To: THE HONOURABLE MINISTER OF FINANCE
Attention: MINISTER TITO MBOWENI
Per e-mail: Budgettips@treasury.gov.za
Dear Honourable Minister
BUDGET TIPS 2019
The Fair-Trade Independent Tobacco Association (“FITA”) has noted your recent request for tips from the public at large in relation to your upcoming budget speech.
One of the main problems with the South African economy is that it remains largely untransformed and largely controlled by the same companies, institutions and people as in the past. The tobacco industry is no exception to this in its own right and has been dominated by monopolistic, foreign capital for centuries. Unfortunately, this trend has not abated in post-democratic South Africa despite our requests to government that they, for the sake of economic growth and job creation, intervene in the monopolised and foreign-controlled tobacco industry;
The tobacco industry per se, as a whole, is a shrinking sector in the economy. This is largely attributable to government’s efforts over the past 15 years to curb smoking and the consumption of other tobacco products;
Around 1999 about 27% of total adults in South Africa smoked. That translates to about 50% of 42 million. That translates to about 5.8 million smokers. At this time, the multinationals occupied about 80% of this market. This translates to about 4.6 million smokers of multinational brands. Smokers were more brand conscious then than price conscious;
By 2015, the total number of adult smokers were around 11% of the population of about 50 million people. This translates to about 25 million adults of which 11% smoked. That translates to about 2.7 million smokers. By this time FITA members (who are all local manufacturers) had entered the market and were beginning to offer cheaper brands. This led to a loss of market share for the multinationals. Smokers became more price conscious due to increased excise year on year;
The total base of smokers went from 4.6 million to about 2.7 million. This means the multinationals lost massive market share. Needless to say, they needed to vilify the new entrants so as to lead them to shut down or be harassed;
It has for been concluded by many researchers, academics and industry experts that one must be wary of big tobacco painting itself as both the victim and saviour when it comes to the illicit tobacco trade1. It has proven time and again by its behaviour and a litany of legal cases to simply not be credible when it comes to illicit trade in tobacco;
One must be cognisant of the fact that “big tobacco” has been a global serial repeat offender when it comes to illicit tobacco, and has spent millions on lobbying to block regulation and promote its own agenda;
Big tobacco has paid billions of dollars in fines over the years and has been found to be either directly involved or complicit in illicit trade in its own product.
One could fill a book on big tobacco’s track record on illicit trade. Having already paid nearly 2 billion euros from 2004 in settlements with the European Union, the UK’s serious fraud office has opened a formal investigation following The Guardian’s investigation revealing that British American Tobacco and other multinationals have used threats against at least eight African nations, demanding they stop or dilute tobacco control measures that have proven effective in the rest of the world. This is no different to the tactics of big tobacco in South Africa.
Part of this investigation revolves around allegations of money- laundering and espionage that took place in South Africa.
Further, a recent study from the Tobacco Control Research Group at the University of Bath exposed evidence that big tobacco companies are facilitating tobacco smuggling, while also attempting to control a global system (WHO FCTC Protocol) designed to regulate it.
The study, which draws on leaked industry documents and investigates industry front groups, highlights the elaborate lengths the industry has gone to, to control a global track and trace system and to undermine the World Health Organisation’s Illicit Trade Protocol (Protocol).
The paper, published in June 2018, “calls on governments and international bodies to crack down on big tobacco tactics and to instead ensure systems designed to control tobacco smuggling are free of industry influence”.
Regulators, including SARS, should be careful in how and where they engage with the tobacco industry and question the solutions they advocate. We should also not be surprised by big tobacco’s behavior when it comes to illicit trade.
From a purely capitalist perspective they are acting rationally – supply must meet demand.
This was openly revealed by BAT’s former chief executive Kenneth Clarke in his op-ed published in The Guardian where he admitted that multinational tobacco companies supply cigarettes knowing they are likely to end up on the black market.
In his piece he said: “Where any government is unwilling to act or their efforts are unsuccessful, we act, completely within the law, on the basis that our brands will be available alongside those of our competitors in the smuggled as well as the legitimate market”.
