Cyprus loses €18 million in taxes due to illicit cigarette trade

Illicit cigarette consumption in Cyprus remains a pressing issue, accounting for 11 per cent of the total market, according to KPMG’s 2023 independent report for Philip Morris International.

While this marks a slight reduction in the rate, the impact on government revenue is still substantial, with contraband cigarettes costing the state an estimated €18 million in tax losses for the year.

The report stresses that 100 million illicit cigarettes were consumed in Cyprus last year, largely due to an influx from areas outside the Republic of Cyprus’ control.

Outflows of illegal cigarettes also rose by 3 per cent, with smaller markets seeing higher volumes. However, the UK remains the largest destination for Cyprus’ illicit cigarette exports, despite a slight reduction in outflows to the country. 

“Eliminating illicit tobacco trade is a long-term priority for Philip Morris International,” said Greg Kamperis, General Manager of Philip Morris Cyprus.

He added that collaboration between the public and private sectors is key in addressing this global problem.

Kamperis also emphasised that the company continues to support European regulations on tobacco product tracing and monitoring. 

The latest KPMG report paints a troubling picture for Europe, where more than 52 billion illicit cigarettes were consumed in 2023, the highest number since 2019. Of those, 35.2 billion were smoked within the European Union. 

This surge has caused EU governments to lose an estimated €11.6 billion in tax revenue in 2023 alone. Over the past five years, the total revenue loss has reached a staggering €49.1 billion, depriving hard-pressed European economies of much-needed resources. 

To put this into perspective, the €11.6 billion lost in 2023 is more than three-quarters of the EU’s entire security and defence budget for 2021-2027 or nearly equivalent to a full year of funding for the EU’s ‘Horizon Europe’ research and innovation programme. 

But, as is often the case, it’s the people who bear the brunt of illicit trade. Millions of adult smokers are being drawn into the black market for cigarettes, while criminal organisations grow more powerful, undermining efforts to reduce smoking rates.  

The toll on society is considerable: with inflation and the cost-of-living crisis squeezing households, illicit trade further fuels criminal activity, often harming the most vulnerable communities. As it drains tax revenues, it weakens public services and threatens safety. 

To bring the impact closer to home: In 2023, France lost over €7 billion in tax revenue due to illicit cigarette consumption.  

Eliminating this black market could have covered nearly 5 per cent of the country’s budget deficit or provided a €1,272 salary boost to every public sector worker. 

“We are witnessing the evolution of organised criminal groups in Europe as they increasingly move production facilities closer to Western European countries,” said Christos Harpantidis, Senior Vice President of External Affairs at PMI.  

He linked this trend to policy shortcomings, explaining that “This phenomenon is a direct consequence of failed policy approaches that have not done enough to curb illicit trade and reduce smoking prevalence.” 

Harpantidis stressed the urgent need for innovative solutions to tackle this growing issue. “To end smoking altogether, traditional tobacco control policies need to be complemented with innovative approaches,” he said.

“Governments need to recognise that adopting alternatives to cigarettes for adults who would otherwise continue to smoke will reduce smoking-related harms much faster than existing measures alone,” he added.

KPMG’s 2023 report underscores the wide-reaching effects of the illicit cigarette trade, which is now affecting all categories of illegal trade across Europe.  

The recovery of cross-border legal cigarette sales following the lifting of COVID-19 travel restrictions has seen non-domestic consumption in the 38 European countries included in the study rise to a record 15.5 per cent. This means that more than one in six cigarettes consumed is illegal. 

The report reveals that, over the past five years, European governments have collectively lost €49.1 billion in tax revenue due to illicit cigarette sales, depriving them of crucial funds.  

To put the 2023 figure into context, the €11.6 billion lost last year is equivalent to three-quarters of the EU’s defence budget or nearly an entire year of EU research funding. 

As Harpantidis noted, the societal consequences of this black market are far-reaching: “Illicit trade fuels ruthless criminal gangs, often impacting the most vulnerable communities. It deprives governments of vital tax revenue and harms public services and safety.” 

Effective law enforcement is essential in tackling the illicit cigarette market, but alone, it is not enough.  

As Massimo Andolina, President of PMI Europe, observed that “Traditional tobacco control policies aimed at fighting illicit trade and reducing smoking prevalence are not doing enough”.

He added that “policymakers lost sight of what they need to prioritise the most,” saying that this includes “people, first and foremost, need to be at the heart of policymaking”.

Andolina called for a more holistic strategy that includes deterrent penalties, public awareness campaigns, and a balanced approach to taxing legal products.  

Finally, he cited countries such as Italy, Romania, and Spain, where tobacco harm reduction measures have been implemented, alongside efforts to combat illicit trade, as examples of how progress can be made.