3 November 1998

Introduction

ITMAC and its member companies would like to express their profound appreciation to the Minister, the Revenue Commissioners and the Garda authorities on their success in reducing the scale of illegal sales of tobacco products on the domestic market during the past year. ITMAC was pleased to have co-operated closely with the authorities in addressing this problem which had developed rapidly in the years since 1993.

In 1996, ITMAC estimated that illegal sales had grown to the point where they accounted for some 5% of the total domestic market for tobacco products. Illegal sales of this magnitude clearly impacted adversely and significantly on Exchequer revenue and on the incomes and profits of manufacturers, wholesalers and retailers. In addition, of course, the development of an unsupervised market on this scale had serious implications for the continuing effectiveness of the wider regulatory regime, particularly with regard to underage sales.

'The reduction in illegal sales activity which has occurred during the past year or so has restored significant lost revenues to the Exchequer and the tobacco sector and has gone a considerable distance towards restoring order in the marketplace. It is to be heartedly welcomed for these reasons.

No Room for Complacency Regarding Smuggling 

ITMAC, however, warns that, despite the creditable achievement of reducing the scale of illegal sales during the past year, there can be no room for complacency regarding the problem. Some 77% of the retail price of cigarettes is accounted for by taxes. Given this reality, and the fact that Irish tobacco taxes are at the top end of the EU and global spectrum, the illegal importation and sale of tobacco products remains a highly lucrative activity for those engaged.

While we in Ireland would appear to have curtailed the expansion o the illegal trade, at least for the present, the same cannot be said of the position in the UK. It is estimated that non-UK duty-paid cigarettes now account for some 15% of its total cigarette market. As far as hand-rolling tobacco is concerned the position is significantly worse, with 75% of the market accounted for by non-UK duty-paid product.

In September 1997, the UK Customs and Excise authorities estimated Exchequer revenue losses due to the illegal trade at Stg£690 million in that year. This year the Exchequer revenue loss is expected to exceed Stg£l billion. In addition, in a recent survey 1 in 4 UK smokers admitted to knowing where to buy illegally traded tobacco products.

And the situation in the UK regarding the illegal trade is expected to grow worse in the years immediately ahead. Industry estimates suggest that, on current trends, the illegal trade in cigarettes will double during the next 2/3 years to the point where it is expected to account for some 30% of the total market.

Clearly the position in the UK has rapidly deteriorated to the point where the market is now in total disorder and is generating massive revenue losses to both the Exchequer and the legitimate tobacco sector. In addition, the very substantial gains made by the illegal operators are fuelling the activities of serious criminal organisations and have very profound implications for law and order policy in that country.

The present experience of gross disorder in the UK tobacco market reinforces ITMAC's view that we in Ireland must continue to be vigilant with regard to the illegal trade. We ourselves experienced for several years, not just the revenue losses associated with a disorderly market which were estimated to have risen to in excess of Ir£ 40 million in 1997, but the effects which the financial benefits of the illegal trade in tobacco products bestowed on some of the most serious criminal organisations in the land. We must not return to that situation. Our determination not to regress must be underpinned by an understanding of the reasons why the illegal trade developed some years ago here and is now rampant in the UK.

In both countries it has been driven by the exceptionally high levels of tax-induced retail prices compared to taxes and, therefore, prices in most EU and international states. In the case of Ireland, on October 1^st last its tax yield on cigarettes was third highest in the EU (and fourth highest in the world) at ECU 151.61 per 1000 in the most popular price category. This compared, for example, with tax yields per 1000 at ECU 112.18 in France; ECU 99.33 in Belgium; ECU 96.99 in Germany, ECU 85.92 in Austria; ECU69.37 in Portugal; and ECU 41.68 in Spain. Retail prices in these countries are, of course, correspondingly lower than in Ireland (details in Appendix).

Given these significant differences in tax yields, and therefore retail prices, of cigarettes between Ireland and other EU states, there is clearly a significant incentive for illegal operators to continue to purchase product in low-tax, and therefore low retail price regimes, for sale on the domestic market. While the UK authorities for the moment are living with the consequences of similar differentials for their market in terms of lost Exchequer revenue and the growth of unsupervised trade, we urge the Minister to avoid their mistakes, most notably their continuing preparedness to push excise rates dramatically ahead of those in the rest of the EU.

Unlike the position in the UK, we in Ireland have reduced illegal operations during the past year. We did so through a combination of prudent excise policy and improved enforcement. In order that we may continue to curtail the growth in the disorderly market we witnessed some years ago and in order that we may avoid "overspill" from the now blurgeoning illegal market in the UK, ITMAC urges the Minister that excises on tobacco products should be increased by a modest amount only in the forthcoming budget.

The ITMAC Companies

As indicated in previous Budget Submissions, the companies which comprise ITMAC are wholly-owned subsidiaries of transnational companies. Their sales are confined to the domestic market exclusively, albeit they manufacture some 95% of all product sold on that market. They operate on a very small scale compared to sister plants within their parent organisations. As a result, they do not benefit from the economies of scale and lower unit costs enjoyed by other cigarette manufacturing plants in Europe.

Given this reality, and the fact the tobacco manufacturing industry is restructuring rapidly within the Single European Market and the forthcoming Euro currency area, the survival of manufacturing in Ireland cannot be guaranteed in the medium-term. Tobacco products are heavily branded and easily transported. These realities, combined with the very small scale of the Irish market (6 billion cigarettes a year compared, for example, to 85 billion in the UK) place very great difficulties on the Irish managements in sustaining the case for continuing manufacturing in Ireland.

The domestic managements are in fact required to justify the continuation of manufacturing in Ireland to their parent company boards virtually on an annual basis. It will be no secret to the Revenue Commissioners that the loss of sales to illegal operators some years ago raised very serious alarm bells in one company in particular.

