Asia Illicit Tobacco Indicator 216: New Zealand Prepared by Oxford Economics November 217
Disclaimer The Asia Illicit Tobacco Indicator 216 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 216 Methodological Overview Report, available to download via the following link illicittobacco.oxfordeconomics.com 2
New Zealand: Legal Domestic Sales New Zealand Legal Domestic Sales of cigarettes and loose tobacco were estimated at 2.5 billion cigarettes (or cigarette equivalents) in 216, a 5.% decline from 215. 1 BAT is the dominant manufacturer in the market, accounting for two-thirds of Legal Domestic Sales. PM and Imperial Tobacco account for the large majority of the remaining one-third of sales. Cigarette prices have increased progressively over the past four years, with annual increases in Excise Tax implemented at the start of each year. Excise Tax has been increased by 1% at the beginning of each year since 213 (on top of the annual index-linked increase). The 216 Budget stipulated further annual increases of 1% up to and including January 22. As a consequence, nominal cigarette prices in New Zealand are the highest in the Asia Pacific region, at NZD 21.6 per pack of 2 cigarettes (USD 15.8) in 216 based on the Most Sold Brand. 2 This is USD.4 higher than in Australia, and over USD 6. more expensive than in Singapore. The legislated future increases in Excise Tax for the years ahead are set to take the price of a pack of 2 of the Most Sold Brand of cigarettes to an estimated NZD 32 by 22. The increases in Excise Tax, along with plain packaging legislation, which was introduced by Parliament in September 216, are part of an ongoing government drive to cut the proportion of the adult population smoking to below 5% by 225. In November 214 the passenger duty-free personal import allowance for adults entering New Zealand was cut to 5 cigarettes, or 5 grams of tobacco product. New Zealand Legal Domestic Sales: 2.5 bn cigarettes Including RYO equivalent Price: NZD 21.6 USD 15.8 1 A conversion rate of.7 grams per cigarette was applied to turn loose tobacco weight into cigarette equivalent, based on rates applied by the New Zealand Ministry of Health in its analysis of annual tobacco returns. 2 Price per pack of 2 of the Most Sold Brand of cigarettes in October 216, based on PM data. 3 New Zealand Market Summary
New Zealand: Excise duty applied to cigarettes 3 NZD per cigarette.8.7.6.5.4.3.29.31.35 1.3%.67.61 11.1%.55 11.3%.49 1.9%.44 14.5%.39.2.1. 28 29 21 211 212 213 214 215 216 Source: New Zealand Customs 3 Rate applied in October of each year to the Most Sold Brand of cigarettes. Includes Individual Excise Tax increases as well as annual indexlinked rises. New Zealand: Legal Domestic Sales and prices 4 RYO cigarette equivalent Cigarettes sales bn 4. NZD per pack of 2 cigarettes 24 3.5 21 Cigarettes bn 3. 2.5 2. 1.5 1. 18 15 12 9 6 NZD per pack of 2 cigarettes.5 3. 28 29 21 211 212 213 214 215 216 Source: Oxford Economics based on PM data 4 Price per pack of the Most Sold Brand in October of each year. The Most Sold Brand changed from Holiday to Pall Mall Baseline in 215. A conversion rate of.7 grams per cigarette was applied to turn loose tobacco weight into cigarette equivalent, based on rates applied by the New Zealand Ministry of Health in its analysis of annual tobacco returns. New Zealand Market Summary 4
New Zealand: Tobacco Consumption The results from the Empty Pack Survey, 1 combined with annual tobacco returns sourced from the New Zealand Ministry of Health, 2 and consumer survey data, 3 were used to estimate Total Consumption of cigarettes in New Zealand. Total Consumption (legal and illicit) was estimated at 2.6 billion cigarettes in 216. Of this, an estimated 9.% or 2.4 billion cigarettes (or cigarette equivalents) is Legal Domestic Consumption,.9% is Non-Domestic Legal, and 9.% or 238 million cigarettes is Illicit Consumption. Total Consumption was modestly higher in 216 than a year earlier, rising by 1.2%. This was underpinned by a 74.1% rise in Illicit Consumption, with Legal Domestic Sales falling by 5.% over the same period. The share of Illicit Consumption is estimated to have risen by 3.8pp between 215 and 216, equivalent to around 1 million illicit cigarettes (or cigarette equivalents) consumed. The 216 Colmar Brunton Illicit Tobacco Research consumer survey found that respondents who identify themselves as daily RYO smokers have a higher propensity to purchase cheap cigarettes and tobacco compared with daily cigarette smokers, and that 8.2% reported buying cheap cigarettes or illicit RYO in the last 12 months, up from 7.6% in 215. 