Illicit Tobacco Consumption in TÜRKIYE

Report by Oxford Economics December 2022

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Disclaimer

This report has been prepared by Oxford Economics. Oxford Economics enjoyed academic freedom and full editorial control of the report. We are grateful for the inputs and data received from industry stakeholders.

Oxford Economics prepared the report in accordance with specific terms of reference agreed with Philip Morris Products SA. Financial support for the report was provided by Philip Morris Products SA. Oxford Economics assumes all responsibility for the report analysis, findings and conclusion.

Scope of the report

Illicit Tobacco Consumption in Türkiye

The primary objective of this report is to provide an independent and robust assessment of the scale of Illicit Consumption of cigarettes and Cut Tobacco in Türkiye, and how this has changed in recent years. The purpose of this report is to:

• Establish illicit incidence levels for tobacco products in Türkiye, covering both cigarettes and Cut Tobacco;

• Estimate the volume of Illicit Consumption, informed by insights from market research conducted by independent research agencies on Cut Tobacco consumption and details from Empty Pack Surveys (EPS) to estimate a breakdown of cigarette consumption by origin;

• Estimate the annual government Tax Loss from foregone Excise Tax and VAT receipts due to Illicit Consumption.

Estimates cover the period from 2017 to the first six months of 2022 (H1) for cigarettes and due to data availability constraints, from 2019 to the first six months of 2022 (H1) for Cut Tobacco and the total tobacco market.

About us

Oxford Economics was founded in 1981 as a commercial venture with Oxford University’s business college to provide economic forecasting and modelling to UK companies and financial institutions expanding abroad. Since then, we have become one of the world’s foremost independent global advisory firms, providing reports, forecasts and analytical tools on 200 countries, 100 industrial sectors, and over 3,000 cities. Our best-ofclass global economic and industry models and analytical tools give us an unparalleled ability to forecast external market trends and assess their economic, social, and business impact.

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O XFORD ECONOMICS

Illicit Tobacco Consumption in Türkiye

About us 3
Contents 5
Glossary of Terms 6
Executive Summary 7
Macroeconomic Context 8
Overview of Tobacco Market 10
Cigarette Consumption 12
Cross-border Cigarette Trade 14
Cut Tobacco Consumption 16
Illicit Consumption of Tobacco Products 18
Tobacco Taxation Structure in Türkiye 19
Tax Loss due to Illicit Consumption 20
Tax Loss due to Illicit Consumption by Products 21
Appendix A: Cigarette Methodology 22
Appendix B: Cut Tobacco Methodology 23

Glossary of Terms

Average Daily Consumption: Average number of cigarettes consumed per day per smoker.

Bn: Billion.

Cigarette-equivalent: Unit of measurement that refers to either a factory-made cigarette or a stick of Cut Tobacco product.

Counterfeit Cigarettes: Cigarettes that are illegally manufactured and sold without permission of the trademark rights holder.

Cut Tobacco: Tobacco cut into thin shreds as used in cigarettes, often for pipes and for rolling. Within the scope of this report, we focus on fine-Cut Tobacco injected into tubes (macarons) or sold in packages to roll by the customers.

Domestic Illicit: Tobacco products (factor-made cigarettes or Cut Tobacco) that are produced for the domestic market but are not duty-paying.

Duty-Free: Consumers may buy Duty-Free products when travelling into or out of the country by land, air, or sea at legal Duty-Free shops up to the legal limit.

Empty Pack Survey (EPS): Studies conducted by independent research agencies, during which agencies collect empty packs discarded by smokers in public places, recording brands and origins. Samples are analysed for authenticity by forensic experts of participating companies. EPS results are used to estimate the shares of domestic and nondomestic consumption (genuine from other countries and counterfeit) in the market.

Excise Tax: An indirect tax on the consumption of certain goods. Excise Taxes can be either specific, i.e., expressed as a monetary amount per quantity/ weight of the product; ad-valorem, i.e., expressed as a proportion of the value of a product; or a combination of both.

