British American Tobacco

…19 September 2022 RE: Reform of the Union customs legislation British American Tobacco (BAT) is a leading, multi-category consumer goods company, which employs more than 52,000 people worldwide. We have over 150 million consumer interactions every day across 175 markets (including the EU). In the EU, BAT employs more than 8,000 people and operates manufacturing facilities in seven EU Member States. We are committed to support the EU tobacco farmers by purchasing EU originating tobacco leaf from Italy, Croatia, Greece and Bulgaria. We welcome the opportunity to contribute to the call for evidence request and would like to present several near-term solutions that follow the guiding principles of a collaborative mindset across jurisdictions and organisational siloes, common standards, interoperability between systems, a data-driven culture, and flexibility to learn and adapt.

…between systems, a data-driven culture, and flexibility to learn and adapt. The proposed near-term solutions are fully in line with the conclusions of the Wise Persons Group report. We also believe that a greater collaboration between the private and public sector (EU customs and law enforcement authorities) can benefit the process for reforming the Union customs legislation. Our proposed near-term solutions are: • Removal of the customs duty ‘de Minimis’ threshold: e-commerce has created new distribution channels for illicit and counterfeit traded goods. The removal of the customs duty ‘de Minimis threshold’ should contribute to the reduction of the illicit trade supply chains. We therefore welcome the Wise Persons Group recommendation to remove the EU ‘de-Minimis’ threshold and we call on the EU Commission to implement this recommendation as soon as possible.

…the EU ‘de-Minimis’ threshold and we call on the EU Commission to implement this recommendation as soon as possible. • Enhance the EU customs risk profiles in order to detect the key inputs utilised for the increasing illicit tobacco manufacturing within the Customs Union (e.g. raw tobacco, acetate tow, cigarettes filters, etc.). Legitimate traders are expected to have a valid tax warehouse licence for the holding, movement and manufacturing Ref. Ares(2022)6452150 - 19/09/2022 of tobacco products. This information should be included as a mandatory requirement in the import customs declaration (e.g., Box 44). In order to mitigate the risks associated with illicit tobacco manufacturing and fiscal evasion, traders who fail to provide the appropriate information should be subject to additional customs and tax audits.

…traders who fail to provide the appropriate information should be subject to additional customs and tax audits. Existing IT solutions, such as the Excise Movement Control System (EMCS), should be extended to include key input materials beyond tobacco, i.e. acetate tow and cigarette filters. In addition, the EU customs authorities should strengthen their cooperation with other enforcement agencies (e.g., OLAF) to develop a comprehensive customs and regulatory framework for monitoring key input materials used in tobacco manufacturing. • The EU Commission in collaboration with the private sector should evaluate and determine whether new and emerging technologies can support the Customs Union in controlling the safety and security risks associated with the growth of e- Commerce and illicit tobacco manufacturing.

…controlling the safety and security risks associated with the growth of e- Commerce and illicit tobacco manufacturing. These new and emerging technologies may include blockchain and artificial intelligence (AI) solutions. The following sections provide further details regarding the current challenges and proposed solutions.

(AI) solutions. The following sections provide further details regarding the current challenges and proposed solutions. 1. The Challenges of Cross-Border E-Commerce 1.1. The Growth of E-Commerce in Europe Global Retail e-commerce has grown significantly over the past years as consumers increasingly choose to shop online for the greater choice and value for money. E- commerce has created new opportunities for the global economy, creating new consumption behaviours, jobs, and methods of trade. In the wake of the COVID-19 pandemic, consumers’ reliance on e-commerce has surged following the global lockdown measures. Particularly in Europe, cross-border e- commerce has doubled in value between 2019 and 2021 from €108 billion to over €220 billion1. EU companies generate around 20% of their revenues from e-commerce and European cross-border transactions are predicted to grow at twice the rate…

