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Cambodia: Raising tobacco taxes to reduce smoking and tackle illicit trade

23 February 2022

During this pandemic, the government needs more resources to protect its citizens. It can increase taxes on harmful products such as tobacco, which will provide triple benefits of more tax revenues, reduced health costs, and better health and productivity for smokers who quit.

Raising tobacco taxes to increase tobacco prices and reduce affordability is firmly proven to be the most effective way to reduce tobacco use and help save lives. In Cambodia this means helping over 2 million smokers quit and potentially preventing 15,000 deaths a year.

Besides the thousands of Cambodian lives taken every year by tobacco, the country also suffers annual economic losses of KHR 2.7 trillion (US$ 663 million) equivalent to 3 percent of Cambodia’s GDP because of tobacco use.

Yet, taxes on tobacco products have not been raised in Cambodia since 2016. The current tax rate is only 25-31% of the retail price, keeping cigarettes very cheap at less than US$ 1 per pack and making cigarettes more affordable over time

Are negative and misleading messages about illicit trade and revenue loss distracting the government from taking necessary action? The tobacco industry routinely exaggerates its contributions and uses biased industry-sponsored research on illicit trade to oppose tobacco tax increases and mislead policymakers and the public alike.

What causes illicit trade?

It is estimated about 11.6% of the global cigarette market is illicit, mostly in low and middle-income countries where cigarettes are cheap. In fact evidence indicates that the illicit cigarette market is larger in countries with low taxes and prices, while relatively smaller in countries with higher cigarette taxes and prices. The causes of illicit tobacco trade are complex, but several studies, including a World Bank Group global review, reveal that the primary reasons for illicit trade are non-price factors, particularly corruption, weak tax administration/customs laws and their enforcement, and the participation of tobacco companies and other criminal networks.

Illicit trade rate was as high as 37% in the early 2000s in Cambodia, while the country had the lowest tax rate as percentage of retail price (20%) compared to other countries in the region. In Malaysia, despite the fact that there has been no tax increase for the past six years (2016 – 2021), industry-sponsored data claims the illicit trade problem has increased, a convenient scenario to persuade government to refrain from tobacco tax increases. Such tobacco industry interference in tax and other measures has undermined public health efforts in Malaysia.

On the other hand, in neighboring Singapore, the government has successfully kept the illicit market share very low, despite having the highest cigarette prices in the ASEAN region.

Raising taxes will lead to decreased demand for cigarettes even when illicit products are present in the market. Tax avoidance and evasion, therefore, will not defeat the effectiveness of tax increases for public health and revenue goals.

How to combat illicit trade in tobacco products in Cambodia?

Since multiple factors contribute to the illicit trade of tobacco products, a whole-government approach is needed, engaging various relevant government agencies such as ministries of health, finance, justice, trade, and others to crack down on the illicit market.

A transparent tax and customs administration system is key to tackling illicit trade. Starting with identifying and analyzing regulatory loopholes that exist, the government should set up a licensing control system, due diligence requirements, a tracking and tracing system (controlled by government and not the industry), and strong penalties for offenses.

It is also crucial to disengage from stakeholders (private sector, non-governmental organizations, think thanks, and others) that have vested interests in the tobacco industry to ensure measures to control illicit trade are not derailed.

Lastly, Cambodia should consider acceding to the WHO Framework Convention on Tobacco Control (FCTC) Protocol to Eliminate Illicit Trade in Tobacco Products, to more fully engage with other countries to tackle and eliminate illicit trade in tobacco products.