Mr. Gerard Moran:

I thank the Chairman for inviting me to address the joint committee. It will not come as a surprise if my remarks do not differ significantly from those of the assistant commissioner. In deciding between a narrow and broad approach to my presentation I have opted for the broader approach in order to be helpful to the committee.

Tobacco tax is a key policy instrument in reducing tobacco consumption and a significant source of tax revenue. Given that illicit tobacco has a significant impact on these objectives, tackling it is a key priority for Revenue. As we collect €1.4 billion in tobacco tax and VAT from tobacco consumption annually, any material level of illicit tobacco consumption translates into a significant loss of tax revenue. It is important that developments such as the standardised packaging legislation are scrutinised to assess their impact on the illicit tobacco market. It might be helpful for the committee if I were to outline briefly the scale and character of the illicit tobacco problem and what we are doing to tackle it before dealing with the impact of the proposed legislation.

Every country with high tobacco taxes has an illegal tobacco problem. Ireland which has exceptionally high tobacco taxes and prices has a significant problem. To provide some international context, the World Health Organization estimates that 10% of the global cigarette market is illicit and this figure rises to over 50% in some countries. The European Anti-Fraud Office, OLAF, estimates that illicit cigarettes result in losses of over €10 billion annually in tax revenues in the European Union. This is a global problem which is particularly significant in a number of EU member states, including Ireland, which pursue a policy of high tobacco taxes. In Ireland the best estimate we have of the scale of the problem comes from the IPSOS-MRBI surveys conducted for Revenue and the National Tobacco Control Office. The most recent survey, conducted in late 2012, found that 13% of cigarette consumption was illicit. It also found that a further 6% of consumption was accounted for by cigarettes purchased abroad and brought into Ireland legitimately for personal consumption. The comparable figure for illicit consumption in 2010 and 2011 was 14%. While we have not been able to make dramatic inroads into the problem, it has been contained and some modest progress has been made.

The nominal cost in terms of lost tax revenues is approximately €240 million annually. This is a useful way of flagging and tracking the financial significance of the problem, but it is important to stress that this is a nominal cost, based on the unrealistic assumption that in the absence of cheap illicit cigarettes, smokers would consume the same amount of more expensive taxed cigarettes using money they are not currently spending on taxable cigarette consumption. These caveats aside, the problem is very significant in terms of its impact on the Exchequer and undermining the Government’s demand reduction objectives. The tobacco industry produces much higher estimates of the level of illicit consumption and the associated Exchequer costs, but their claims need to be viewed in terms of their interest in minimising tax increases, while imposing significant price increases of their own. All estimation methodologies have their limitations, but we are satisfied that the IPSOS-MRBI surveys provide a reasonable indication of the extent of the problem and, in particular, that the consistency of the methodology allows us to track changes in illicit consumption levels.

As I noted, this a global problem. It is driven by a number of key regions in Asia, the Middle East and eastern Europe where there is large-scale production of cigarettes for illicit distribution to other countries or which serve as distribution centres for illicit product. I have circulated to members a European Commission map which illustrates the main international trafficking routes. Internationally and domestically, the field is dominated by organised crime groups.

Revenue’s response to the problem includes a number of key elements. We work closely with our EU partners to tackle source countries and apply the maximum pressure on the governments concerned. We also work closely with EU and other member state law enforcement agencies, particularly OLAF, to get the best possible intelligence on illicit shipments into Ireland. We work closely with An Garda Síochána, the CAB, the PSNI and Revenue and Customs in the United Kingdom in identifying and tackling the illicit trade on an all-island basis. We examine shipping and passenger traffic on the basis of intelligence and risk profiling. In terms of detection technologies, we use scanning equipment and sniffer dogs at ports and airports. We conduct regular street level exercises to tackle illicit cigarette sales. Our enforcement activities are kept under continuous review by a tobacco executive chaired at commissioner level.

In assessing the adequacy of our response we have had a good deal of success in seizing illicit cigarettes intended for sale here or in the United Kingdom. In 2010 we seized 178 million cigarettes; in 2011 the figure was 109 million; in 2012, 96 million and in 2013, 41 million. These figures show a marked decline, reflecting a shift in the way illicit cigarettes are trafficked. It is believed criminal gangs have been moving away from very large consignments in favour of smaller volumes as a result of the number of large seizures being made throughout the European Union, including Ireland. However, the most important measure for us is the survey data for illicit consumption which indicate containment and some modest progress. Where possible, we prosecute those involved in smuggling, distributing or selling illicit cigarettes. In 2013, 100 people were convicted for smuggling or other illicit cigarette offences. The courts imposed custodial sentences in 38 cases and average fines of over €2,600 in 62 cases.

On the impact of the standardised packaging legislation on the illicit cigarette market, we are satisfied that it will not damage our efforts to tackle the problem. We rely on our tax stamp to identify tax paid tobacco products and the standardised packaging legislation will accommodate the stamp. We expect the new packaging rules to ensure effective security features to make counterfeiting very difficult. The tax stamp will certainly contain all of the features possible to minimise the risk of counterfeiting.

I assure the committee that tackling illicit tobacco is a key priority for Revenue. We are planning on the basis that Ireland will remain a very high tax country for tobacco products and will be undertaking a fundamental review of our tobacco strategy in the next couple of months.