Poor Tax Policy Is Worsening Cigarette Smuggling in the EU

Growing cigarette taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.levels and differentials have made cigarette smuggling a lucrative criminal enterprise and created problems for many national governments. Higher tax rates incentivize smuggling. As tax rates increase, consumers and suppliers search for ways around these costs. In cigarette markets, consumers tend to shop across borders where the tax rates are lower, and illicit market entrepreneurs develop black and gray markets to sell illegally to consumers, paying little or no tax at all.

In the European Union, cigarette smokers pay far more in excise taxes than they do for the cigarettes themselves. The EU Tobacco Tax Directive requires all Member States to levy a minimum excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.on cigarettes and other tobacco products. The current minimum cigarette excise rates in the EU are €1.80 ($2.12) per 20-cigarette pack, and the minimum total excise duty is at least 60 percent of the national weighted average retail price. These excise taxes are levied before adding the broadly applied value-added tax (VAT).

The highest tax in the EU is levied in Ireland at €10.71 ($12.64) per pack of 20 cigarettes, followed by France at €8.09 ($9.55). The lowest excise tax per pack of 20 cigarettes is levied in Bulgaria at €2.03 ($2.39), followed by Croatia at €2.63 ($3.10). When adding up all the taxes consumers pay for cigarettes, the average tax share of weighted average retail prices in EU countries ranges from 67.8 percent in Germany to 91.6 percent in Finland.

Academics have long noted that a serious consequence of high cigarette tax rates is smuggling. Cigarettes are easily transportable, and as tax rates increase, so do the profit margins for smugglers and illicit operators.

Smuggling that occurs within the borders of the EU is mostly a zero-sum activity from a cost perspective. Smugglers may even facilitate an increase in total economic activity by decreasing the market tax burden.

A smuggler who legally purchases cigarettes in a lower-tax area, such as Germany, and then sells the cigarettes in a high-tax area, like France, still pays tax and buys European-produced goods. The tax gain for Germany is less than the tax loss for France, and consumption may decrease more slowly due to the lower effective (tax-reduced) price for French smokers, but all the gains from trade stay within the EU.

But some criminals avoid the legal market altogether. Rather than pay market prices and lower taxes on European cigarettes, certain criminals produce counterfeit cigarettes with the look and feel of legitimate brands and sell them with counterfeit tax stamps, paying no tax whatsoever.

Many counterfeit cigarettes in the EU are smuggled from China and Russia. "Cheap whites" or "illicit whites" are a staple of the international counterfeit market. These generic-looking white cigarettes are produced legally in low-tax jurisdictions but are often intended for smuggling. Estimates put Chinese counterfeit production as high as 400 billion cigarettes per year to meet international demand.

Smuggling is notoriously difficult to measure because illegal sales and tax avoidance are not well captured in government or tax data. To get an estimate of smuggling and illicit trade, KPMG conducts a discarded pack auditA tax audit is when the Internal Revenue Service (IRS) or a state or local revenue agency conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return.each year, collecting discarded cigarette packs. They then produce data on whether the discarded packs were purchased domestically­-and have the appropriate tax markings-or if the products were purchased abroad, are counterfeit, or contraband.

The estimated smuggling figures vary from year to year, so we average the most recent four years of data, from 2021 to 2024, to estimate the rates of smuggled (non-domestic) products in 38 European countries. Smuggling rates range from a low of 2 percent in Bulgaria to a high of 38.5 percent in France.

Taxes and smuggling have a direct relationship. Academic research suggests that a one-euro increase in tax per pack in a country will increase illicit market share by 5 to 12 percentage points and increase illicit cigarette sales by 29 percent to 95 percent of the average consumption. Similar analysis from US states suggests a one-dollar increase in tax per pack increases smuggling by 13 percentage points.

The highest average smuggling rates in the EU are in France and Ireland, the countries with the highest taxes on cigarettes. We find that one additional euro tax per pack of 20 cigarettes increases smuggling by roughly 7 percent.

Cigarette smuggling can be a costly endeavor for governments. KPMG estimated that nearly 40 billion counterfeit and contraband cigarettes were consumed in 2024, meaning EU countries missed out on €14.9 billion in tax revenue. These figures don't even include tax revenue losses from cross-border shopping purchases in legal, low-tax jurisdictions.

Internationally smuggled and counterfeit cigarettes also pose dangers to consumers because they do not live up to the quality control standards imposed on legitimate products. Researchers have found that counterfeit cigarettes can have as much as seven times the lead of authentic brands and close to three times as much thallium, a toxic heavy metal, and other sources report finding dead flies, mold, insect eggs, and human feces in counterfeit cigarettes.

Much of the pressure to combat illicit trade falls on enforcement agencies. In 2023, the European Anti-Fraud Office (OLAF) seized more than 600 million illicit cigarettes. Earlier this year, a multinational force arrested criminals smuggling an estimated 1.5 billion cigarettes into the EU from Turkey and Iran.

But these efforts represent only a small fraction of all cigarette smuggling in Europe. Wherever taxes are high, smuggling tends to follow.

Global illicit trade in tobacco is a growing problem driven by strong financial incentives. Unfortunately, the consequences are far-reaching: consumers face unsafe products that bypass health regulations, legitimate business struggle to compete with untaxed illegal goods, and governments lose out on significant tax revenue. Worse still, smuggling operations involve corruption, money laundering, and terrorism.

Countries and global organizations should recognize these harms caused by smuggling and the fact that this illicit trade is a direct result of exorbitant tax policies. Governments should begin to wean themselves off of cigarette tax revenues, as cigarette consumption shrinks around the globe. Authorization and promotion of less harmful alternative tobacco products-such as vaping, heat-not-burn, oral pouches, and gums-will encourage more smokers to switch away from cigarettes, without the damage caused by smuggling and illicit trade.