1. 1
Considerations for the
Strategy of excise taxation
of tobacco products
III Tax Forum
Odessa, Ukraine
August 29th, 2017

2. 2
BUILD GROW PROTECT

3. Fundamentals of Illicit Trade
Criminal networks extract significant profits from the
illegal trade in various goods / sectors
III Tax Forum – 8/29/17
3
OECD Report on Illicit Trade, 2016
Europol SOCTA Report 2017
Various Driving Forces
• Globalization of Trade
• Expanded Transnational Crime
• Illicit Trade as Service
Illicit Trade across sectors
• Prohibited Goods & Services
• Irregular sale of regulated
commodities
• Illegal sales of excised goods
• Stolen Goods

4. Fundamentals of Illicit Trade
Criminal networks extract significant profits from the
illegal trade in various goods / sectors
III Tax Forum – 8/29/17
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Europol SOCTA Report 2017

5. Tax differentials and high taxes drive excise fraud
III Tax Forum – 8/29/17
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Source: KPMG Project SUN 2016

6. III Tax Forum – 8/29/17
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SmugglingCounterfeit
Illicit Manufacturing
Excise Tax Evasion / Fraud comes in many forms
Tax schemes /
Legislative Loopholes

7. III Tax Forum – 8/29/17
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Example of Tax Evasion Scheme – United States 2009 -
2012
Source: Government Accountability Report, April 2012 on Tax Schemes
http://www.gao.gov/assets/600/590192.pdf

8. Fundamentals of Illicit Trade
Counterfeit /
Unauthorized
Production
Genuine
Production
Authorized
Retailer
Unauthorized
Distribution
Legal
Distribution
Unauthorized
Reseller
End
User
Legend:
Genuine
Product / Legal
Distribution
Genuine Non-
Duty Paid /
Smuggled
Illegal Product –
Counterfeit / Illegal
Manufacture
8
III Tax Forum – 8/29/17

9. Illicit Trade model simplified
Legal Distribution
9
Schematic model for illustration
purposes only – Not to scale
Non-Duty Paid / Smuggled
Counterfeit / Illegal Manufacturing
III Tax Forum – 8/29/17

10. Data driven system design
10
Schematic model for illustration purposes only – Not to scale
Legal Distribution Smuggled Illegal Product
Scenario 1 Scenario 2
III Tax Forum – 8/29/17

11. Scenarios: Retail Smuggling Driven
Counterfeit /
Unauthorized
Production
Genuine
Production
Authorized
Retailer
Unauthorized
Distribution
Legal
Distribution
Unauthorized
Reseller
End
User
Legend:
Genuine
Product / Legal
Distribution
Genuine Non-
Duty Paid /
Smuggled
Illegal Product –
Counterfeit / Illegal
Manufacture
11
III Tax Forum – 8/29/17

12. Scenarios: Smuggling Driven
Counterfeit /
Unauthorized
Production
Genuine
Production
Authorized
Retailer
Unauthorized
Distribution
Legal
Distribution
Unauthorized
Reseller
End
User
Legend:
Genuine
Product / Legal
Distribution
Genuine Non-
Duty Paid /
Smuggled
Illegal Product –
Counterfeit / Illegal
Manufacture
12
III Tax Forum – 8/29/17

13. Scenarios: Illegal Product Driven
Counterfeit /
Unauthorized
Production
Genuine
Production
Authorized
Retailer
Unauthorized
Distribution
Legal
Distribution
Unauthorized
Reseller
End
User
Legend:
Genuine
Product / Legal
Distribution
Genuine Non-
Duty Paid /
Smuggled
Illegal Product –
Counterfeit / Illegal
Manufacture
13
III Tax Forum – 8/29/17

14. Illicit Market Shifts
Illicit Trade shifts to meet market demand – Example New York
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1990s
- 2004
2004 -
2011
2012+
Grey Market
Untaxed
reservation
sales
Smuggling &
Expansion of illicit
Manufacturing,

15. Best Practices to combat illicit trade &
excise fraud
• Comprehensive approach of licensing, recordkeeping,
reporting requirements, well resourced enforcement and
aggressive penalties
• Involve all stakeholders, including government, public
health, manufacturers, distributors and retailers
• Integrate and utilize existing industry solutions and
systems
• Private Public Partnerships on data exchange
• System needs to be driven by the actual illicit trade issue
and not by technology
15
III Tax Forum – 8/29/17

16. Paradigm Shift
16
Technology
&
Application
Issue
Government
Stakeholder
s
Industry,
NGO’s etc.
Policy
Options
Interoperability
III Tax Forum – 8/29/17
Category
Specific Issue
Identification

17. Best Practices on tax indicia system
• Data is the key to the system to aid enforcement
• System needs to be flexible and adaptable for
changing illicit trade environments
• Interoperability with open technology standards
(GS1)
• Integrate and utilize existing industry solutions and
systems
• Ensure interoperability with FCTC requirements
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III Tax Forum – 8/29/17

18. • Public Process with all stakeholders
• Integration of technology & policy
• System focus on data analysis
• Utilizes and fits existing manufacturing and
distribution
• Global interoperable systems
• Cost effective customer driven solutions
Case study: Pharma Track and Trace
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III Tax Forum – 8/29/17

19. Outcomes
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Industry compliance
Global interoperability
Technology Innovation
III Tax Forum – 8/29/17

20. Further considerations
• Systems should be specific to the category being
addressed
• System should not be burdensome to not increase
price of legitimate products
• Better tax revenue should finance any system rather
than industry
• System equipment should be purchased by every
party at his own expense and is one of the mandatory
requirements for licensing
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III Tax Forum – 8/29/17

21. Going Forward
• Cooperation amongst all stakeholders
• Integrate already operational systems
• Focus on data generation and storage
• Ensure interoperability with various systems
• Ensure costs are justified by increased tax revenue
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III Tax Forum – 8/29/17

22. 22
Sven Bergmann – Managing Partner
SBergmann@VentureGlobalCo.com