Millions of dollars in revenue up in smoke after one-off tobacco duty cut
The Government lost out on almost $12 million in customs revenue after allowing a local cigarette manufacturer to pay reduced import duty on tobacco for six months, according to public records.
The Smoke Shop imported about 30,000 kilos of loose-leaf tobacco in two containers at a discount of almost 80 per cent on the normal rate, after former finance minister Curtis Dickinson granted the relief in April 2021.
Records disclosed by the Ministry of Finance under public access to information reveal that the decision resulted in “unrealised duty revenue” of $11,868,420.80 for the Government.
Health leaders spoke out on the issue yesterday, with Bermuda Health Council chief executive Ricky Brathwaite noting the multiple downsides to tobacco use, including the fact that it “kills too many people in Bermuda prematurely, leading to all kinds of irreparable harm to communities and culture”.
Dr Brathwaite said Bermuda should do all it could to prevent tobacco use from increasing in the population, including imposing high import/duty taxes. He said that such taxes raised valuable funds for public health interventions.
Lynn Woolridge, the CEO of Bermuda Cancer and Health Centre, said: “We do not support any programme that incentivises or makes concessions for the importation of tobacco into Bermuda.”
The Smoke Shop — which employs eight Bermudians and is the only cigarette manufacturer in Bermuda — would have been unable to survive without the concession, according to owner Michael Heslop, who lobbied the minister for the discount.
Mr Heslop told The Royal Gazette that he had run out of tobacco at the time and could not afford to import it at the normal duty rate of $500 per kg, so would have had to close down, letting go of his workforce.
He has now run out of tobacco again and, after failing to get permission for another concession, hopes that the Government will soon decide on a new, reduced duty rate.
“I have been chatting with government,” he said. “They want to make it work.”
The Smoke Shop began operating in 2013, when it paid a duty rate of 35 per cent on the value of the loose-leaf tobacco it imported to make cigarettes on island.
The Government eventually scrapped that and switched to a rate based on weight. It initially set the new “sin tax” at $300 per kg of tobacco to “reduce the inconsistency between duty rates on cigarettes and tobacco” and then to $500 per kg.
Mr Heslop said the rate went up after the locally made cigarettes he was selling improved in quality and grew in popularity, leading to the expansion of his manufacturing operation.
That had a knock-on effect on the number of commercially produced cigarettes being imported by other businesses, he said, thereby reducing the associated duty revenue received by the Government.
Mr Heslop said he never imported tobacco at the $300 or $500 a kg rate as it was cost prohibitive.
“We went from paying a maximum of $2,000 tax on a 240lb box of tobacco to [what would have been] $50,000.”
He was able to start importing again after Parliament approved a concessionary rate of $105 per kg and Mr Dickinson designated The Smoke Shop an “approved business” able to benefit from the relief.
“At $500 a kg, we can’t work at that rate, we would go out of business,” said Mr Heslop. “We sat down at his [Mr Dickinson’s] boardroom table and hashed out the numbers.
“I think he was right on track. What he wanted to do was come up with a number that worked for both of us. He passed the concession to give us a six-month window to stay in business.”
Mr Heslop said the concession enabled him to bring in a container containing about 15,000kg of tobacco that was already on the docks and he then ordered another container with about the same amount.
“I guess I took advantage of that,” he said, adding that he was never told there was a cap on the amount of tobacco he could import during the concession period.
He said: “There has been some lost revenue to them [the Government]. I think maybe at that time that was quite a substantial loss of revenue.”
The Royal Gazette asked David Burt, who is now the finance minister, for comment on the concession, the almost $11.9 million of “unrealised duty revenue” and the potential public health implications.
A Ministry of Finance spokeswoman responded: “Premier Burt was not the Minister of Finance when The Smoke Shop was approved for this relief.
“However, a limit on the amount of tobacco to be imported under the proposed relief formed part of the discussions at that time.
“The legislation by which this was implemented formed part of the 2021-22 Budget presented by the former Minister of Finance.”
In response to further questions on the “limit” and whether there was a formal cap on how much tobacco could be imported, she replied: “The discussions were internal.”
Mr Heslop did not have exact figures at hand for the duty on his two containers but the Gazette calculates that The Smoke Shop paid the Government slightly less than $3.2 million. The company would have paid about $15 million under the normal duty rate.
Packs of Smoke Shop cigarettes sell for several dollars less than the mass-produced cigarettes imported by other companies, including Pitt & Company, a sister firm to BGA wholesale distributor, which is owned by businessman Wendell Brown.
The records released under Pati show that Pitt & Co asked for a meeting with home affairs minister Walter Roban in July last year to discuss tobacco matters.