H1: Half one (of the calendar year).

TL: Turkish Lira.

Illicit Consumption: Sum of Domestic Illicit and Non-Domestic Illicit.

Inflows/Outflows: Inflows/Outflows of product into/ from a market.

Legal Domestic Consumption: Defined as Legal Domestic Sales net of Outflows.

Legal Domestic Sales: Sales of genuine domestic taxpaid product through legitimate, domestic channels.

Market Share: The proportion of total sales, expressed as a percentage, accounted for by a particular company, product or brand.

Mn: Million.

Non-Domestic: Product not originally intended for the market in which it is consumed.

Non-Domestic Illicit: Contraband, counterfeit and imports of other illicit tobacco products.

Non-Domestic Legal: Product that is brought into the market legally by consumers, such as during a cross-border trip, subject to Duty-Free allowances as applicable.

Executive Summary

Increasing consumption of illicit Cut Tobacco has driven higher Total Consumption of tobacco products

• Total Consumption of Cut Tobacco in Türkiye almost doubled to 29,427mn Cigarettes-equivalent in 2021, from 16,423mn Cigarettes-equivalent in 2019. Cut Tobacco as a share of Total Consumption also increased from 11.9% in 2019 to reach 18.9% in 2021. In the first six months of 2022, this share rose to 26.1%.

• Total Consumption of cigarettes has remained stable. During the 2019-21 period when estimates for both cigarette and Cut Tobacco consumption are available, annual consumption of cigarettes averaged at 120,646mn cigarettes.

• Total Consumption of tobacco products (including manufactured cigarettes and Cut Tobacco) has steadily increased in recent years, largely driven by illicit Cut Tobacco consumption. Total Consumption increased by 18,037mn Cigarettes-equivalent between 2019 and 2021, rising from 137,461mn Cigarettesequivalent in 2019 to 155,498mn Cigarettes-equivalent in 2021.

Illicit Consumption has also picked up due to Illicit Consumption of Cut Tobacco

• Illicit Consumption accounted for approximately 94% of Total Consumption of Cut Tobacco between 2019-21. Among all tobacco products, Cut Tobacco accounts for approximately 91.3% of Illicit Consumption between 2019 and 2021.

• Illicit Consumption as a share of Total Consumption of cigarettes fell from 2.1% in 2019 to 0.9% in 2020 before rising again to 4.6% in 2022 H1. Iran and Iraq are identified as the major origins of illicit cigarettes in Türkiye, accounting for 98% of Illicit Consumption of cigarettes in 2022 H1.

• Illicit Consumption as a share of Total Consumption of tobacco products steadily increased to 18.6% in 2021, from 13.5% in 2019. This increase reflects the rising popularity of Cut Tobacco, which has a much higher illicit incidence rate. In the first six months of 2022, the illicit incidence continue to grow sharply to 27.9%, representing 21,624m Cigarettes-equivalent.

Tax Loss due to Illicit Consumption of tobacco products has increased in recent years

• Total Tax Loss due to Illicit Consumption of tobacco products reached TL 18,327mn in 2021, almost doubling from TL 9,744mn in 2019.

• Illicit Cut Tobacco accounted for 86.4-95.9% of annual Tax Loss during the 2019-21 period. In absolute term, Tax Loss due to illicit Cut Tobacco consumption doubled from TL 8,419mn in 2019 to TL 16,773mn in 2021.

• In the first six months of 2022, estimated Tax Loss from Illicit Consumption amounted to TL 21,326mn, surpassing the total amount of Tax Loss incurred in the whole of 2021.

