Asia Illicit Tobacco Indicator 6: Hong Kong Prepared by Oxford Economics October 7
Disclaimer The Asia Illicit Tobacco Indicator 6 Report (the Report ) on the illicit tobacco trade in selected Asian markets (including Australia and New Zealand) has been prepared by Oxford Economics (OE). OE enjoyed academic freedom and full editorial control of the Report. We are grateful for the inputs and data received from public sector and industry stakeholders. OE prepared the Report in accordance with specific terms of reference agreed between Philip Morris International Management SA, an affiliate of Philip Morris International (PM), and OE. Financial support for the Report was provided by PM. OE assume all responsibility for the Report analysis, findings, and conclusion. The terms of reference under which OE were engaged by Philip Morris International Management SA are detailed in the Asia Illicit Tobacco Indicator 6 Methodological Overview Report, available to download via the following link illicittobacco.oxfordeconomics.com
Hong Kong: Legal Domestic Sales Hong Kong Legal Domestic Sales, based on duty-paid volumes, are estimated at 3.3 billion cigarettes for calendar year 6, broadly unchanged versus 5. The vast majority of Legal Domestic Sales were consumed in Hong Kong, with the volume of outflows of duty-paid cigarettes estimated to have been negligible at just 9 million cigarettes in 6. Legal Domestic Sales are primarily accounted for by four manufacturers: PM, BAT, JT, and Nanyang Brothers. Together, these manufacturers comprise nearly 95% of Legal Domestic Sales. Cigarette prices rose by around % in 4 following an increase in the rate of the Excise Tax from HKD,76 per thousand cigarettes to HKD,96. The Excise Tax rate has remained at this level since, while cigarette prices rose marginally in 6, by around 3.6% based on the Most Sold Brand. The price differential between Hong Kong and Macao has narrowed in recent years as a result of the % increase in the Excise Tax rate implemented in Macao in July 5. However, cigarettes in Hong Kong remain nearly USD more expensive, with the price of the Most Sold Brand of cigarettes in Hong Kong equivalent to USD 7.35 per pack of in 6, higher than the equivalent of USD 6.45 in Macao. Furthermore, cigarettes in Hong Kong remain more expensive than in other neighbouring economies such as China (USD.5), Taiwan (USD 3.), and South Korea (USD 4.4). Hong Kong Legal Domestic Sales: 3.3 cigarettes Price: HKD 57. USD 7.35 Note that estimated Outflows of duty-paid cigarettes are based only on identified Inflows in the other markets covered in this Report and may therefore be an underestimate. Price per pack of of the Most Sold Brand in October 6, based on PM data. 3 Hong Kong Market Summary
Hong Kong: Excise duty applied to cigarettes 3,76 4.5%,76,96.7%,76,96,96 HKD per, cigarettes 5 5 84,6 5.%,6 8 9 3 4 5 6 Source: Hong Kong Customs & Excise Department and Oxford Economics based on PM data 3 Rate applied in October of each year to the Most Sold Brand. Hong Kong: Legal Domestic Sales and prices 4 4. Cigarette sales HKD per pack of cigarettes 56 3.5 49 Cigarettes 3..5..5. 4 35 8 4 HKD per pack of cigarettes.5 7. 8 9 3 4 5 6 Source: Hong Kong Customs & Excise Department and Oxford Economics based on PM data 4 Price of the Most Sold Brand in October of each year. Hong Kong Market Summary 4
Hong Kong: Cigarette Consumption The results from two Empty Pack Surveys conducted in 6, combined with data on the volume of duty-paid tobacco sourced from the Hong Kong Customs & Excise Department, were used to estimate the total volume of cigarettes consumed in Hong Kong. Total Consumption was estimated at 5. billion cigarettes in 6, broadly unchanged versus the previous year. Within Total Consumption, the share of Legal Domestic Consumption was.5pp higher than a year before at 65.3%. In volume terms, Legal Domestic Consumption rose from 3. billion in 5 to 3.3 billion in 6, within the context of stable Total Consumption. We estimate that consumption of Non-Domestic Legal cigarettes has been broadly stable over the four-year period of the Asia Illicit Tobacco Indicator Report, at around 4 million