The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Tobacco imports recorded at Bahamas Customs are almost one-eighth of the true value that should be declared, the International Monetary Fund (IMF) has estimated, indicating the existence of “large-scale smuggling”.

Such a conclusion, which will surprise no one in the Bahamian tobacco industry, is based on Fund estimates that the Bahamian population size, combined with its estimated five million tourists, should consume around 1.36 million packs of cigarettes annually.

This, according to the IMF’s June 2013 report, Tax Reforms for Increased Buoyancy, translates into a declared value of $2.7 million for cigarette imports. Yet just $354,000 worth - close to one-eighth of this sum - were recorded at Customs in fiscal year 2011-2012.

“The total import value of tobacco products indicate large scale smuggling in tobacco products,” the IMF concluded.

“While imports of alcoholic beverages were $44 million in 2011-2012, imports of tobacco products recorded at Bahamas Customs were only $354,000.

“A simple calculation indicates a significant amount of tobacco products are bypassing Customs,” the IMF added. “About five million tourists visit annually, of which most come from North America, where the smoking population is about one-fourth.

“Assuming that the same proportion of the local population also smokes, this results in a smokers’ population of about 1.3 million. Assume further that the local smokers buy a pack once a month and one-fourth of the smoker-tourists buy one pack. This implies about 1.36 million packs of cigarettes annually.

“At a CIF value of $2 per pack, the declared value of imported cigarettes at customs should be around $2.7 million.”

Hence the Government’s decision to introduce the Excise Stamp on tobacco products to confirm that the appropriate duty has been paid, in a bid to eliminate smuggling. It has previously estimated it is losing up to $20 million in annual revenues due to this practice.

The IMF report, meanwhile, also backed Bahamian industry suggestions that it is the high 220 per cent import duty rate - the highest - that drives persons to smuggle in tobacco products.

“The high ad valorem rate may result in undervaluation and smuggling,” the Fund agreed. “The choice between specific and ad valorem excises affects the revenue collected as well as the price and the quality of the tobacco products.

“Specific rates reduce relative price differences between low-priced and high-priced brands, whereas ad valorem rates increase absolute price differences,” the Fund added.

“Because when an ad valorem tax is levied, tobacco excise is not differentiated according to tobacco content. Since heavy taxation of tobacco products is justified because of their negative externality, the tax structure should be based on tobacco content, not relative values.”

The IMF suggested that because the tobacco content of filtered and unfiltered cigarettes was the same, averaging one gram per stick,the tax rates should be the same.

“Specific taxes result in lesser price competition, higher quality, diversity, and prices, and a larger number of manufacturers,” the IMF report said.

“Because the tax per cigarette is fixed, manufacturers can reap the benefits of investments in product differentiation with a smaller price increase (improved quality and greater diversity).

“In addition, specific taxes constitute a de facto minimum price and push the entire price spectrum higher by the same amount (the price of all brands will be increased by the amount of the tax). Hence, there will be a lower percentage price difference between high and low quality brands, making it easier to switch to higher quality brands.”

When it came to alcoholic beverages, the IMF urged the Government to tax imported and domestically produced drinks equally, due to the impending World Trade Organisation (WTO) membership.

And it also criticised the Excise Tax regime for luxury goods, such as perfumes, linen, bags, cameras and jewellery, as “neither progressive nor revenue productive”.

Noting that the tax rates varied between 7 per cent and 10 per cent, with these products mostly sold to tourists, the IMF added: “Excises are applied to about 70 products and account for about 3.5 per cent of Excise revenues.

“Multiple and separate Excises add to the cost of administration. If Excises on luxury goods are intended to increase the tax system’s overall progressivity, they should be levied on products with income elasticity of demand exceeding one.

“These will be products for which expenditure rises proportionately faster than income and their consumption. Only very few products such as cars, pleasure craft, yachts and aircraft are good candidates for higher excise taxes.”

As a result, the IMF recommended reducing the list of luxury goods items by moving some under the Tariff Act.

And it added: “Instead of Excise on luxury goods, increase Excise taxes on luxury passenger cars, yachts, and aircraft to add progressivity to the tax system.”