Macroeconomic Context

The Turkish economy has faced significant challenges in recent years

Real household disposable income has declined by almost 20% since 2017, which is the starting year for the analysis included in this study. After the rebound in 2021 due to the immediate recovery from COVID-19 lockdowns, household disposable income again dropped in 2022 to the level observed in 2020 at the height of the COVID-19 pandemic. Oxford Economics forecast suggests that consumer prices are expected to rise by 72.8% in 2022, the fastest rate since mid-1998. Against this backdrop, the cost-of-living crisis has become a serious concern. An interview conducted with Professor Uğur Emek at Başkent Üniversitesi as part of this study suggests that the challenging economic conditions and higher prices have contributed to an uptick in Illicit Trade across a range of goods such as fuel, drugs and tobacco.

Average real household disposable income

100=2017 level

Source: Oxford Economics/Haver Analytics
Consumer prices are expected to increase by

in 2022 overall

Source: PMI

The price of tobacco products increased significantly in 2022, especially for cigarettes

In this inflationary economic context, the weighted average price for a pack of 20 factory-made cigarettes quickly increased in 2022, reaching TL 28.7 a pack by July 2022. Previously, the weighted average price remained stable between 2019 Q3 and 2021 Q3, reaching TL 15.7 in July 2021. This change reflected an 83.3% year-on-year hike, or an increase of TL 13.1 per pack, in the price of cigarettes.

The price for Illicit Cut Tobacco products has also increased, albeit at much slower pace. In the summer of 2021, consumer research suggests that a pack of 20 pre-made macarons cost TL 8.7. By July 2022, the price for 20 pre-made macarons increased to TL 11.5, a TL 3.3 increase per pack.

Quarterly Cigarette Prices

Weighted Average Prices in Turkish Lira

Average price of cigarettes increased by

year-on-year by July 2022

Overview of Tobacco Market

Total Consumption has increased in recent years

Total Consumption of tobacco products (including manufactured cigarettes and Cut Tobacco) has steadily increased in recent years. Total Consumption has increased from 137,461mn Cigarettes-equivalent in 2019 to 155,498mn Cigarettes-equivalent in 2021. This increase in Total Consumption is dominated by the growth of Cut Tobacco market whose consumption grew from 16,423mn Cigarettes-equivalent in 2019 to 29,427mn Cigarettesequivalent in 2021, the majority of which is illicit. In the first six months of 2022, Cut Tobacco accounted for 26.1% of Total Consumption, up from 11.9% in 2019.

Total Consumption of Tobacco Products

Cigarettes equivalent, mn

Source: Oxford Economics
Cut Tobacco consumption accounted for

of Total Consumption in 2022 H1

Illicit Consumption has also increased

Over recent years, Illicit Consumption of tobacco products has increased significantly. Illicit Consumption as a share of Total Consumption increased from 13.5% in 2019 to 27.9% in 2022 H1. At the same time, market research suggests that smoker prevalence in Türkiye has remained relatively stable at around 37.1% between 2019 and 2022.1 A key driver of the increase in Total Consumption is due to the rising prevalence of Cut Tobacco users, who tend to smoke more per day than users of factory-made cigarettes. Market research in May-August 2022 suggests that Average Daily Consumption (ADC) per Cut Tobacco user reached 20.8 Cigarettes-equivalent, higher than the ADC of cigarette smokers at 19.3.

Smoker Prevalence and Illicit Consumption

Weighted Average Prices in Turkish Lira

Source: PMI and Oxford Economics analysis
Illicit Consumption of tobacco products has increased to

1 Based on recent surveys, this figure provides more recent picture of smoker prevalence in Türkiye compared to estimates from WHO using the Global Adult Tobacco Survey (whose latest data dated 2016). This figure includes users of all combustible tobacco categories, i.e. factorymade cigarettes, fine Cut Tobacco, cigarillo, pipe and water pipe.

in 2022

Cigarette Consumption

Total Consumption of cigarettes has remained stable

Total Consumption averaged at 121,444mn cigarettes annually between 2017-21, ranging from 114,827mn in 2020 to 127,219mn in 2018. Cigarette consumption in Türkiye is predominantly domestic. Indeed, based on EPS analysis, between 2017 and 2022 H1, Non-Domestic incidence in Türkiye decreased from 11.3% in 2017 to 0.9% in 2020. The drop in 2020 reflects not only Covid-related travel restrictions that limited the Inflows of cigarettes from other countries but also a long-term decline since 2017. The Non-Domestic incidence has since rebounded, reaching 2.1% in 2021 and 5.0% in 2022 H1.