cigarettes. Hong Kong has a relatively small passenger duty-free personal import allowance for inbound arrivals, 9 cigarettes per person. Illicit Incidence in Hong Kong has been declining steadily from 35.9% in to 7.5% in 6..7pp of this decline was achieved in 6. In volume terms, the number of illegal cigarettes consumed in Hong Kong has fallen by 446 million from to 6, 84 million of this drop coming in 6. This represents a decline of nearly 5% since the beginning of the Asia Illicit Tobacco Indicator in. Stricter enforcement against smuggling has been a key driver of the decline in Illicit Consumption. The Customs & Excise Department (CED) the primary agency responsible for anti-smuggling efforts continue to target the source of smuggling activities in Hong Kong, through a combination of market intelligence and timely enforcement. In particular, the CED has identified telephone ordering as the primary distribution channel for illicit cigarettes in Hong Kong, setting up a dedicated team to combat this activity. This has yielded significant results; 3.8 million illicit cigarettes were seized in 6 by the actions of this team, an increase of nearly 87% in comparison with 3. Total seizures by the CED in 6 were valued at HKD 7 million. 3 Hong Kong: Composition of cigarette consumption Cigarettes 3 4 5 6 % % Cigarettes % Cigarettes % Cigarettes % Cigarettes % change 5-6 Legal Domestic Consumption (LDC).9 56.7 3. 58.6 3. 63.7 3. 6.8 3.3 65.3 4. Legal Domestic Sales (LDS).9 3. 3. 3.3 3.3. Outflows of domestic dutypaid cigarettes Total Non-Domestic Inflows (ND).. -. -.. -77.5. 43.3. 4.4.7 36.3.9 37..8 34.7-6.5 Non-Domestic Legal ().4 7.4.4 7.9.4 8.3.4 8..4 7. -9.8 Non-Domestic Illicit.8 35.9.8 33.6.3 8..5 9..4 7.5-5.7 Domestic Illicit.......... n/a Total Consumption 5.. 5.4. 4.8. 5.. 5... Total Illicit Consumption.8 35.9.8 33.6.3 8..5 9..4 7.5-5.7 Source: Oxford Economics Empty Pack Surveys were undertaken in 6 Q and 6 Q4 (see Report methodology for more details). Estimated using passenger data, Smoking Prevalence in tourists country/market of origin, and the passenger duty-free personal import allowance limit. 3 Hong Kong Customs & Excise Department statistics. More information available via http://www.info.gov.hk/gia/general/77/5/ P77554.htm?fontSize= 5 Hong Kong Market Summary
Hong Kong: Composition of cigarette consumption (% of Total Consumption) % of Total Consumption 8 6 4 35.9 33.6 8. 9. 7.5 7.4 56.7 58.6 7.9 63.7 8.3 6.8 8. 65.3 7. Illicit Consumption Non-Domestic Legal () Legal Domestic Consumption 3 4 5 6 Source: Oxford Economics Hong Kong: Composition of cigarette consumption (number of cigarettes) Cigarettes 6 5 4 3 5..8.9.4 5.4.8 3..4 4.8.3 3..4 5..5 3..4 5..4 3.3.4 Illicit Consumption Non-Domestic Legal () Legal Domestic Consumption 3 4 5 6 Source: Oxford Economics Hong Kong Market Summary 6
Hong Kong: Government Finances Hong Kong levies a single unit-specific Excise Tax rate, raised from HKD,6 per, cigarettes to HKD,76 in February, and further to HKD,96 in February 4, where it has remained since. There is no GST or VAT in place. Revenues from cigarette taxes have risen fairly quickly in recent years, from HKD 5.3 billion in fiscal year /3 to HKD 6.5 billion in 5/6. However, revenues from cigarettes fell by HKD 54 million (8.%) in 6/7. This was underpinned by a decline in Legal Domestic Sales in the fiscal year running from April 6 to March 7 which fell by 8.4%. 6/7 is the first fiscal year in which excise revenues from cigarettes in Hong Kong recorded a decline in our Asia Illicit Tobacco Indicator research. However, revenues are still higher than the /3 and 3/4 fiscal years. More positively, the fall in Illicit Consumption (both in level terms and as a share of Total Consumption) means that the estimated Tax Loss resulting from the Illicit Consumption of cigarettes continues to fall in both absolute and relative terms. At HKD.5 billion in 6/7, the estimated Tax Loss was 5.