Tax avoidance and illicit production and distribution
Tobacco taxes and tax systems may create financial incentives for those who engage in legal and illegal activities to either reduce (tax avoidance) or completely avoid tax liabilities (tax evasion). However, research has demonstrated that a variety of other factors such as corruption, weak customs, slow judicial process, low penalties and lack of communication and collaboration between neighboring countries are of equal or greater importance in explaining the extent of these activities. At the end, public health and also governments pay a high price because both avoidance and evasion activities undermine tobacco control efforts and cost governments significant revenue losses.
Tax avoidance is a legal activity that enables either producers of tobacco products or individuals to reduce their tax liabilities. On one hand, tax systems create loopholes for the producers to engage in tax avoidance, for example, by differentiating the brands' characteristics towards lower tax brackets. On the other hand, tax differentials create incentive for individuals to purchase tobacco products for personal consumption from lower tax jurisdictions within legal quantity limits.