Total cigarette consumption breakdown

Cigarettes, mn

Source: Oxford Economics, EPS analysis
Illicit Consumption of cigarettes in the first six months of 2022 reached

which surpassed Illicit Consumption for all of 2021

Total cigarette consumption breakdown

(Cigarettes, mn, unless specified)

Illicit Consumption has rebounded since 2021

Illicit Consumption of cigarettes as a share of Total Consumption fell sharply from 10.6% in 2017 to 0.9% in 2020. However, the illicit incidence rate then rose again to 1.9% in 2021 and 4.6% in 2022 H1. In volume terms, Illicit Consumption of cigarettes peaked at 12,521m cigarettes in 2017. The illicit volume fell steadily to 1,042m cigarettes in 2020 before rebounding to 2,451m cigarette in 2021. In the first six months of 2022, Illicit Consumption is estimated at 2,624m, which is already higher than total Illicit Consumption for the whole of 2021.

	2017	2018	2019	2020	2021	2022 H1
Legal Domestic SalesOutflows	106,223	118,501	119,748	114,776	125,109	55,453
Legal Domestic SalesOutflows	1,527	1,7	1,601	1,029	1,681	1,023
Legal Domestic Consumption	104,697	117,114	118,147	113,747	123,428	54,430
Total Non-DomesticNon-Domestic LegalNon-Domestic llicit	13,369	10,15	2,891	1,081	2,643	2,841
	849	814	368	39	193	216
	12,521	9,291	2,523	1,042	2,451	2,624
Total Consumption	118,066	127,219	121,038	114,827	126,071	57,271
Illicit as % Total Consumption	10.6%	7.3%	2.1%	0.9%	1.9%	4.6%

Source: Oxford Economics, EPS analysis

Cross-border Cigarette Trade

After analysing the origin structure of Non-Domestic Inflows to Türkiye and netting off Non-Domestic Legal Inflows (see Appendix A for full methodological details), Iran and Iraq have been identified as the major origins of illicit cigarettes being consumed within Türkiye. Their combined share as origins of illicit cigarettes (excluding counterfeits with unidentified origins) has risen significantly over recent years, from 85.3% in 2017 to 98.4% in 2022 H1. In particular, Iran is the top source for illicit cigarettes, accounting for 49.4% of total Illicit Consumption in 2017, rising to 92.9% in 2022 H1. Other notable origins of illicit Inflows to Türkiye over recent years include Uzbekistan, Georgia, Kyrgyzstan, Ukraine, Armenia and Syria, albeit their prominence has faded significantly in recent years.

Illicit Consumption of cigarettes by origin

% Total Illicit Consumption (excluding counterfeits)

Source: Oxford Economics, EPS analysis
Cigarettes originating from Iran and Iraq accounted for

of total Illicit Consumption in the first half of 2022

Price differentials across countries can help explain the sources of cigarette inflows to Türkiye. The cheapest brand 20-cigarette pack retailed at \$1.58 in 2020 in Türkiye. This price was significantly higher than in Türkiye’s Eastern neighbours (Iran, Azerbaijan, Georgia, Armenia and Iraq). At the same time, our analysis of cross-country EPS data suggests that cigarettes of Turkish variant mostly arrive to Western European countries with higher cigarette prices such as France, Netherlands and the United Kingdom. Outflows typically accounted for 0.9-1.4% of Legal Domestic Sales in Türkiye between 2017 and 2021.