Mr Roban referred the company to Mr Burt, who is responsible for customs tariffs.
Many of the records released in response to the Gazette’s Pati request were redacted by the ministry. Some records were withheld altogether, including e-mails between the Government and Pitt & Co and the Government and The Smoke Shop.
One that was disclosed from government backbencher Jache Adams, an adviser to the Premier in the finance ministry, shows that Mr Burt “urgently” requested a policy proposal from civil servants on tobacco matters last May.
Keeping Bermudians in work was the rationale Curtis Dickinson, then the Minister of Finance, gave the House of Assembly in March 2021, when he slashed the duty rate on imported tobacco in the Customs Tariff Amendment Act.
He said a concessionary rate of $105 per kg for loose-leaf tobacco — 79 per cent less than the normal rate — was “intended to assist local commercial manufacturers of cigarettes and cigars to maintain competitive pricing of their products in relation to imported cigarettes and cigars, and thereby continue to employ Bermudian workers in local manufactories”.
Mr Dickinson made The Smoke Shop an “approved business” able to benefit from the concession for a temporary six-month period. The finance minister has the power to make the designation with a notice in the Official Gazette, without having to seek MPs' approval.
Ricky Brathwaite, the chief executive of the Bermuda Health council, said yesterday that the health council was not formally consulted on the concession.
He said tobacco use caused a “disproportionate health and economic burden”.
Dr Brathwaite added: “While some may argue that the sale of tobacco products and supplies creates jobs and opportunities for employment, there is adequate evidence to point out that such marginal economic gains are a far cry from balancing out all the economic, health and emotional destruction that tobacco use causes.”
Importers of mass-produced cigarettes pay duty of 40 cents per cigarette.
The Gazette calculates that The Smoke Shop paid about 12.3 cents per cigarette in duty under the concession, assuming tobacco wastage of 15 per cent. At the normal duty rate of $500 per kg, it would have had to pay almost 59 cents a cigarette.
The records disclosed under Pati include e-mails between civil servants about whether the duty rate for tobacco should change. In one, senior civil servant Jennifer Attride-Stirling suggests the status quo should remain “in order to ensure parity among tobacco importers”.
The Assistant Collector of Customs replies: “Parity among tobacco importers is very likely to cause local manufacturing of tobacco products to cease, resulting in job losses.”
The e-mail, which was partially redacted before release, continues: “… Customs would prefer to have an excise duty on production, rather than a continuation of the concessionary rate.”
Excise duties are usually levied to discourage the purchase of certain goods, including those harmful to health.
Mr Heslop said discussions within government about taxation on importing tobacco had been going on for some time and he was hopeful the issue would be resolved soon.
“It’s quite difficult to work out a fair tax,” he said. “That has been the issue.
“It’s a sensitive subject. There is not much empathy because most people are against smoking.”
John Tomlinson, the president and CEO of BGA, declined to comment for this article.
• To view the records released under Pati and the Ministry of Finance’s reasons for not disclosing certain records, click on the PDFs under Related Media.
TheRoyal Gazette asked David Burt, the Premier and the Minister of Finance:
• How many jobs held by Bermudians were saved because of the decision to grant a concessionary rate to The Smoke Shop in 2021
• If he was concerned that The Smoke Shop brought in such a large amount of tobacco, bearing in mind Bermuda's small population
• If it was a good idea to make it cheaper to import tobacco in light of the growth in cancer caused by tobacco use "which has placed strain on Bermuda's health system capacity" (per the Government's health strategy 2022-27)
• If he was concerned that the decision to grant the concession, while possibly helping a small number of Bermudians employed at The Smoke Shop, was not in the best interests of the wider community, public health and the public purse
• What solution to taxation of local tobacco manufacturing was being considered by the Government
• If he would grant The Smoke Shop another temporary concessionary period to enable it to stay in business
• What representations had been made to him from importers of commercially produced cigarettes and how that would influence government policy
• If he had met Wendell Brown and Pitt & Co to discuss taxation on tobacco measures after the company wrote to the Government.
A finance ministry spokeswoman responded that Mr Burt was not finance minister at the time the concession was granted but that “... a limit on the amount of tobacco to be imported under the proposed relief formed part of the discussions at that time”.
She said the customs relief was granted under the Customs Tariff Amendment Act 2021 using a code that set the concessionary rate of duty at $105 per kg of tobacco for any “approved business”.
The spokeswoman said The Smoke Shop was approved for the relief and was the only business to benefit from the code.
She said the discussions about a limit on the amount of tobacco to be imported were “internal”.
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