4 Despite this modest increase reported by daily RYO smokers, and given that RYO illicit accounts for such a small share of Total Consumption, Colmar Brunton concluded that in aggregate there was no significant shift in the reported purchase of illicit tobacco products in New Zealand in comparison with 215. We have therefore applied the same share of illicit RYO calculated in 215 to estimate 216 figures for Illicit Consumption. 5 The growth in Illicit Consumption illustrated by this Report is consistent with observations from New Zealand Customs, who have identified notable growth in New Zealand s illicit market, based on a 216 report obtained by media outlets via the Official Information Act. The Customs department has remained vigilant to the influx of illicit tobacco products, recently making its largest-ever tobacco seizure of 5.7 tonnes with a retail value of NZD 1.4 million. 6 New Zealand: Composition of cigarette consumption 7 Cigarettes mn 215 216 % % Cigarettes mn % change 215-16 Legal Domestic Consumption (LDC) 2,439 93.6 2,374 9. -2.7 Legal Domestic Sales (LDS) 2,593 2,464-5. Outflows of domestic duty-paid cigarettes 154 91-41.2 Total Non-Domestic Inflows (ND) 166 6.4 263 1. 58.1 Non-Domestic Legal (NDL) 3 1.1 25.9-16.1 Non-Domestic Illicit 128 4.9 229 8.7 78.9 Illicit RYO 8.3 9.3 1.2 Domestic Illicit.. n/a Total Consumption 2,65 1. 2,636 1. 1.2 Total Illicit Consumption 137 5.2 238 9. 74.1 5 Source: Oxford Economics 1 The Empty Pack Survey was undertaken in 216 Q2 (see Report methodology for more details). 2 New Zealand Ministry of Health annual tobacco returns 216. A conversion rate of.7 grams per cigarette was applied to turn loose tobacco weight into cigarette equivalent, based on rates applied by the New Zealand Ministry of Health in their analysis of annual tobacco returns. 3 Illicit Tobacco Research Updates, Colmar Brunton (215 and 216). 4 ibid 5 Some questions related to the frequency and volume of illicit RYO purchases that would otherwise facilitate an estimate of illicit RYO were omitted from the Colmar Brunton Illicit Tobacco Research consumer survey in 216. 6 See http://www.stuff.co.nz/national/88414136/government-at-high-risk-of-losing-1-million-annually-if-tobacco-black-market-surges and http://www.newshub.co.nz/home/new-zealand/217/2/customs-makes-1-4-million-tobacco-bust.html 7215 figures have been restated based on updated data on Legal Domestic Sales, sourced from the New Zealand Ministry of Health annual tobacco returns. All references to cigarette consumption includes RYO equivalent. It is recognised that illicit RYO originates from both Non-Domestic and Domestic home-grown sources; however it is not possible to separate the two, and therefore for the purposes of this Report we consider all illicit RYO volumes to be of Non-Domestic origin. New Zealand Market Summary
New Zealand: Composition of cigarette consumption (% of Total Consumption) 1 % of Total Consumption 1 8 6 4 5.2 93.6 1.1 NDL 9. 9..9 NDL Illicit Consumption Non-Domestic Legal (NDL) Legal Domestic Consumption 2 215 216 Source: Oxford Economics 1 Cigarettes and RYO equivalent New Zealand: Composition of cigarette consumption (number of cigarettes) 2 Cigarettes mn 3, 2,5 2, 1,5 1, 2,65 2,636 137 3 NDL 238 2,439 2,374 25 NDL Illicit Consumption Non-Domestic Legal (NDL) Legal Domestic Consumption 5 215 216 Source: Oxford Economics 2 Cigarettes and RYO equivalent New Zealand Market Summary 6
New Zealand: Government Finances New Zealand operates a weight-based-specific Excise Tax system. As of 1st January 216, for manufactured cigarettes weighing less than or equal to.8kg of actual tobacco content per thousand cigarettes, a rate of NZD 668.51 per thousand cigarettes applied. For manufactured cigarettes containing more than.8kg of actual tobacco content per thousand cigarettes, as well as smoking tobacco, homogenised or reconstituted tobacco, the duty rate was NZD 952.62 per kg of tobacco content. For all other tobacco products, including snuff, cigars, cheroots, and cigarillos, the duty rate was NZD 835.61 per kg of tobacco content. The Government announced in the 212 budget a series of four annual 1% Excise Tax increases between 213 and 216. The final increase in this series was implemented on 1st