Cigarette retail price and inflows of illicit cigarettes to Türkiye

Price per pack (20) of the cheapest brand in 2020 (US\$)

Cut Tobacco Consumption

Cut Tobacco consumption has increased in recent years

Türkiye is a major producer of tobacco, with over 50,000 farmers producing almost 80,000 tons of leaf tobacco in 2020 (BETAM, 2020)1 . While most tobacco is grown through contract production, the share of tobacco grown without a contract or grown over the specified contracted amount has grown in recent years. Some farmers then sell the tobacco to intermediaries who participate in a complex illicit supply chain of Cut Tobacco. Illegal producers of Cut Tobacco products can purchase tobacco in bulk from wholesale markets and sell it in smaller illicit packages or inject them into macarons (BETAM, 2020)2 .

We estimate that Total Consumption of Cut Tobacco in Türkiye almost doubled to 29,427mn Cigarettes-equivalent in 2021, from 16,423m Cigarettes-equivalent in 2019. An interview conducted with Professor Uğur Emek at Başkent Üniversitesi suggests that the increase in Cut Tobacco consumption is largely driven by the increasing price gap between Cut Tobacco products and factory-made cigarettes, the expanded Cut Tobacco supply chain and the difficult economic condition in Türkiye.

Total Cut Tobacco Consumption breakdown

Cigarettes-equivalent, mn

Total Consumption of Cut Tobacco reached

Cigarettes-equivalent in 2021

Source: Oxford Economics

2 ibid.

The vast majority of Cut Tobacco consumption is illicit

The illicit incidence of Cut Tobacco consumption decreased from 97.6% in 2019 to 89.9% in 2021, driven by a slight increase in the share of duty-paid consumption by the domestic population according to insights from market research. However, this ratio increased again in 2022 H1 to reach 93.8%. In addition to being more affordable than cigarettes, the availability of illicit Cut Tobacco products also contributed to their growing prevalence. For example, prefilled macarons are available on internet platforms and at tobacconist outlets, who typically only have operating permits to sell souvenirs. The number of these outlets has increased from around 6,000 in 2016 to around 20,000 in 2020 (BETAM, 2020) 1 .

Total Cut Tobacco Consumption breakdown

(Cigarettes-equivalent, mn, unless specified)

	2019	2020	2021	2022 H1
Legal Consumption Domestic Legal Non-Domestic Legal	392345	1,5341,519	2,9762,948	1,2521,236
Legal Consumption Domestic Legal Non-Domestic Legal	47	16	29	16
Illicit Consumption	16,030	24,476	26,450	18,999
Total Consumption	16,423	26,010	29,427	20,251
Illicit as % Total Consumption	97.6%	94.1%	89.9%	93.8%

Source: Oxford Economics, consumer research surveys

1 BETAM (2020) An analysis of the illegal trade of alcoholic beverages, cigarettes and tobacco, fuel and mobile phones in Turkey, https://betam.bahcesehir.edu.tr/en/2021/05/an-analysis-of-the-illegal-trade-of-alcoholicbeverages-cigarettes-and-tobacco-fuel-and-mobile-phones-in-turkey/

Illicit Consumption of Tobacco Products

The composition of tobacco consumption has shifted towards Cut Tobacco

Cut Tobacco as a share of Total Consumption increased from 11.9% in 2019 to reach 18.9% in 2021. In the first six months of 2022, this share rose further to 26.1%. The widening price gap between factory-made cigarettes and Cut Tobacco products has likely contributed to this trend. In 2021, consumer research suggested that a pack of 20 premade macarons had cost TL 7.0 less than a pack of 20 factory-made cigarettes (weighted average prices) in July 2021. By July 2022, this price gap had widened to TL 17.2.

