The benefit of controlling smuggling is not principally that it reduces supply, but that it helps the effective implementation of price increases that reduce demand. Differences in price between countries or states will clearly increase the incentives to smuggle cigarettes. However, the determinants of smuggling appear to be more than price alone. A study prepared for this report assessed the extent to which other factors, such as general levels of corruption in a country, contribute to the size of the smuggling problem. Large-scale tobacco smuggling relies on criminal organizations, comparatively sophisticated systems for distributing smuggled cigarettes in the destination country, and a lack of control on the international movement of cigarettes.
Most smuggled cigarettes are well-known international brands.
The profits to smugglers are thus so high that they can absorb long-distance travel costs. Cigarettes are usually smuggled in transit between their country of origin and their official destination. To encourage trade between countries, a so-called transit system operates that temporarily suspends custom duties, excise, and VAT payable on goods originating in country A and bound for country B while they are in transit through countries C, D, and so on. However, many cigarettes simply fail to arrive at their destination, having been bought and sold by unofficial traders. Exported cigarettes from Canada, Brazil, and South Africa, for example, have been documented entering neighboring countries and then reappearing in their country of origin at cut-rate prices, untaxed.