% lower than the previous year, and a full 5% down from /3. We estimate that 9.3% of potential total Excise Tax revenues were lost in 6/7 due to Illicit Consumption of cigarettes, 9.4pp less than four years earlier. Hong Kong: Actual government revenues and estimated Tax Loss /3 fiscal year HKD USD mn 3/4 fiscal year HKD USD mn 4/5 fiscal year HKD USD mn 5/6 fiscal year HKD USD mn 6/7 fiscal year HKD USD mn % change in local currency 5/6-6/7 Actual revenue from excise duties on tobacco 5.3 678 5.8 754 6. 783 6.5 843 6. 773-8.% Estimated number of illicit cigarettes purchased (cigarettes ) Estimated Tax Loss from Illicit Consumption..9.3.5.3-5.% 3.3 49 3. 49.5 38.9 377.5 3-5.% Lost excise revenue 3.3 49 3. 49.5 38.9 377.5 3-5.% Excise Tax Loss as % of potential total Excise Tax revenues 38.7% 35.7% 9.5% 3.9% 9.3% Source: Hong Kong Customs & Excise Department and Oxford Economics based on PM data Estimated number of illicit cigarettes purchased adjusted for fiscal year. Fiscal year runs from April to March. Data from the Hong Kong Customs & Excise Department suggest that while Legal Domestic Sales in the 6 calendar year increased by 3.8% vs. 5, when comparing fiscal year data, Legal Domestic Sales declined by 8.4% in 6/7 compared with 5/6 (Legal Domestic Sales declined by nearly 7% y/y in the first three months of 7). 7 Hong Kong Market Summary
Hong Kong: Actual government revenues and estimated Excise Tax Loss HKD 7 6 5 4 3 5.3 5.8 6. 6.5 6. Actual Excise Tax revenues Estimated Excise Tax Loss 3 4 3.3 3. FY/3 FY3/4.5 FY4/5.9 FY 5/6.5 FY 6/7 Source: Hong Kong Customs & Excise Department and Oxford Economics based on PM data Hong Kong Market Summary 8
Hong Kong: Trade Flows Non-Domestic Illicit Inflows of cigarettes fell an estimated 5.7% in 6 (equivalent to 84 million cigarettes), after rising in 5. Over a longer perspective, Non-Domestic Illicit Inflows are still modestly higher than in 4, but just short of 5% lower than in, the first year of the Asia Illicit Tobacco Indicator. Given the proximity to China and the high frequency of passenger traffic over land borders, a high proportion of cigarettes consumed in Hong Kong originate abroad. At 736 million cigarettes, Other Duty-Free labelled products from a broad range of markets accounted for roughly half of all illicit Inflows to Hong Kong in 6. Including Duty-Free labelled Inflows from China, Duty-Free labelled products accounted for just over 6% of all illicit Inflows (855 million cigarettes). This share has been relatively consistent for the last couple of years. China remains the largest market of origin for illicit tobacco Inflows into Hong Kong, accounting for 4.8% of all illicit Inflows in 6. But this is 4.8% lower than in 5, marking the first decline in illicit Inflows from China in our fiveyear time series. Only % of this decline was due to the decline in illicit Inflows from the Chinese Duty-Free market, which accounts for 3% of all illicit Inflows from China and has remained broadly stable. Counterfeit cigarettes have fallen by just short of 8% between and 6, and now account for just 3% of all illicit Inflows. However, other market variants, including Unspecified Market Variant cigarettes, have increased in recent years up % in 6, to 69 million. Hong Kong s role as a key trading hub means that enforcement activity is targeted not only at the importation of illicit tobacco, but also at transhipment activity. For example, in October 6, the CED intercepted 5,3 kilograms of tobacco, with an estimated duty liability of HKD million. It is thought this tobacco was en route from Vietnam to Australia. A month prior, the authorities made the largest seizure of illegal tobacco in nearly a decade, where million cigarettes from Greece (via Vietnam) were seized with an estimated duty liability of HKD 38 million (thought to be destined for Europe). Hong Kong: Origin of total Non-Domestic Illicit Inflows Other Duty-Free labelled products 736 mn Counterfeit 43 mn (-4.7%) Total,394 mn (-5.7%) Rest of the World including Macao, Philippines, and Vietnam 69 mn (+.%) China 346 mn (-4.8%) (-6.8%) Cigarettes mn 3 4 5 6 China 7 344 349 46 346 Duty-Free labelled products, 978 73 79 736 Other / Unspecified 5 39 68 4 69 Counterfeit 56 84 57 43 Total,84,798,334,478,394 Source: IT Flows Model and Oxford Economics Unspecified Market Variant refers to cigarette packs that do not bear specific market labelling or Duty-Free labelling. As such the intended market is not known. Double Happiness, Esse, and Zhong Nan Hai were the primary Unspecified Market Variant brands identified in 6. Figures in brackets reflect % change from 5. 9 Hong Kong Market Summary
