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PHL to lose P60B from illicit tobacco

Boxes of fake cigarettes are seen at a police station in Manila. — PHILIPPINE STAR/MIGUEL DE GUZMAN

THE PHILIPPINE government could lose at least P60 billion in revenue this year due to illegal tobacco trade, which has severely undermined gains from the sin tax reform passed almost a decade ago, a lawmaker said.

Authorities are now doubling efforts to curtail the illegal trade of tobacco products, which are also being manufactured inside industrial hubs and openly sold in online stores.

House of Representatives Ways and Means Chairman Jose Maria Clemente S. Salceda said excise tax collections from cigarettes fell by 7.8% to P160.4 billion in 2022 from P173.9 billion in 2021, describing the downward trend as deeply alarming.

He noted the decline in excise tax collections was the biggest since the enactment of the sin tax reform law in 2012, which increased the taxes imposed on cigarettes and alcohol.

Despite the higher taxes, smoking prevalence only slipped to 23% in 2020 from 23.4% in 2019, which means “something else happened,” Mr. Salceda said at a forum on illicit tobacco trade on Tuesday.

“A decline of one billion sticks could not have been accounted for by an incidence decline of just 0.4 percentage point alone,” he said.

“It is more logical to suspect that illicit trade accounted for much of the decline in licit removals. The 2022 figures stare us in the face, with the problem becoming more undeniable,” he said, noting the illicit trade would likely hit 2.026 billion sticks by end-2023.

Mr. Salceda estimated the government revenue losses due to illicit trade in cigarettes at P60.6 billion this year if the trend persists.

The illicit cigarette trade will further worsen the smoking prevalence among Filipinos, he said, with the health costs of smoking-related diseases possibly swelling to P217 billion this year.

“The [government’s] revenue base will continue to shrink and there is a chance that prevalence might actually increase as a result of cheaper illicit alternatives,” Mr. Salceda said. “This is a serious national crisis.”

Bureau of Internal Revenue Commissioner Romeo D. Lumagui, Jr. said the illicit tobacco trade was estimated to have reduced the Philippines’ gross domestic product (GDP) by an average of 0.39% and cut employment by 4.9% between 2018 and 2022, citing a recent study by University of Asia and the Pacific and Federation of Philippine Industries, Inc.

He said the government stands to lose about P30.57 billion in revenues this year, 16.7% more than P26.19 billion in foregone revenue last year.

“This will also mark the fourth consecutive year that lost revenues have increased in volume,” Mr. Lumagui said.

He said foregone revenues are estimated to increase to P33.7 billion next year, P36.8 billion by 2025, P39.8 billion by 2026, and jump to P42.54 billion in 2027.

“To give an idea of the impact of these revenue losses on the country, just consider that the P26.19 billion in lost revenues in 2022 could have funded the construction of 57,000 socialized housing units, 8,642 classrooms and 75 hospitals,” he said.

Mr. Lumagui said the illicit tobacco trade happens in many forms, citing illegal manufacturing, counterfeit production, smuggling and bootlegging, which refers to the practice of buying cigarettes in large quantities from countries where taxes are low and selling them in countries where taxes are high.

The BIR has been conducting major raids to address the illicit trade, confiscating about P5.8 billion worth of fake cigarettes.

Mr. Lumagui said the Philippines’ location as a “gateway” to the Asia-Pacific region is both a boon and a burden because perpetrators have exploited the country’s “strategic location.”

“Our location makes it a considerable challenge to monitor — much less control — the movement of illicit ‘whites,’” he said. “For this reason, it is imperative that the Philippine government improve its border defenses, to support the tax administration in its efforts to control the illegal trade of cigarettes.” 

Mr. Lumagui noted that a significant number of illicit cigarettes come from Malaysia and other neighboring countries. Industrial parks and economic and freeport zones have also been used in the illicit tobacco trade.

Many online stores are also illegally selling tobacco products.

Mr. Salceda said online stores have been selling unstamped cigarettes “at prices less than half those of their licit counterparts” — placing them under unrelated categories such as “Asian herbs” and “T-shirts.”

“On the review page, buyers indicated that they bought these cigarettes for their sari-sari stores, indicating that the purchase of these cigarettes online is meant for resale to the retail market,” he said.

In Facebook marketplaces, brands like San Marino, Casablanca, Cannon, Fort and Bravo sell for as low as P350 per ream, in which is way lower than their mainstream counterparts, like the brand Marlboro, which sells for P1,750 a ream.

Illicit trade also happens at the high-end market, he added. For example, cigarettes by Chunghwa, a luxury tobacco brand in China, are available without tax stamps in Binondo for P350 a pack, Mr. Salceda said.

“There is no challenge to buying these brands. And they sell at as low as one-fifth the price of illicit cigarettes. Even fakes of premium brands are becoming easier to come by,” he added.

The BIR chief said they would intensify the monitoring of supply chains and distribution channels of tobacco products and enhance the track and trace system as well as the security features of the Internal Revenue Stamp Integrated System (IRSIS), which covers the internal revenue stamps that are currently in use.

The agency also plans to coordinate with local government units and various law enforcement agencies.

“We shall also endeavor to coordinate with our Asian neighbors, and work to form alliances with our counterparts in Malaysia, Indonesia, Vietnam, Taiwan and China,” he added.

Mr. Lumagui said the government would review and update rules and explore the possibility of imposing stiffer penalties.

“We will soon issue a Revenue Memorandum Circular updating the schedule of penalties and fines for violations of the excise tax provisions of the National Internal Revenue Code of 1997.”

Meanwhile, Mr. Salceda said he is looking to file a comprehensive anti-illicit tobacco trade bill, which would also authorize the blocking of all e-commerce platforms that allow the sale of tobacco products.

“We must attack the problem in its complete form — in every stage of the value chain,” he said. “That is why I am considering a comprehensive tobacco illicit trade bill that addresses everything from smuggling through the de minimis loophole and through our ecozones, to leakage of tobacco declared for export or transshipment, to the manufacture of fake cigarettes.”

At the same forum, advocacy group HealthJustice called for the implementation of a track and trace system that would record the movement of tobacco products throughout the entire value chain.

“This system should provide real-time monitoring and should be maintained by the BIR and the Bureau of Customs,” it said. “The need for a funding mechanism for this should be prioritized in a separate bill.” — Kyle Aristophere T. Atienza

Neil Banzuelo

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