Total Consumption

(Cigarettes-equivalent, mn, unless specified)

	2019	2020	2021	2022 H1
Legal ConsumptionCigaretteCut Tobacco	118,908	115,320	126,597	55,898
	118,516	113,786	123,621	54,646
	392	1,534	2,976	1,252
Illicit ConsumptionCigaretteCut Tobacco	18,553	25,518	28,901	21,624
	2,523	1,042	2,451	2,624
	16,030	24,476	26,450	18,999
Total ConsumptionCigaretteCut TobaccoCut tobacco as % Total Consumption	137,461	140,838	155,498	77,522
	121,038	114,827	126,071	57,271
	16,423	26,010	29,427	20,251
	11.9%	18.5%	18.9%	26.1%
lllicit Incidence as % Total Consumption	13.5%	18.1%	18.6%	27.9%

Source: Oxford Economics

Illicit Consumption of Cut Tobacco accounted for

of total Illicit Consumption between 2019 and 2021

Cut Tobacco accounts for most of Illicit Consumption

Illicit Consumption as a share of Total Consumption among tobacco products (cigarettes and Cut Tobacco) steadily increased from 13.5% in 2019 to 18.6% in 2021. This share is comparable to previous media reporting1 , which estimated the Illicit Incidence in Türkiye at around 20% of Total Consumption in 2020. In the first six months of 2022, illicit incidence grew sharply to 28%, representing 21,624mn Cigarettes-equivalent.

Cut Tobacco accounted for approximately 91.3% of Illicit Consumption of tobacco products between 2019 and 2021. During this period, Illicit Consumption of all tobacco products increased by 10,347mn Cigarettes-equivalent. Driving this trend, Illicit Consumption of Cut Tobacco increased by 10,420mn Cigarettesequivalent while Illicit Consumption of cigarettes declined slightly.

Tobacco Taxation Structure in Türkiye

Türkiye applies a mixed Excise Tax system to cigarettes, composed of both a specific and an ad-valorem component. The ad-valorem component is comprised of a rate of 63.0%. The specific component was charged at TL 0.715 per pack of 20 cigarettes in February 2022. In addition, a minimum Excise Tax of TL 14.394 per pack of 20 cigarettes applies, which is the rate payable if the ad-valorem component of the retail price falls below this minimum Excise Tax threshold.

Cut Tobacco is subject to a similar Excise Tax structure but at different rates compared to taxes on cigarettes. Up until 2019, the ad-valorem component for Cut Tobacco was applied at a rate of 63.0%, the same rate to the advalorem tax applied to cigarettes. In March 2020, this rate was decreased to 40.0% which created significant scope for large tax differentials between Cut Tobacco products and factory-made cigarettes. By April 2022, the ad-valorem tax rate had been adjusted to 55.0%.

The specific component of Excise Tax for Cut Tobacco has been set at TL 0.921 per 50 grams of Cut Tobacco since May 2022, following a sharp increase in January 2022. For comparison, the specific component tax on Cut Tobacco is equivalent to a rate of TL 0.269 for a pack of 20 cigarettes, compared to TL 0.714 for factory-made cigarettes. Furthermore, a minimum Excise Tax applies at the rate of TL 0.101 per gram – equivalent to TL 1.418 per pack of 20 cigarettes.

Both cigarettes and Cut Tobacco products are subject to VAT at a rate of 18.0%, in common with most goods and services in Türkiye.

Ad-valorem excise tax for tobacco products

Source: PMI

In June 2022, the ad-valorem Excise Tax applied to Cut Tobacco was

compared to a rate of 63.0% applied to factory-made cigarettes

Tax Loss due to Illicit Consumption

The total Tax Loss due to Illicit Consumption of tobacco products has rapidly increased in recent years. Total Tax Loss amounted to an estimated TL 18,327mn in the full calendar year of 2021, almost doubling from TL 9,744mn in 2019. Relatively, Tax Loss due to Illicit Consumption represented about 21.5% of total tax revenues collected in 2021 from Legal Domestic Consumption. This ratio was lower at 15.8% in 2019.

Cut Tobacco accounted for 86.4-95.9% of annual Tax Loss due to illicit tobacco consumption between 2019 and 2021. In absolute term, Tax Loss due to illicit Cut Tobacco consumption doubled from TL 9,744mn in 2019 to TL 21,326mn in 2021.

