South Africa’s cigarette ban backfire

Tax and customs legal expert, Telita Snyckers, says that South Africa’s tobacco sales ban has done nothing to stop the trade of cigarettes in South Africa, and has likely led to huge profits for all producers – non-taxable.

Speaking in a webinar with Daily Maverick, Snykers – a former SARS tax executive and customs expert working internationally – said that no matter the size of the tobacco producer in South Africa, the ban on the sale of tobacco products has pushed all their brands into the illicit market, which is an incredibly profitable space.

According to Snyckers, one of the main reasons cigarette sales have survived through the vast number of prohibitions and bans throughout time, is because it’s incredibly profitable, and relatively easy to do.

She said that syndicates can see a ten-fold return on the money they pump into illicit trade. And even if 90% of their stock is seized by authorities, the remaining 10% would still be enough for them to turn a profit.

This isn’t only the case from criminal syndicates, either, she said. Big tobacco companies also have a stake in the game, with all types of brands, from premium to no-name, ending up in the illicit market at some point.

She said that, while the public face of tobacco companies is that of legitimate business operations and working within the confines of the lockdown regulations, the reality is that, whether they admit it or not, their brands are being sold illegally.

Snyckers’ comments echo a recent report from The University of Cape Town’s Research Unit on the Economics of Excisable Products (REEP), where researchers claimed that big cigarette producers are likely to be feeding illicit trade in the country.

The current regulations, which ban all sales of tobacco products in South Africa, have opened up loopholes for illicit products to be distributed in South Africa, the researchers said.

Being able to produce cigarettes legally for the export market, but not able to sell cigarettes in South Africa, has created a loophole and an incentive to sell illegally in the very lucrative local market, the REEP said.

“Manufacturers will find it difficult to resist this temptation, especially because so many companies are selling cigarettes, despite the sales ban. Given the tobacco industry’s long record of involvement in illicit trade, it is likely that they will divert cigarettes, ostensibly destined for the export market, to the local market,” it said.

One of the biggest multinationals in South Africa, British American Tobacco (BATSA) has refuted this, saying that it is complying with the regulations 100%.

BATSA said it exports to BAT entities in 12 other countries and the volumes it is producing are consistent with export volumes before the lockdown.

“BATSA is working closely with SARS and have implemented SARS’s new processes and protocols for production and export. We have SARS officials at our factory who are controlling production volumes, auditing the export declarations, verifying the container loading and sealing the containers.

“This process also includes the checking of containers at the ports of exit by customs officials. Furthermore, we are obliged to send production and forecast reports on a weekly basis to SARS. Although some of these new processes have affected our production efficiency, we recognise the importance of these steps and are complying with them 100%,” it said.

However, Snyckers said that companies can still ‘legitimately’ work around these checks and balances – specifically by logging larger export numbers to neighbouring countries, which far exceed the demand of those markets, and then illegally distribute the overflow back in South Africa.

“In May, SA manufacturers suddenly began exporting astronomical volumes. Indeed, that month saw the biggest volume of cigarette exports since November 2017,” she noted in an article published earlier this month.

“Most of this was exported to Mali (27% of the volume exported), Namibia and Lesotho (some also bizarrely went to Syria). So, were we to believe these numbers, it suggests we shipped 61% of Lesotho’s annual consumption in one month. In one month, we shipped 733-million cigarettes to Namibia – more cigarettes than Namibians smoke in a year.”

The illicit trade of cigarettes is, at its simplest, cigarettes that have not had tax paid on them. In the current regulatory framework, with lockdown prohibitions in place, all cigarette sales are illicit sales, and government is losing billions in tax revenue as a result.

BATSA says government has lost R4 billion in excise taxes because of this, to-date, with billions more to be lost in the coming months. SARS itself has highlighted R18 billion in lost tax revenue from excise – though this includes tobacco and alcohol.

The most conservative estimate of around R6 billion in taxes being lost from cigarette sales to date, makes the damage of the ban considerable, with estimates at about R13 billion to R15 billion lost if the ban continues until the end of the year.

South Africans, meanwhile, continue to light up, with 93% of an estimated 11 million smokers still finding a source to feed their habit.

You can watch the full webinar with Snyckers on Daily Maverick.

Read: South Africa’s cigarette ban could backfire spectacularly: research

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South Africa’s cigarette ban backfire