The objective of tobacco companies is more sales, both legal and illegal. Tobacco companies make their profit the moment the shipments leaves the factory, whether the tax is paid – or not – makes no difference to their bottom line.
The practice of oversupplying a low tax market with more cigarettes than can be consumed serves as a source of supply to smugglers who then sell them in a higher-tax jurisdiction.
This is a well-known practice used by big tobacco over the years and they have been caught red-handed many, many times. BAT is currently facing a fine of £650,000 for oversupplying the Belgian market which British Customs believes to be the source of smuggling back into the UK.
Big tobacco is the progenitor of the illicit trade monster.
That is the main focus of the study it released. But, is big tobacco out of the game completely and can they be trusted with the solution? According to the 2018 Tobacco Atlas, 98% of the world’s illicit tobacco comes from legitimate suppliers.
Recent investigations with regard to money-laundering, corporate espionage, bribery and smuggling around the world and including South Africa, should provide a sobering caution as to who government can really trust.
Hopefully the new focus on illicit trade and recent changes at SARS will translate into concrete actions. If South Africa is serious about tackling the problem of illicit trade and getting this essential revenue back into government coffers, SARS has the ability to act under its existing powers. It does not need, and should not accept, assistance from the tobacco industry or its front groups.
Not only are the goals of SARS and the industry opposite, SARS as a government entity must also comply with the article 5.3 of the WHO Framework Convention on Tobacco Control that limits the industry involvement in government matters.
To do otherwise plays into the hand of big tobacco and should have South Africans questioning the sincerity of government’s commitment to stamping out illicit trade.
We as an organization align ourselves with the above sentiments on the notion that we are of the firm view that If South Africa is serious about tackling the problem of illicit trade and getting this essential revenue back into government coffers, SARS has the ability to act under its existing powers and it does not need, and should not accept, assistance from the tobacco industry or its front groups such as the #TakeBackTheTax campaign.
As an organisation we fully support any effort by the state and affected industry stakeholders to curb smuggling and the illicit trading in cigarettes. This is echoed by our signing of a joint statement with TISA and SARS declaring our intention to combat inter alia the illicit trade, and which statement was released to the press and the public at large on 15 August 2018. This was done whilst maintaining our position that if one seeks to understand the fiscal risks to the economy, you should not restrict your views to excise taxes and illegal tobacco alone. One needs to look at the entire sector, across all tax types, and along the value chain holistically. This calls for a need to look at corporate income tax, STC, VAT, PAYE, personal income tax, SDL, UIF, import duties and excise holistically. One then needs to look across the value-chain, from the agricultural sector, to the importers and manufacturing, to retail and wholesale and exports. Different unlawful and illegal practices manifest in different ways across this spectrum. It is only then that one will be able to determine the complete set of risks in the industry. As things stand, and as they have been looked at over the years, the multinationals dictate the public perception. They do this by lobbying at policy levels, financing and directing law enforcement agencies by pretending to be the innocent victims through aggressive media and marketing campaigns, biased research papers and industrial espionage. The result is that there is an extreme focus on losses of excise only, and the perception that illegal tobacco and manufacturing is the sole risk in the industry. For instance we know that British American Tobacco South Africa owes SARS in excess of R 2 billion for the tax period 2006 to 2010;
We believe the time has come for all stakeholders to meaningfully deal with all the challenges facing the tobacco industry in South Africa and to ensure that the playing field is levelled for all. The old refrain of “smuggling” and “illicit manufacturing” being the primary cause of losses to the fiscus is now running thin. The fact of the matter is that billions are pilfered out of our economy annually by a handful of multinationals through aggressive profit-base erosion schemes. We believe it incumbent on government and the relevant regulatory bodies to put measures in place that will level the economic landscape, including giving us, as local employers and contributors to the economy, equal hearing and platforms. We believe the days of “big business” having some sway over how government should conduct their business should now come to an end, particularly when their influence is applied to the detriment of smaller players in the industry;
We trust the above to be in order and wish you luck with upcoming Budget Speech.
THE FAIR-TRADE INDEPENDENT TOBACCO ASSOCIATION (“FITA”)