Cyprus Mail
Cyprus

State’s tobacco revenues up in smoke

The doubling of tobacco taxes at the end of 2012 coupled with a hike of around 20 per cent in cigarette levies has not added a single cent to state coffers over the last three years, official figures from the Customs and Excise Department confirm.

In fact, not only were there zero gains for the state from the higher prices imposed at the end of 2012, but it lost another €13 million on top of that in 2013, raking in €200 million compared to €213 million in 2012, and has continued to steadily lose revenue in the years since.

Estimated losses to the state over the past three years, according to information from the industry, have been in the region of €90 million, taking into account what should have accrued from the 2012 tax hike.
Official figures show that last year, revenues dropped to €189 million from €196 million in 2014. In the first five months of this year, taxes from cigarettes and tobacco have brought in just over €70 million, meaning if ‘legal’ consumption remains steady, this year’s total revenue will be the region of only €145-€150 million even though the price of tobacco products in Cyprus is at an all-time high.

The average price of a pack of 20 cigarettes in the RoC now costs around €3.80 compared with €3 in the north of the island while tobacco on average costs €6 for a 25g pouch in the RoC compared with €5 for a 50g pouch in the north. Cigarette packs also used to be half the price but the Turkish Cypriot side hiked them at the same time as the government, making them only marginally cheaper now. Taxes – import and excise duties plus VAT – on legal tobacco products add up to around 80 per cent of the retail price.

The kicker for a lot of smokers is that under the 2004 Green Line Regulation, people are legally allowed to bring over two packets of 20 cigarettes from the north but not a single gramme of tobacco. However, it seems that’s not stopping them. Most of the ‘smugglers’ in Cyprus are ordinary people crossing the Green Line, and Ledra Street is the hub.

“The main seizures of tobacco are from the occupied areas,” said Christos Christou, customs officer and spokesman for the Customs and Excise Department.

Though, he said, there are occasional seizures of large amounts that have crossed the 180 km-long buffer zone at non-designated crossing points “half of the people who go through the crossing points do so to buy tobacco because it’s half the price,” Christou told the Sunday Mail in an interview.

And, only 25-30 per cent of them are nabbed every year by customs officers stationed at the crossings.

“The main problem is with tobacco,” said Christou. “We seize a percentage of those because we can’t search everyone.” Checks are random based on suspicions or patterns of behaviour, or come as a result of tip-offs as with a case last week when a man was caught at a crossing point with over 7 kg of tobacco stashed in the bonnet of his car.

A haul of rolling tobacco which is less than half the price in the north
A haul of rolling tobacco which is less than half the price in the north

“We find (tobacco) in boxes of sweets, wrapped on the body. We have the right to do a body search if we have suspicions. We have found tobacco inside a loaf of bread, in a juice box, a big one. They emptied the juice, cut the box carefully, they put inside six or seven packages,” said Christou. “Most of them, and especially at the crossing points are for personal use.” Tourists too have cottoned on and a small percentage of them are caught at the airports every year with “suitcases full”.

Christou said if anyone smuggled a really large quantity into the government-controlled areas it would be identified immediately because the market is so small and because only two or three companies are importing tobacco products legally so they would notice a big drop in sales. The companies already estimate that they have lost around one third of their sales over the past three years.

The biggest-ever haul for customs came late last year when 20 tonnes (20,000kg) of illegal tobacco and 630,000 cigarettes worth millions in unpaid taxes was seized during a raid on a warehouse in Aradippou in Larnaca. Christou said they suspect the contraband came from the north through a non-designated area.

“The buffer zone is around 200km. There are (mixed) villages like Potamia and Pyla where the police can’t enter. They can only check outside but not inside,” he said. “According to our information, every day some quantities are crossing from areas other than the checkpoints.”

Between 2010 and 2014, customs seized nearly 825,000 packs of illegal cigarettes in total, plus 11,000 kg of tobacco from various sources. The two total figures include the crossing points and larger smuggling operations.

Christou said tobacco products from the latter activity were being sold around colleges and to foreign workers who have lower incomes. “People approach them in coffee shops and sell them cheap tobacco,” Christou said. “There are also some kiosks that are known to be selling cheaper tobacco,” he added.

