Experts said the illicit tobacco trade in the Arab region had grown rapidly in recent months as members of extremist organizations entered the business. They were exploiting instability in some countries to smuggle tobacco and finance their activities.
Elie Atallah, chairman of the GCC Brand Owners’ Protection Group and director of tax policy and illicit trade at British American Tobacco, said members of terrorist organizations had become active in this trade, particularly in Iraq and Syria. Sometimes, he said, they used mules trained to follow winding routes to carry smuggled tobacco into neighboring countries, avoiding the arrest of members in areas outside their control.
Company officials expected annual uncollected taxes and lost treasury revenues in Arab countries from illicit tobacco trading to rise from $1 billion to $1.2 billion because of smuggling.
They said the expected increase reflected not only extremist groups’ involvement but also large one-off tax increases and permission for companies to manufacture cheap tobacco in free zones, creating a substantial cross-border black market. They estimated the regional illicit market at around 58 billion cigarettes annually, nearly 30 percent of the total market.
Local media had reported that Gulf finance ministries intended to double tobacco tax rates from 100 to 200 percent at the start of the following year. This would widen price gaps between Gulf countries, other Arab states, and neighboring non-Arab countries. Tobacco prices in GCC states were already the region’s highest. Tobacco companies feared an increased inflow of illicit products.
British American Tobacco’s Middle East regulatory affairs director Wael Ismail said tobacco companies did not interfere in governments’ tax decisions. He nevertheless stressed the need for a unified Gulf tax policy to prevent price differences that encouraged illegal movement of goods.
He argued that tax policies based on fixed taxes and minimum collection thresholds pushed cigarette prices to levels that left consumers turning to the black market. Moderate, gradual taxation, he said, supported government policy and revenues, protected legal markets, and limited smuggled or counterfeit trade. He recommended an ad valorem system, collecting a percentage of product value.
Atallah said illicit trade affected regional countries to differing degrees because its causes varied by market. However, higher taxes, counterfeiting, and cheap production in free zones all increased the appeal of illicit goods. Harm extended beyond lost tax revenue to consumer health risks from products outside regulatory oversight and security concerns about the organizations behind the trade.
He noted the growing link between terrorism and cigarette smuggling: “Terrorists found new opportunities during the region’s recent unrest to finance some of their activities through illegal trade, particularly tobacco.”