The upcoming entry into force of the agreement between the EU and the United Kingdom on Gibraltar threatens to reactivate one of the most serious problems in Campo de Gibraltar and the whole of Andalusia, this being the massive diversion of tobacco and other nicotine products towards illicit trade. The concern is that, although the treaty pursues a more fluid coexistence and a border with fewer barriers, taxes will continue to be lower in Gibraltar than in Spain, which will be a great and clear economic incentive for smuggling in the region.
To understand it better, the difference is that while in cigarettes the agreement sets for Gibraltar a minimum of 115 euros per 1,000 units, for Spain the current effective charge exceeds 167 euros, that is, 52 euros more. Furthermore, the Gibraltar indirect tax will start at 15% and will only increase progressively, while in Spain it is at 21%. In this way, when two neighboring markets sell almost the same product with such a short distance, but very wide in fiscal terms (taxes), the pressure ends up transferring to the street.
Concern grows because the agreement introduces price caps for cigarettes, but leaves other segments more exposed. In this sense, products such as heated tobacco, cigarettes or some bags of nicotine could become the new gateway for fraud. In other words, the risk does not disappear, since it simply changes the product and format.
A more open border, but with an intact incentive
The design of the agreement provides for a transitional period with customs formalities and controls, in addition to requiring a tobacco traceability system equivalent to that of the EU. However, the underlying problem is not resolved immediately. Since trade opening advances faster than fiscal convergence, and that asymmetry is the key piece that explains the sector’s alarm.
According to The EconomistAndalusian tobacconists fear that this combination will multiply the pressure on legal trade. If the product reaches the other side cheaper and circulation becomes more fluid, the attractiveness for illicit distribution networks increases. In this way, price advantage can become the main driver of smuggling, especially in an area that has known this phenomenon for decades.
The fear of returning to the worst years
Estimates used by the sector suggest that, in the best case scenario, illicit trade could double. At worst, some Andalusian provinces could return to figures close to 40% of the market, as occurred in past stages. That would mean hundreds of millions of cigarettes outside the legal circuit and an annual loss of more than 100 million euros in collection between excise taxes and VAT. Therefore, the consequence would not only be fiscal, it would also affect tobacconists, employment and economic activity in the region.