With the government facing a budget shortfall of R1.1-trillion and tax collections 20% lower than last year, you’d think it would be happy for whatever extra revenue it could get.

At the annual Tax Indaba this week, Keith Engel, CEO of the SA Institute of Tax Professionals, spoke of the contribution transactional taxes could make to close the gap.

As it turns out, there is quite a bit of room for extra collections from the tobacco industry — in large part due to hidden tax perks the industry secured for itself.

A bizarre Swiss agreement

Switzerland, curiously, exports almost as many cigarettes as it does chocolates — nearly 2-billion packs a year. As much as 75% of that is exported to Japan, Morocco and SA.

Now, I really couldn’t tell you the business rationale for SA importing cigarettes from Switzerland, given its own domestic capabilities and its proximity to tobacco powerhouse Zimbabwe. Nonetheless, in 2014, 74% of SA’s imported cigarettes came from Switzerland. By 2018, this had increased to 87%.

But there’s one possible explanation for why so many SA cigarettes are imported from Switzerland – home to the three biggest tobacco companies in the world: there’s a big incentive to do so.

The European Free Trade Agreement stipulates that if SA imports cigarettes from Switzerland, there is no duty payable — yet a 45% duty is slapped on imports from anywhere else.

In other words, importing tobacco from Switzerland is eight to nine times cheaper than doing so from anywhere else.

As trade analyst Donald MacKay points out, SA’s bilateral agreement with Switzerland includes 22 tariff headings, but imports are only made against five of them: small volumes of cheese, vegetable extract, pet food, animal feed — and enormous volumes of cigarettes.

Consider that between May 2019 and April 2020, SA imported R4m of cheese from Switzerland, R3m of pet food — and R600m of cigarettes. In fact, 98% of the imports under this “trade agreement” with Switzerland relate to cigarettes, rendering it one of the more peculiar trade agreements the country has ever concluded.

Unless, perhaps, the original purpose of this deal was to create a preference for tobacco, and the rest was simply padding to hide the true intent of the deal, it’s a bizarre agreement with little apparent commercial substance.

This isn’t the only cushy deal the tobacco industry has negotiated in SA.

Consider the concept of “wastage allowances”. The way it works is, many governments allow manufacturers to deduce a “wastage allowance” of around 0.5% to cater for “spillage and clingage”, on which they needn’t pay tax.

Most countries entirely exclude tobacco products from this allowance.

So you can imagine my astonishment when one source told me that (some) SA manufacturers seem to have informally negotiated something between a 5% and 20% wastage allowance — for which there is no mandate in legislation. Now, it may be that my source is wrong. Or maybe not.

Failing to tax e-cigarettes

Normally, excise duties and import duties are payable on cigarettes, cigars, tobacco waste, tobacco extracts and the like. But, unlike many other jurisdictions, SA has not specified a specific tariff heading to classify electronic cigarettes for customs and excise purposes. And it hasn’t imposed any such duties for electronic cigarettes or vaping devices.

As a result, these products don’t attract either excise or import duties like cigarettes would.

And because there is no particular tariff heading against which to declare electronic cigarettes on import, SA Revenue Service (Sars) trade data does not track import volumes or values.

This makes it virtually impossible to risk-profile these consignments.

Big Tobacco argues that this new generation of products should receive a tax break because they “potentially” reduce risk.

And, so far, they’ve actually succeeded in making this argument.

Philip Morris International, which sells brands including Marlboro, says in its annual report: “To date, we have been largely successful in demonstrating to regulators that our reduced-risk products are not cigarettes, and as such they are generally taxed either as a separate category or as other tobacco products, which typically yields more favourable tax rates than cigarettes.”

British American Tobacco (BAT), which bought Twisp in 2017 and has its own Glo and Vype product lines, will increasingly be playing in this space.

In this context, the government’s failure to adopt a much stronger policy upfront may prove to be its Achilles heel. We’d better hope that these new e-cigarettes really are “reduced risk” — or you and I will continue to foot the health-care bill for smokers.

Tax breaks contribute to mega profit

Clamping down on these hidden tax breaks accruing to the tobacco industry may not completely close the gap created by the rapacious plunder of our economy by the captured and the corrupt, but every bit helps.

In response, you can expect the tobacco industry to tell us it is already under pressure. But with BAT being the best-performing company on the London Stock Exchange for the past 35 years, it and its cohorts deserve much closer scrutiny of their cushy tax deals.

*Snyckers, an independent illicit trade expert and former SA Revenue Service executive, is the author of an exposé released in May on the role of big tobacco in fuelling illicit trade ‘Dirty Tobacco: Spies, Lies and Mega Profits’

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