Smuggled cigarettes leave stateaa‚¬a„¢s coffers gasping

Smuggling and tax evasion are two of the less obvious consequences of the current economic situation. The Romanian authorities have announced that the cigarette black market alone deprives the state budget of EUR 1 billion in revenues, while tobacco firms complain that their profits are going up in smoke.

Dana Ciuraru

It is increasingly common these days to buy something from the shop around the corner and not be given a receipt, and ever more difficult to avoid the sales pitches of petty criminals hawking black market clothes, perfumes and cigarettes. Areas in Bucharest such as Piata Sudului and Politehnica are teeming with people selling cigarettes on the black market.

There has been a marked decline since the economic expansion a few years ago when even florists were persuaded to obey the law and pay taxes to the state.

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More and more Romanians, from lawyers, dentists and members of the liberal professions to small companies struggling with the forfeit tax, are inclined to find ways to avoid state taxes.

The anecdotal evidence is borne out by the figures. National Customs Authority (NCA) data reveal that the number of smuggled products is increasing year on year.

Recently, customs inspectors in Satu Mare confiscated over 250,000 packs of cigarettes

coming from Ukraine, worth EUR 400,000.

Smuggled cigarettes came to account for 36 percent of the total Romanian tobacco market in the first two months of the year, up from 22 percent in the last quarter of 2009, according to a survey by Novel Research.

Most contraband cigarettes sold in Romania come from the Republic of Moldova (32 percent),

duty-free shops (27.4 percent) and countries such as Ukraine, Russia and Serbia.

Specialists say that the main factors behind the surge in tax evasion are a lack of enforcement from the relevant bodies, the increase in taxes and the economic downturn. “The latter has had a significant role in this respect as it led to a cash crunch at the level of taxpayers. They consequently attempted to cost cuts, looking first to their tax bill. Meanwhile, taxpayers were not greatly helped by the state in terms of measures designed to ease the negative effects of the economic downturn,” Andra Casu, tax manager with the tax advisory services practice at Ernst & Young in Romania, told Business Review.

Tobacco firms’ profits turn to ash

The top three cigarette producers on the Romanian market, Japan Tobacco International (JTI), Philip Morris Romania (PM) and British American Tobacco (BAT), all saw declines in sales in January and February this year.

While in 2008, BAT had a market share of 38.5 percent, PM 21.8 percent and JTI 20.2 percent, with smuggled cigarettes accounting for just 17.6 percent of the market, in January and February 2010, BAT’s market share slipped to 32.5 percent, JTI’s to 15.8 percent and PM’s to 14.5 percent, while contraband cigarettes soared to the top of the list with 36.2 percent.

Officials from the big three tobacco companies said the smuggling was prompted by a near 50 percent increase in cigarette prices following excise hikes.

“A market share of over 36 percent for smuggled cigarettes means one in three cigarettes smoked in Romania comes from illicit trade. If contraband was the market leader in 2009 by profit, now it is also leader by volume,” said Adrian Popa, corporate affairs manager at BAT.

According to him, smuggled cigarettes alone deprive the state coffers of EUR 1 billion in taxes and excises. Producers expect smuggled products to reach 50 percent of the total market by the end of the year.

Tobacco producers estimate they will sell 37.5 billion cigarettes in Romania this year and contribute over EUR 2 billion in taxes to the state budget. “Of 20 cigarettes in a pack, 13 make up excises and taxes, three VAT and three are the producer’s costs and profit. The last cigarette is the seller’s profit,” said Andrei Vasilescu, Philip Morris’ corporate affairs manager for Romania and Bulgaria.

Gilda Lazar, corporate affairs manager at JTI, said legal tobacco sales had decreased by about 40 percent last year. According to her, the cheapest pack of cigarettes in Romania is RON 8, while the cheapest pack in the Republic of Moldova is just RON 1.

Fighting fire with fire

One way to combat tax evasion would be to increase the frequency and strictness of fiscal audits and to expand their area of coverage, especially with respect to small and medium sized companies.

“Another tax evasion reduction method would be to target the more recent so-called Missing Trader Intra-Community, MTIC, or carousel fraud in respect of VAT, which nowadays appears to top tax evasion lists. It is obvious that ANAF would need to increase the number of tax inspectors, especially at the level of Financial Guard (the unit within ANAF dealing with tax evasion), but considering the current budgetary cuts, this is hardly achievable,” said Andra Casu.

According to her, the key measures to reduce tax evasion do not essentially depend on ANAF, with its scarce level of resources, but rather on the Ministry of Finance and other executive bodies, which could take measures to persuade taxpayers to declare and pay their taxes.

“For instance, the envisaged measure regarding the introduction of the reverse charge mechanism for business-to-business transactions on the grain market is more than welcome as this area is easily susceptible to tax fraud. This mechanism would eliminate VAT from the relationship between producers and processors and restrict it to the bill paid by traders,” said the E&Y tax manager.

dana.ciuraru@business-review.ro