Illicit Trade and Tax Engagement’ said yesterday.

The annual conference, held at the JW Marriott Marquis, was hosted by British American Tobacco (BAT).

International experts and analysts gathered to discuss and review case studies on the tobacco black market trade. The conference also covered taxation-related issues and provided insights into the best practices in adopting sensible tax policy regimes.

“Cigarettes are the most smuggled legal substances in the world. It is estimated that over 600 billion illicit cigarettes are smoked every year,” Wael Esmail, Area Regulatory Affairs Manager of BAT in the Middle East, said.

“It is extremely difficult to control the sale of illicit cigarettes. Smugglers operate wherever there is profit. Illicit cigarette traders will not hesitate selling cigarettes to youngsters. What makes them exceptionally harmful is that these cigarettes do not go through quality control and their tar, nicotine and carbon dioxide levels are unregulated.”

In the Middle East, 23 per cent of consumed cigarettes are illicit and are counterfeited.

“The illicit trade of tobacco causes governments in the Middle East to lose approximately $800 million (Dh2.93 billion) a year and $1 billion in North Africa,” Ismail said.

The losses to governments in unpaid tobacco taxes are estimated to be $50 billion worldwide.

Tareq Najjar, head of Corporate and Regulatory Affairs of BAT for the Middle East, said there is a link between high taxation and the illicit trade of tobacco.

“Price differentials enable smugglers to profit by purchasing tobacco products at low price markets and reselling them in markets where prices are higher. Introducing big increases in tax rates without careful consideration of all the variables may have negative consequences,” he said. “The wider the price differential the higher the incentive for cross-border smuggling. We have seen this happen in a number of markets that witnessed massive tax hikes.”

Steve Bill, former head of the European Commission’s VAT Unit, said it was normal for governments to raise taxes on tobacco products. The effective way, however, was to do it gradually over a few years.

“After the financial crisis in Greece, the Greek government spiked taxes on tobacco products. They used a specific system which compressed the differential of cigarette brands,” he said, “So, suddenly, the various grades of cigarettes, from the cheaper brands to the premium ones, were made more expensive and by a compressed margin. As the government raised prices on roll-your-own tobacco as well, citizens had no alternative and started engaging in the illicit tobacco trade.”

Bill said that in order for governments to deter its populace from consuming illicit tobacco products, taxes should be raised gradually over the course of a few years.