Some kiosks have been caught selling cheaper tobacco
Some kiosks have been caught selling cheaper tobacco

According to industry information, kiosks have seen the sale of tobacco products plummet by around 25 per cent. Christou said customs know who’s selling the contraband and officers keep a close eye on them.

“We monitor the kiosks. In one case we had in Nicosia we identified 16.5 kilos of tobacco and 79 cartons of 200 cigarettes,” he said. In addition to this warehouses are also regularly inspected and homes searched when there’s a tip-off.

Smuggling only became a problem in 2003 when the first crossing opened at the Ledra Palace. Now there are seven, two of which – Strovilia and Pergamos – are under the jurisdiction of the eastern British Sovereign Base Area of Dhekelia. Between 2010 and 2015, customs seized almost 20,000 packs of 20 cigarettes from individuals. The number of seizures spiked in 2013 to over 8,000 packs after the price increase, from just over 3,000 the previous year. In 2014 only around 2,300 packs were confiscated but last year customs netted 12,000, having stepped up their game.

When it came to tobacco, in 2010 almost 7kg was seized, rising to 24kg in 2011 and 38kg in 2012. The biggest jump was in 2013 when 329 kg was confiscated but like cigarette seizures, the number dropped back in 2014 to 202 kg. In 2015 it appears a real clampdown began and officers at the crossings seized 400kg.

Customs, though Christou says staffing levels are down 25 per cent due to the public service hiring freeze, have not compromised their numbers at the crossings.

Increased controls means more bag searches and body patdowns, and more observation of those crossing. Christou said that aside from tip-offs, the officers mainly use observation and experience to spot suspicious activity.

“People aged 16 to 20 are definitely going to the other side for tobacco so you can search them… the students, and if you are observing well, you can see that this guy went only ten minutes ago. He is not paying a visit to a friend or having lunch,” he said.

Confiscated tobacco and cigarettes from the north are destroyed irrespective, he said. All other tobacco products seized through larger smuggling operations might be sold for export after public procurement.

However, if they are counterfeit tobacco products they are also destroyed. “Destruction is always done by two officers who are appointed by a senior collector at Customs and they are not the same people each time,” he said.

Though customs have a state-of-the art scanner for containers at Limassol port, there are no plans to set them up at the crossings at the moment. “It’s a political issue… if we are not to consider them as borders,” said Christou. Three new scanners are on the way however, two for parcel post offices in Larnaca and one for Nicosia.

Asked why the Turkish Cypriot side did not simply raise the price of tobacco like they did with cigarettes, Christou said: “Because they are selling a lot of quantity to us [Greek Cypriots] so they don’t have a problem [with that].” There is also the added fact that Turkish Cypriots have lower monthly incomes.
On whether the government had made the right choice in raising the taxes to the extent they did given the massive revenue fall and the extra work for the Customs Department, Christou was non-committal.

“Maybe, but it’s a decision of the ministry of finance. After reviewing all of the for-and-against, he [the finance minister] decided to impose the higher taxes. They are doing their job. The companies that import the cigarettes, he had a lot of meetings with them. They couldn’t convince him,” Christou said.

Taking the UK as an example, he said it has the biggest problem within Europe when it comes to cigarette smuggling “and there are still high taxes”. “One could say they impose high taxes to stop people smoking,” he added.
No longer a transit hub for smuggling
An independent survey by KPMG every year on behalf of the four big tobacco manufacturing companies worldwide shows that in 2015 Cyprus was among the five EU member states where it is estimated that the percentage of smuggling from abroad was around 4.5 per cent. The EU average is around 12 per cent.
Ten years ago Cyprus used to be a transit country, meaning large amounts of cigarettes were coming from abroad, stored in bonded warehouses all over the island and then re-exported to other countries, ending up mainly on the UK black market.

Measures taken over the years include the prohibition of cigarettes as loose cargo, a ban on placing them in the same container with other goods (stuffing shipments), a ban on vessels under 250 tonnes carrying tobacco products and the requirement to produce landing certificates from importers in high-risk countries such as Egypt, Syria, Lebanon, Jordan and Turkey.

The measures, and others, have resulted in an overall decrease of 91 per cent in cigarette shipments from bonded warehouses in Cyprus.

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