Tax hikes have led to smuggler’s paradise

Stuff reports:

Cigarette smuggling is booming, with Customs warning that organised crime syndicates are now muscling in because of the huge profits to be made.

The high cost of a packet of cigarettes here, and the relatively low cost in nearby Asian countries makes New Zealand a prime target.

While ethnic Chinese and Korean groups have driven the trade, Customs’ lead investigator says trans-national crime gangs and local gangs are now running cigarette smuggling in parallel with their usual drug operations.

NZ should become a global case study in the perils of hiking excise tax too far. It first led to a massive increase in dairy robberies as cigarettes became so valuable they were worth stealing, and then led to organised crime moving into tobacco smuggling.

When we confronted the man as he prepared to complete the transaction, he said he was paying cash for the cigarettes from another Korean he contacted via Kakao Talk, and insisted he would pay GST on the transactions. He said he was paying less than $175 a carton for his supply, but wouldn’t say how much, or give his own name or the name of his supplier. He said it was his 34th such street sale and he was a New Zealand citizen on a sickness benefit.

On a benefit and selling smuggled tobacco.

Bruce Berry, Customs’ national investigations manager, wasn’t surprised. He said Chinese and Korean communities were the main source of the illicit trade, and much of it was conducted almost openly on social media. Customs were battling against a community belief that cigarette smuggling was not a serious offence.

Berry said the price of cigarettes was now high enough that the profit margin for smugglers was appealing enough to attract organised crime.

“It’s been a consistent message from Customs for a while now that we’ll see an increase in this [smuggling] as we reach that tipping point,” he said. “We are well past it now, and it [tobacco] is a viable commodity in its own right.

The lesson is if tax increases become too punitive, you set off the black market.

Customs seized 1.8m cigarettes and around $2m cash and also restrained multiple properties, luxury cars and bank accounts.

Berry says a conservative estimate of the amount of tax and duty avoided by those involved in Whitethorn would be $16-20m.

This is big business now.

A ten per cent increase in excise duty every year since 2011 has driven New Zealand prices to the second-highest in the South-east Asia/Pacific region, behind only Australia. An average pack might cost $31 in New Zealand, but just $1.62 in Vietnam, $5.29 in China and $6.07 in Korea.

A tobacco industry source said the major companies typically made just a few per cent profit on each cigarette, with three-quarters of the sale price going to the government: “So if you can cut 75 per cent out of your costs, then it can become very lucrative.” Each individual cigarette is worth about $1 to the government.

$1 per cigarette tax!