January 216. The 216 Budget then legislated for a new series of four annual increases at the same rate, beginning on 1st January 217. In addition to the 1% annual increase, Excise Tax rates are subject to an annual indexation increase, based on the Consumer Price Index (excluding credit services). Excise Tax increases are implemented on 1st January every year and are based on the 12-month period to September the previous year. As such, the applicable Excise Tax rates rose by 1.4% on 1st January 217, to NZD 738.13 per thousand cigarettes for manufactured cigarettes with.8kg of actual tobacco or below per thousand cigarettes, NZD 1,51.83 per kg of tobacco content for manufactured cigarettes containing more than.8kg of actual tobacco, smoking tobacco, homogenised or reconstituted tobacco, and NZD 922.64 per kg of tobacco content for all other products. A 15% GST tax is also levied on all retail sales of cigarettes. Total revenues from Excise Tax duties on tobacco were reported at NZD 1.7 billion in the 216/17 fiscal year. This represents a 2.% decline in actual revenues, compared with an estimated 4.% decline in Legal Domestic Sales over the fiscal year, which runs from July to June. 1 Our estimates indicate that the Tax Loss associated with Illicit Consumption of cigarettes and RYO in the fiscal year 216/17 amounted to NZD 2 million (USD 142 million), representing an increase of 89.2% in comparison with the 215/16 fiscal year. The Excise Tax Loss as a share of total potential Excise Tax revenues was equal to 9.%, an increase of 4.2pp compared with the previous fiscal year. New Zealand: Actual government revenues and estimated Tax Loss 1 215-16 fiscal year NZD mn USD mn 216-17 fiscal year NZD mn USD mn % change in local currency 215/16-216/17 Actual revenue from excise duties on tobacco 1,71 1,142 1,677 1,195-2.% Estimated number of illicit cigarettes purchased (cigarettes mn) 128 229 79.% Estimated volume of illicit loose tobacco purchased (cigarettes equivalent mn) 8 8-1.8% Estimated Tax Loss from Illicit Consumption 16 71 2 142 89.2% Lost excise revenue 86 58 166 118 92.2% Lost VAT revenue 19 13 34 24 76.% Excise Tax Loss as % of potential total Excise Tax revenues 4.8% 9.% Source: New Zealand Treasury Department and Oxford Economics based on PM data Estimated number of illicit cigarettes purchased adjusted for fiscal year, which runs from July to June. Includes loose tobacco. A conversion rate of.7 grams per cigarette was applied to turn loose tobacco weight into cigarette equivalent, based on rates applied by the New Zealand Ministry of Health in its analysis of annual tobacco returns. 1 Based on PM IMS data on Legal Domestic Sales. 7 New Zealand Market Summary
New Zealand: Actual government revenues and estimated Excise Tax Loss 2, 1,5 Actual Excise Tax revenues Estimated Excise Tax Loss NZD mn 1, 5 1,71 1,677 5 86 FY 215/16 166 FY 216/17 Source: New Zealand Treasury Department and Oxford Economics based on PM data New Zealand Market Summary 8
New Zealand: Trade Flows Non-Domestic Illicit Inflows, including illicit RYO, rose by 74.1% in 216. 1 This was underpinned by a sharp rise in the volume of illicit cigarettes consumed, with illicit RYO consumption estimated to have remained broadly stable. As a consequence, illicit cigarettes accounted for 96.4% of total Illicit Consumption, up from 93.8% in 215. The 216 Empty Pack Survey indicates a more varied mix of Inflows of illicit cigarettes in 216 compared with the previous year. The growth in the volume of Illicit Consumption in 216 was underpinned by a sharp rise in Duty-Free labelled products to 55 million, up from 7 million in 215, while illicit cigarettes intended for final retail sale in China and South Korea both more than doubled over the same period. By contrast, illicit Inflows from Australia remained relatively stable in 216. Outflows to Australia fell from 154 million cigarettes to 9 million over the same period, while Empty Pack Surveys in other markets do not suggest substantive flows of legally sold cigarettes from New Zealand to other markets in the Asia Pacific region, consistent with large price differentials between markets. 2 New Zealand: Origin of total Non-Domestic Illicit Inflows 3 Australia 64 mn (+2.4%) South Korea 34 mn (+143.5%) Illicit RYO 9 mn (+1.2%) Total 238 mn (+74.1%) Other / Unspecified 52 mn (+48.%) China 24 mn (+177.5%) Cigarettes mn 215 216 Illicit RYO 8 9 Australia 63 64 South Korea 14 34 China 9 24 Other Duty-Free labelled products 7 55 Other / Unspecified 35 52 Total 137 238 Other Duty-Free labelled products 55 mn (+63.7%) Source: IT Flows Model and Oxford Economics. 1 It is recognised that illicit RYO originates from both Non-Domestic and Domestic home-grown sources; however it is not possible to separate the two, and therefore for the purposes of this Report we consider all illicit RYO volumes to be of Non-Domestic origin. 2 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. 3 Including illicit RYO. Figures in brackets reflect % change from 215. 9 New Zealand Market Summary
