Study | One in three cigarettes illegal, making MSAR second-worst in Asia

Adrian Cooper, CEO of Oxford Economics

A regional study has found that Macau has the second-­highest incident rate of illegal cigarette consumption in the Asia region. More than one-third of all cigarettes consumed is said to be either illegally produced here or smuggled into the city.
The report, entitled “Asia-16: Illicit Tobacco Indicator 2014”, was commissioned to better understand the use of cigarettes in Macau and how many of these are being sourced illegally. It found that around 34.5 percent of all cigarettes consumed within the territory were illegal, and that more than two-thirds of  cigarettes coming in from overseas were illegal for the year 2014.
Adrian Cooper, Chief Executive Officer of Oxford Economics, reported on the economic effects of the illegal cigarette trade at a press conference yesterday. According to Mr Cooper, the estimated revenue loss to the government is considered to be MOP185 million, which is approximately MOP300 per person in Macau.
“Another way to look at this is that it’s equal to 0.7 percent of the total non-gaming revenues,” said Mr Cooper. “It hurts the government financially, effectively wiping out the tax revenues that could have covered this year’s cash payout to more than 20,000 citizens.”
Cigarettes in the MSAR are relatively expensive compared with many other places in the region, with the exception of other high-income territories such as Hong Kong. According to the report, the most popular cigarette brand is sold at MOP30 locally, compared with only MOP9 for the most popular brand in China, making cigarettes on average more than three times as expensive in Macau as they are in the mainland.
“The difference in price creates an incentive for cross-border trade in cigarettes,” argued Mr Cooper, “which is facilitated by [significant] cross-border traffic in Macau.” There is also a “lack of rigorous custom enforcement at the border.” In 2014, there were over 27.6 million visitors from mainland China, a number nearly 50 times the entire population of Macau.
According the report, of the 1.1 billion cigarettes consumed in the city in 2014, an estimated 0.4 billion were illegal. Approximately 141 million originated in mainland China, 117 million were from Hong Kong, while only 10 million were counterfeits produced locally within Macau.
The results of the report, which suggests that Macau has the second-highest incidence of illicit consumption, credited Brunei with the worst record of the 16 countries or territories sampled in the Asia region.
In Brunei, punitive legislation has created a technicality which has led to 100 percent of the cigarettes consumed being considered effectively illegal, according to the report. This makes it difficult to compare with other countries and territories in the region. With the exception of Brunei, no other country or territory in the sample has a higher incidence of illicit consumption of cigarettes than the MSAR.
“To summarize, Macau has a very serious problem with [the] illicit consumption of cigarettes. This is also a problem in fueling organized crime and damaging the reputation of a city like Macau,” Adrian Cooper said.
He added, “It’s not my place to make policy recommendations to the government [of Macau], but this is something that is a problem and is worthy of consideration from the authorities.”
In spite of this, he suggested that in order to tackle the issue of illicit cigarettes, a three-pronged approach would be required. “The government should consider introducing a balanced excise policy with regular but moderate tax increases to keep excise tax at pace with inflation,” he said. “It is also essential to step up law enforcement efforts and, at the same time, raise public awareness on the serious consequences of selling and buying illegal cigarettes.”
The report was based on a survey of 1000 cigarette packs discarded in the city. Survey organizers collected the discarded boxes and determined the origin of the cigarettes. This is believed to be the most accurate method of ascertaining the number of illegal cigarettes in an area. According to Mr Cooper, “People are not always forthcoming or honest” when they are asked about the origins of their cigarettes.
Two additional data sources were included; a retail audit from a global information and measurement company, Nielson; and data provided by Philip Morris International.
The price differential between mainland China and Macau has been intensified by the recent steep tax increases on cigarettes in 2010 and 2012, which amounted to a total of nearly 300 percent. A major finding of the report was that countries with higher cigarette taxes and which happen to neighbor significantly cheaper locations “tend to see a higher rate of illicit consumption.”
The study looked at data exclusively from 2014, and so does not reflect the recent regulations introduced in 2015. These changes include the tax hike of an additional 200 percent, and the reduction of the personal duty-free allowance from 100 to 19 cigarettes, as in Hong Kong. Staff Reporter