In the first six months of 2022, estimated Tax Loss from Illicit Trade amounted to TL 21,326mn, surpassing the total amount of Tax Loss incurred in the whole of 2021. This was driven by strong growth in Illicit Consumption of both cigarettes and Cut Tobacco. Their increased prices also contributed to the higher Tax Loss due to Illicit Consumption. In particular, Tax Loss due to Illicit Consumption of cigarettes reached TL 2,588mn in the first half of 2022, a 66.6% increase from 2021 (TL 1,554mn).

Tax Loss in the first half of 2022 was estimated at

Turkish Lira, which surpassed estimated Tax Loss for the whole of 2021

Estimated Tax Loss due to Illicit Trade

Source: Oxford Economics

Tax Loss due to Illicit Consumption by Products

Cigarette Tax Revenues and estimated Tax Loss

	2017	2018	2019	2020	2021	2022 H1
Legal Domestic Sales (Cigarettes, mn) Total tax revenues (TL, mn) Excise Tax (TL, mn)VAT (ILS, mn)	106,223	118,501	119,748	114,776	125,109	55,453
	45,806	52,388	61,308	75,354	83,242	50,782
	37,427	42,725	50,5	61,801	67,620	41,286
	8,379	9,664	10,950	13,552	15,622	9,496
Illicit Consumption (Cigarettes, mn)Estimated Tax Loss (TL, mn)Excise Tax (TL, mn)VAT (ILS, mn)	12,521	9,291	2,523	1,042	2,451	2,624
	5,515	4,059	1,325	675	1,554	2,588
	4,508	3,312	1,090	554	1,262	2,1
	1,007	747	235	121	292	486

Cut Tobacco Tax Revenues and estimated Tax Loss

Legal Consumption (Cigarettes-equivalent, mn) Total tax revenues (TL, mn)Excise Tax (TL, mn)VAT (ILS, mn)Illicit Consumption (Cigarettes-equivalent, mn)Estimated Tax Loss (TL, mn)Excise Tax (TL, mn)VAT (ILS, mn)	2017	2018	2019	2020	2021	2022 H1
			392	1,534	2,976	1,252
			206	994	1,887	1,234
			169	816	1,533	1,002
			37	178	355	232
			16,030	24,476	26,450	18,999
			8,419	15,865	16,773	18,737
			6,923	13,025	13,619	15,216
			1,496	2,840	3,154	3,522

Total estimated Tax Loss (Cigarettes and Cut Tobacco combined)

Total estimated Tax Loss (TL, mn)			9,744	16,540	18,327	21,26
Total Tax Loss as % collected tax revenues			15.8%	21.7%	21.5%	41.0%

Source: Oxford Economics, EPS analysis, Market research surveys

Appendix A: Cigarette Methodology

• Estimates of Legal Domestic Sales are based on in-market sales data provided by PMI.

• Outflows of Legal Domestic Sales are then netted off. Genuine cigarettes of Turkish market variant were detected in the Empty Pack Surveys (EPS) of other countries. We derive Legal outflows from Türkiye to these markets by combining in-market sales and EPS data in each destination.

• The EPS collects discarded empty cigarette packs from streets and public bins in major cities. Collected packs are analyzed by forensic teams of the participating companies to ascertain authenticity and provenance. The results of the collection are used to estimate the shares of legal domestic (duty paid) and non‐domestic consumption (genuine from other countries and counterfeit) in the market. In Türkiye, EPS are conducted by the independent market research agency NielsenIQ and are commissioned by the participating manufacturers. The sampling plan is designed by the agency to make the sample statistically representative of consumption in the country. The survey is conducted 3 times a year (Q2, Q3, Q4) collecting 10 000 packs from 36 largest cities in Türkiye.

• Legal Domestic Consumption equals Legal Domestic Sales less Outflows.

• Total Consumption is estimated via the Türkiye EPS, whereby an implied Non-Domestic incidence rate is calculated and applied to Legal Domestic Consumption. The difference between Total Consumption and Legal Domestic Consumption is equal to Non-Domestic.