The development of export markets does not offer a potential lifeline to the Irish manufacturers. Their unit costs due to small scale, and the manufacturing strategies of their parent companies in a sector which is undergoing rationalisation throughout Europe, preclude this possibility.

In these circumstances, ITMAC again urges the Minister that any increases in excise duties this year should be modest in scale. Any further widening of the gap in taxes between those in Ireland and most other EU states will place Irish manufacturing at a further disadvantage compared to other manufacturing locations in Europe and will place further question marks over the merits of a continuation of manufacturing in Ireland.

The Regulatory Environment.

In addition to facing the third highest tax yields on cigarettes in the EU (and the fourth highest in the world), the Irish tobacco industry has faced one of the toughest overall regulatory regimes in the world during the past 10-15 years.

The principal elements of the regulatory regime are:

1. Advertising is confined to print media intended for persons over 18 years; its content is significantly
   curtailed; and expenditure on advertising and sponsorship is at present being reduced by regulation by 5% annually. Advertising and domestic sponsorship will be eliminated entirely within four years under the terms of the recently enacted EU Directive.
2. Uniquely in Europe and probably in the world, price discounting as a means of sales promotion is prohibited in law. This prohibition restricts both the price bands within which cigarettes may be sold and the application of discount prices to particular brands. The practice in the UK and Northern Ireland, for example, whereby the variation in the recommended retail prices of cigarettes lie within wide Stg£ 0.63p range, while the price of individual brands may be discounted by as much as Stg£ 0.15p, would be seen by the Irish authorities as designed to increase sales and would be prohibited.
3. Smoking in a wide range of public places is prohibited or restricted in law. The list of such places is thought to be greater at present than in any other EU state.
4. All tobacco packs and advertisements carry mandatory health warnings. In addition, cigarette packs show tar and nicotine yields. ITMAC has recently agreed to provide the Department of Health and Children with detailed information on the constituents of tobacco products. This information will be provided on a confidential basis to protect the intellectual property rights of the manufacturers. So far as ITMAC is aware, this will be the first time such commercially sensitive . information will have been made available to national authorities in the EU.
5. Sales of tobacco products are correctly prohibited to persons under 16. In addition, the location and supervision of vending machines for the sale of cigarettes is regulated by law to curtail, again correctly, the sale of cigarettes to those under 16.
6. The Department of Health and Children has published guidelines on smoking in the workplace. These have been actively promoted by IBEC and ' ICTU and have led to the introduction of no-smoking or restricted smoking policies in a very significant number of working environments.

These elements of the Irish regulatory regime are highlighted to emphasise the fact that, contrary to the perception often conveyed in the media and usually based on information from other jurisdictions, the Irish industry is striving to survive not just in a high tobacco tax regime, but in a market characterised by comprehensive and tough regulation.

The lndustry' s Response to the Requirements of the Regulations

The industry's response to the provisions in the regulations has been to accept them and to co-operate in making them work. Just as the industry was heavily proactive in seeking to reduce the scale of illegal sales in recent years, it seeks to encourage compliance with the requirements of the regulations in other areas. The industry:

1. has encouraged the Irish Hotels Federation and the Restaurants Association of Ireland to ensure the provision of designated no-smoking areas in restaurants and it did this before the present Regulations were introduced;
2. has drawn the guidelines on smoking in the workplace to-the attention of a large number of business enterprises;
3. has provided appropriate signage to retailers reminding them of the prohibition on sales of tobacco products to those under 16 years';
4. is co-operating with the Vending Machine Operators' Association to seek to ensure that machines are located in supervised areas within premises and to provide signage regarding the law on underage selling;
5. is in discussions with the Vintners organisations regarding methods to improve air standards in pubs.

The above initiatives demonstrate the industry's willingness to co-operate fully with the authorities in the implementation of the regulations in place. In turn, it seeks understanding from the authorities that the Irish excise and regulatory regimes should not get seriously out of line with those in the rest of the EU.

Conclusion

The ITMAC companies believe that so long as there is a market for tobacco products in Ireland, it should be supplied for as long as possible by companies manufacturing in Ireland. Domestic manufacturing is good for employment, the balance of trade and security of Exchequer revenue. In addition, it offers the best guarantee of the maintenance of an orderly market in which companies understand and comply with the requirements of the Irish authorities in an open and co-operative manner.

As indicated in this submission, the Irish industry does its business in one of the toughest excise and health regulatory regimes in the world. As indicated in previous submissions, it faces a continuing secular decline in sales which will be intensified in the early years of the new millennium. While the reduction in illegal sales during 1998 restored volumes to the legitimate industry, it will be difficult to retain these volumes in the years ahead as Department of Health and Children and EU measures continue to squeeze the market.

Against this background, and mindful of the rapidly developing breakdown in the legitimate market in the UK, ITMAC urges minimal increases in excises in the December Budget.

Ref, F22/24/81 Part 8

PRE-BUDGET MEETING WITH THE MINISTER
ON 4 NOVEMBER 1998

On 4 November 1998, the NEnister, accompanied by Bob Bradshaw and Joan Daly met with Mr Flor O'Mahony and a delegation from ITMAC to discuss their pre-Budget submission. ITMAC said that they were hoping that any increase imposed in the Budget would be a "modest" one. while smuggling was eliminated from the streets, due to recent Finance Act measures, some illegal sales continued in housing estates. These sales were hard to quantify. ITMAC was aware that smuggling was a major problem for the UK and they hoped that it would not have any adverse effects here. 

ITMAC also mentioned that the Irish tobacco manufacturing, industry was quite small and that any excessively high increase levels in tax might put employment in jeopardy.

The Minister stated that he would take on board all the views in the context of the Budget preparations.

Joan Daly
 5 November 1998