Hong Kong: Consumption breakdown 6, Cigarettes mn, 3, 4, 5, 6, Legal Domestic Sales 3,334 Outflows of duty-paid 9 Legal Domestic Consumption 3,35 China 63 346 Other Duty-Free labelled products 4 736 Other/ Unspecified 69 Non-Domestic Legal Inflows Illicit Inflows Counterfeit 43 Total 5,76,, 3, Cigarettes mn 4, 5, 6, Source: IT Flows Model and Oxford Economics Hong Kong Market Summary
Hong Kong: Other Estimates Source Comparing consumption estimates with LDC ( bottom up approach) Chen J, McGhee SM, Townsend J, et al. Tob Control, 4. Retrieved via https://www.ncbi.nlm.nih.gov/ pubmed/55668 Euromonitor Passport, 7 Comment Using data on Smoking Prevalence and average daily consumption of cigarettes, plus UN population data, a bottom up estimate of cigarette consumption can be made which can then be compared with LDC. This approach yields an estimate for the Illicit Incidence of.9% in 5, or around 6 million cigarettes (based on 5 LDC). The source for Smoking Prevalence and average daily cigarette consumption is the Hong Kong Thematic Household Survey Report No. 59, compiled by the Census and Statistics Department, 6. Total Consumption is estimated through a bottom up approach, including estimates of both domestic consumption and visitor consumption. Illicit Consumption is subsequently estimated as the difference between Legal Domestic Sales, sourced from Hong Kong Customs & Excise, and Total Consumption, allowing for Non-Domestic Legal Inflows from inbound visitors and returning domestic residents. Based on this approach, the authors estimate Illicit Consumption of between 8.% and 5.4% in. Euromonitor estimates an Illicit Incidence of 5.% in 6. The methodology, sampling, and coverage are unknown, so it is difficult to assess the robustness of this estimate. Hong Kong: Alternative estimates of Illicit Consumption 3% 5 5 7.5 5. 5.9 Oxford Economics (6) Euromonitor (6).9 Bottom up consumption (5) Chen et al () Hong Kong Market Summary
Hong Kong: Data Sources Primary source Calculation Comments Legal Domestic Sales (LDS) Sales of Duty-Paid Tobacco, sourced from the Hong Kong Customs & Excise Department. Outflows of domestic duty-paid cigarettes Empty Pack Survey data in other markets included in this Report. Empty Pack Survey data in other markets used to identify the presence of packs bearing Hong Kong market-specific labelling (e.g. health warnings, tax stamps etc.). Outflows of domestic dutypaid cigarettes to other markets are estimated at around 9 million cigarettes, with the large majority destined for Macao. Legal Domestic Consumption (LDC) Total Non-Domestic Inflows (ND) Non-Domestic Legal () Legal Domestic Sales minus Outflows of legal sales. Sum of Non-Domestic Legal and Non-Domestic Illicit. Estimated using passenger data, smoking rates, and passenger duty-free personal import allowance. Outflows of duty-paid cigarettes refer only to Outflows to other markets included in this Report. Maximum theoretical amount an individual can carry across a border. Passenger data from the Hong Kong Tourism Board. Non-Domestic Illicit Empty Pack Surveys. Based on Empty Pack Surveys plus OE estimates. Domestic Illicit Zero under-declaration of domestically produced cigarettes. Estimates derived from the average of Empty Pack Surveys conducted in 6 Q and 6 Q4. See Report methodology for more details. There is assumed to be no under-declaration of domestically produced cigarettes. Total Illicit Consumption Sum of Non-Domestic Illicit and Domestic Illicit. Total Consumption Legal Domestic Sales minus Outflows of domestic duty-paid cigarettes, plus estimated Non-Domestic Legal consumption, plus estimated Illicit Consumption. Total Tax Loss Total Illicit Consumption multiplied by the prevailing Excise Tax rate. The IT Flows Model estimate of consumption is 5. billion cigarettes for 6. See Report methodology for more details. Hong Kong Market Summary
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