Ffects of the illegal market in Brazil are profoundly harmful

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SpaccaSeveral aspects contribute to facilitating or hindering the business environment in a given country. The situation is usually remembered: opening a business, credit, investment protection, tax levels and labor regulations, etc. However, the existence of the extent of the illegal market, whose effects are profoundly harmful, is not always taken into account. It cannot be forgotten that it affects the economy (productive sector, commerce and consumers), as well as the State, reducing revenue and fueling crime.

The illegal market in Brazil is significant, comprising a varied number of products: cigarettes, fuel, clothing, pharmaceuticals, beverages and fertilizers, among others. Sectors of Brazilian B2B Lead industry lost R$100.2 billion, and tax evasion reached R$46.1 billion [1] .

According to Fundação Getulio Vargas, in 2010, the illegal economy earned R$650 billion, a value corresponding to around 18.6% of Brazil's GDP that year. In developed countries, this number is much lower [2] .

The case study of cigarettes in Brazil is illustrative, as it is the largest illegal market in existence. This growing market is due not only to cigarettes produced nationally without the required licenses, but, especially, to those brought illegally from other countries, especially Paraguay. Approximately 48% of the cigarette market is illegal [3] . The majority of the volume of illegal cigarettes consumed in Brazil comes from the aforementioned country, and this illegal market is well structured and concentrated.

The following factors contributed greatly to the growth of the illegal market: (i) the tax disparity between Brazil and Paraguay; (ii) the minimum price; (iii) the increase in cigarette taxes in Brazil; and (iv) the porosity of Brazilian borders.



(i) Tax disparity. While Paraguayan cigarette taxes are 16%, in Brazil it is close to 71%. This allows the sale of illegal Paraguayan merchandise for a small fraction of the price of the product produced in accordance with the law.

(ii) Minimum price. What is aggravating is the fact that in Brazil a minimum price has been set for the sale of cigarettes at retail — R$5 currently —, under Law 12,546, of December 14, 2012 [4] ; while illegal cigarettes are sold at approximately half that price. The aim of this fixation was to recover and increase the sector's tax revenue, as well as contribute to public health spending; what did not happen. It was imagined that the above law would contribute to the process of legalizing the illegal market, inducing the practice of legal prices. This aim did not prove to be effective or lasting.