New Zealand: Consumption breakdown 216 Cigarettes mn 1, 2, 3, Legal Domestic Sales 2,464 Outflows of duty paid 91 Legal Domestic Consumption 2,374 Illicit RYO 9 Australia 64 South Korea 1 34 China 24 Non-Domestic Legal Inflows Other Duty- Free labelled products 24 55 Illicit Inflows Other/ Unspecified 52 Total 2,636 1, Cigarettes mn 2, 3, Source: IT Flows Model and Oxford Economics New Zealand Market Summary 1
New Zealand: Other estimates Source Comment Euromonitor Passport, 217 Euromonitor estimates an Illicit Incidence of 1.6% in 216. The methodology, sampling, and coverage are unknown, so it is difficult to assess the robustness of this estimate. Action on Smoking and Health (ASH) New Zealand, Update of Illicit Trade in Tobacco Products in New Zealand in 213. Retrieved via http://www.ash.org.nz/the-evidence/we-produce/ research-on-the-illicit-tobacco-market/ Marshall et al. Missed tobacco tax revenue from foreign packs in New Zealand: results from a discarded pack collection study, NZMJ 22 November 213, Vol 126 No 1386. Retrieved via https://www.nzma.org.nz/journal/read-the-journal/allissues/21-219/213/vol-126-no-1386/lett-wilson Analysis by ASH based on data on the import and seizure of legal and illegal tobacco in New Zealand from Customs, combined with previous literature which was used to calculate interception rates of illegal tobacco being smuggled and home grown in New Zealand, suggest an Illicit Incidence of between 1.8% and 3.9% in 21-13 (including RYO). A total of 1,776 discarded packs were collected from 7 locations across New Zealand between November 212 and January 213, suggesting a Non-Domestic share in Total Consumption of 5.8%. However no attempt was made to subtract Non-Domestic Legal consumption to derive an estimate of Illicit Consumption. New Zealand: Alternative estimates of Illicit Consumption 1% 8 6.3 Loose Tobacco Cigarettes 4 8.7 2 Oxford Economics (216) 1.6 Euromonitor (216) 2..8 ASH (213) 11 New Zealand Market Summary
New Zealand: Data Sources Primary source Calculation Comments Legal Domestic Sales (LDS) Outflows of domestic dutypaid cigarettes Legal Domestic Consumption (LDC) Total Non- Domestic Inflows (ND) Non-Domestic Legal (NDL) Annual tobacco returns filed by manufacturers and importers with the New Zealand Ministry of Health. Empty Pack Survey data in other markets covered in this Report. Empty Pack Survey data in other markets used to identify the presence of packs bearing New Zealand market-specific labelling (e.g. health warnings, tax stamps etc.). 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 domestic dutypaid cigarettes to other markets are estimated at around 91 million cigarettes, nearly all of which are destined for Australia. Outflows of duty-paid cigarettes refer only to Outflows to other markets. Maximum theoretical amount an individual can carry across a border. Passenger data from Statistics New Zealand. Non-Domestic Illicit Empty Pack Survey and Colmar Brunton Survey. Based on the Empty Pack Survey, Colmar Brunton data, and OE estimates. Domestic Illicit Zero under-declaration of domestically produced cigarettes. Total Illicit Consumption Total Consumption Sum of Non-Domestic Illicit and Domestic Illicit. 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 weighted average tax rates (Excise Tax and GST). Estimates derived from the Empty Pack Survey conducted in 216 Q2. An estimate for loose tobacco has been added based on analysis of the Colmar Brunton Consumer Surveys (215 and 216). See Report methodology for more details. There is assumed to be no under-declaration of domestically produced cigarettes. The IT Flows Model estimate of consumption is 2.6 billion cigarettes for 216. See Report methodology for more details. New Zealand Market Summary 12
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