…estimates a five-year growth rate of over 110% for all Consumer Packaged Goods (CPG) sold online in the EU from 2019 to 2024. The fastest growing CPG categories are packaged food, soft drinks, and excisable goods such as tobacco, with compound annual growth rates of 19.4%, 19.2% and 18.4%, respectively. The changing trade environment due to the rapid expansion of cross-border e-commerce is impacting all EU Member States and a more inclusive, proactive, and innovative collaboration between the public and private sectors is required to overcome the various challenges that go along with it. 1.2. Supply Chain Challenges in The Cross-Border Trade of CPGs The proliferation of CPGs via e-commerce, coupled with the lockdown measures introduced, led to serious supply chain challenges.

…of CPGs via e-commerce, coupled with the lockdown measures introduced, led to serious supply chain challenges. As EU customs authorities and national postal operators rely on labour-intensive manual clearance of packages3, they have been struggling to cope with the increasing frequency of shipments and temporary unavailability of staff. The current, largely manual, real-time clearing process is both inefficient and prone to human error, which makes it impossible for customs authorities to check every single consignment. In addition, newly added complexities in regulations, such as the prioritisation of essential goods (i.e., COVID-19 vaccines and personal protective equipment (PPE)) over non- essential goods (such as CPGs), added pressure on EU customs authorities and postal operators.

(PPE)) over non- essential goods (such as CPGs), added pressure on EU customs authorities and postal operators. This, compounded by an inadequate integration between electronic customs declaration systems and postal services, led to significant delays and inefficiencies, effectively turning them into bottlenecks for cross-border trade. The small, low-value consignments delivered by post or express courier are the most challenging for customs to monitor as the declarations currently rely on the sender to fill in the correct information. Poor quality of information, inaccurate data (due to misdeclarations) and the lack of adequate monitoring technologies in place have made the CPG trade, and particularly the trade in excisable goods, a target for fraud, counterfeiting and illicit trade. Private entities, such as express couriers, have also been a target for fraud.

…fraud, counterfeiting and illicit trade. Private entities, such as express couriers, have also been a target for fraud. According to the OECD, law enforcement agencies have indicated a significant growth in the use of both postal and courier streams by criminal networks as a delivery method for illicit trade4. A lack of information sharing with customs authorities leads criminal networks to exploit these weaknesses and use express couriers to move counterfeit goods. 1.3. Challenges for Excisable Goods Companies and Governments Companies trading in goods with high excise duties, such as tobacco and nicotine containing products, alcohol and energy, are a major target for illicit trade.

…duties, such as tobacco and nicotine containing products, alcohol and energy, are a major target for illicit trade. Illicit trade can come from both the smuggling of products across borders without the payment of taxes (contraband) and the illegal manufacturing of such products, often with illegally produced trademarks (counterfeit). The anti-competitive practices posed by the influx of contrabands and counterfeits (whether produced domestically or smuggled) lead to losses of excise, VAT, and import tax revenues for EU Member States as well as losses in profits for businesses. EU authorities and the industry have been taking steps to collaboratively address this challenge. In 2010 for instance, EU law enforcement agencies have coupled their efforts with policies and technologies provided by the tobacco industry to reduce the number of cigarettes illegally entering the EU 5.

…and technologies provided by the tobacco industry to reduce the number of cigarettes illegally entering the EU 5. However, the reduction of smuggled cigarettes across EU borders was replaced by a growth in the illegal manufacturing of counterfeit cigarettes, manufactured within the Customs Union. In many cases consumers are tricked into buying identical looking but non-genuine products online. The KPMG ‘Project Stella’ Report, 2021 results, June 2022, shows that the majority of illicit cigarettes consumed within the EU do not conform to EU regulations, either through the health warnings printed, legal format or regulations. 58% of cigarettes were either counterfeit, or illicit whites. Counterfeits, manufactured in clandestine factories conform to no regulatory standards, whilst illicit whites are mainly manufactured in countries with weaker regulations.

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