Companies flood market with cigarettes to avoid tax hikes

By CHRIS GRAEME [email protected]

In a game of cat and mouse against the Government, tobacco companies operating in Portugal have been flooding the market with cigarettes in a bid to temporarily cheat the authorities of increased taxes.

But the government has rushed through new laws tightening up loopholes which should increase its tax receipts on tobacco by 61.6 per cent to 819.7 million Euros for the 12 months up until July this year. 

The game of beat the taxman was most evident between 2005 and 2007 when the Government raised taxes on tobacco yearly and increased VAT.

Tobacco operators, like Philip Morris International’s Portuguese subsidiary Tabaqueira, which has 90 per cent of the market share in Portugal, responded in the months leading up to tax increases coming into force by releasing large quantities of cigarettes onto the market.

This means that during a considerable period of time newsagents and tobacco kiosks could stockpile cigarettes and legally sell them to the public at the older tax rate stipulated on the side of the packet. This did not, however, affect VAT which is subject to immediate Government changes.

In 2007 the Government responded to this tactic by publishing two tax laws: one prohibiting more than 30 per cent increases in tobacco coming onto the market than in the previous year’s average from the period of September to December in each year.

The other ensured that tax duty stamps on each packet of tobacco only became valid at the end of February on the following year to make it illegal for tobacco sellers to sell them.

The tactic has had mixed results. In 2010, because of elections, the State Budget (OE) was only published half way through the year and the two tax laws that had been introduced by the Government, because of the way they had been done, only worked for budgets that would come into force at the beginning of the year.

This meant that in April, a short while before the tobacco tax hike and VAT increase from 20 to 21 per cent came into force; the tobacco companies once again flooded the market with tobacco.

They sold 249.9 million Euros of tobacco, more than double the average of 105 million sold in the previous 12 months.

The Government, caught by surprise by the tobacco companies, reacted by introducing a new law which means that packets of cigarettes and pouches of tobacco subject to 2009 taxes and VAT of 20 per cent “could only be marketed and sold to the public up until July 31, 2010”.