Lithuanian Institute Blames Smuggling On High EU Taxes

by Ulrika Lomas, Tax-News,com, Brussels

31 August 2004

Lithuania was one of the ten countries joining the EU last May, and a new study from the Lithuanian Free Market Institute (LFMI) reports that increased excise taxes imposed as a result of EU membership are leading to an increase in smuggling.

Frequent changes of tax laws, numerous tax exemptions and a complicated tax collection system increase the indirect tax burden and lead to the expansion of the shadow economy, says the study. In 2003 VAT was levied on certain goods that previously had been exempt from taxation; the excise tax on tobacco is set to increase 156% by 2009; and the excise tax on liquid gas has been raised by 20 percent in 2004.

The Institute says that harmonization of excise taxation in the EU is intended to protect the interests of member states with high excise taxes at the expense of the consumers in low-excise countries (who receive lower income than the EU average as a rule). But the study says it would be preferable to reduce excise levels given that the new EU member states now have the responsibility of administering the majority of the EU's external border with less economically advanced countries which are a ready source of smuggled goods.

As part of the project, LFMI conducted a sociological survey with a view to ascertaining public opinion about smuggling of excisable goods and other taxed goods (tobacco, alcohol, fuel, and sugar), public tolerance towards smuggling, the scope and trends of smuggling, public opinion about primary and secondary causes of smuggling and about the effectiveness of public policy, administrative and legal measures designed to combat corruption and smuggling.

The survey shows that the majority of the Lithuanian population believe that the major causes of smuggling in Lithuania are price differences between Lithuania and neighbouring countries caused by high taxes (excise duties). Corruption and an overly complicated business environment were named as other important factors of smuggling. According to the survey, people in Lithuania are rather tolerant towards smuggling: nearly half of those polled (47%) completely justify or tend to justify smuggling, while the other half (47.8%) hold the opposite view. It is interesting to note that those who completely justify smuggling are twice as many as those who completely disapprove of it.

LFMI also conducted analytical research aiming to assessing existing tax, regulatory, administrative and legal aspects of the market for excisable goods and their implications for the operation and trends of the market and smuggling of excisable goods. LFMI concluded that the primary reasons for smuggling are the high prices of goods resulting from high excise duties and extensive, cumbersome and unpredictable licensing and regulation. Scrapping redundant regulation and licensing and striving for the reduction of excise duties at the EU level would serve as the most effective tool in combating smuggling.

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