• Total Non-Domestic is then split into Non-Domestic Legal and Non-Domestic Illicit.

• Non-Domestic Legal is estimated based on passenger data, adult population shares, smoking rates, and passenger Duty-Free personal import allowances. Flows in excess of estimated Non-Domestic Legal by origin are deemed illicit.

• Inbound and outbound passenger data was sourced from Tourism Economics (a sister company of Oxford Economics) and includes the impact of Covid-19 on passenger flows due to travel restrictions etc.

• Non-Domestic Illicit is then calculated as the difference between Total Non-Domestic and Non-Domestic Legal.

• Industry intelligence has ascertained that Domestic Illicit is negligible.

• To calculate the Tax Loss due to Illicit Consumption, we apply the average tax rates between factory-made cigarettes and Cut Tobacco products weighted by the Legal Domestic Consumption of each category. This method is consistent with previous estimates of Tax Loss due to Illicit Consumption of tobacco in Australia, where a significant Cut Tobacco market also exists, by Oxford Economics (2021) and KPMG (2016).

Appendix B: Cut Tobacco Methodology

• Total Consumption of Cut Tobacco is modelled as the sum of consumption by the domestic population and tourists.

• Total Consumption by the domestic population is calculated separately for each category of Cut Tobacco consumption – for consumption of Roll-Your Own (RYO) and Make Your Own (MYO) products, and consumption of pre-made products. Market research conducted by NielsenIQ and commissioned by PMI inform the assumptions over prevalence and average daily consumption for each Cut Tobacco category. Market research conducted by Kantar for PMI inform the assumptions over prevalence of Cut Tobacco users. The size of adult population was sourced from UN World Population Prospects 2022.

• Total Consumption by tourists is calculated separately for each country of origin based on estimated origin specific prevalence and data on average daily consumption assumptions. Total Consumption by tourists is not split out into RYO/ MYO and pre-made given data constraints.

• Legal Consumption splits into three categories: (i) Legal Consumption by the domestic population; (ii) Legal Consumption by tourists from countries with higher tobacco prices; and (iii) Non-Domestic Legal Consumption by inbound tourists and Turks returning from abroad, up to the Duty-Free allowance. The first two categories constitute Domestic Legal consumption while the third category makes up Non-Domestic Legal consumption.

• Duty Paid Consumption by the domestic population is calculated by applying duty paid shares of consumption among RYO/MYO products (based on the consumer research) to the equivalent consumption level. All consumption of premade products are assumed to be illegal.

• Non-Domestic Legal by Turks abroad refers to Turkish Cut Tobacco users travelling abroad to countries with cheaper tobacco prices and bringing OTP back into Türkiye with them. It is assumed that given the price dynamics, they purchase a volume of OTP in line with the full duty-free allowance. This estimate is based on outbound passenger data adjusted for population of legal age, Cut Tobacco smoking prevalence and the duty-free allowance.

• Non-Domestic Legal by inbound tourists refers to tourists coming to Türkiye from countries with cheaper tobacco prices and bringing OTP into Türkiye to use for the duration of their stay. It is assumed that given the price dynamics, they bring a volume of tobacco consistent with what they can reasonably consume during their stay in Türkiye.

• Total Illicit Consumption is calculated as the difference between Total Consumption and Legal Consumption.

• To calculate the Tax Loss due to Illicit Consumption of Cut Tobacco, we apply the average tax rates between factory-made cigarettes and Cut Tobacco products weighted by the Legal Domestic Consumption of each category. This method is consistent with previous estimates of Tax Loss due to illicit Cut Tobacco consumption in Australia, where a significant Cut Tobacco market exists, by Oxford Economics (2021) and KPMG (2016).

• In Market Sales data provide Weighted Average Price (WAP) for Cut Tobacco products in 2022 H1. We then apply the dynamics of premade Cut Tobacco products, informed by market research, to construct WAP for Cut Tobacco products in 2019-21.

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