How can gov’t stop tobacco smuggling?

How can gov’t stop tobacco smuggling? | Daily Tribune

In a Senate hearing of the Committee on Ways and Means last week, the Philip Morris tobacco company revealed the Philippine government lost more than P50 billion in 2024 due to the illicit trade in cigarettes. This translated to a combined P190 billion in the last four years.

The Bureau of Internal Revenue (BIR) pointed out the illicit trade was one of the factors pulling its excise collection downward. The BIR revealed the excise tax collection has been on a decline starting in 2022, from P160.4 billion to an estimated P134 billion in 2024.

As the Philippines faces a staggering loss in excise tax collection due to the persistent problem of the illicit tobacco trade, calls for urgent action are growing louder.

One solution some experts and industry players are floating is a moratorium on the increase in the excise tax.

The Minimal Government Thinkers, for one, has called for a rollback of the tax rate to P50 per pack of cigarettes.

Why P50? When the government collected a record tax collection of over P176 billion in 2021, the tax rate stood at P50, indicating this level to be the optimal rate based on the Laffer Curve Analysis the group used to evaluate the relationship between tax rates and tax revenue collection.

However, the Action for Economic Reforms (AER) dissented, saying a simple, direct correlation between cigarette prices and tax revenue collection does not exist. The group went on to emphasize that pausing tax hikes may derail the success of the government in reducing smoking and increasing spending on public health, which has been tied to its excise tax hikes beginning 2012.

Reducing taxes, in fact, could harm public health goals by making tobacco and e-cigarette products more accessible to vulnerable groups, the AER argued. Furthermore, lowering taxes is unlikely to address the underlying issue of the illicit trade, as the price differential between legal and illicit cigarettes is often vast.

Consider the example of a smoker who switches from a legal brand at P165 per pack to an illicit one at P40 per pack. Even if the government were to remove the excise tax on legal cigarettes entirely, the price of the legal product would still be over twice that of the illicit alternative. Thus, merely lowering the tax on legal cigarettes would fail to make them competitive with illicit brands and would have little impact on illicit trade consumption.

As the debate unfolds, it is crucial that the government relies on a data-driven analysis to guide its decision-making. The priority must be the protection of our precious resources from excise tax collection with the end in view of protecting the public health. While the moratorium proposal is one perspective, a more holistic approach to combating the illicit trade must be considered.

Pending a resolution, agencies must deepen their coordination to find the root causes of the illicit trade as global evidence seems to point to effective governance and the strengthening of institutions as key to combating the illicit trade.

The Minimal Government Thinkers, for one, has called for a rollback of the tax rate to P50 per pack of cigarettes.

The best course of action is to target illicit cigarettes by ensuring strict enforcement and a more competitive tax administration regime for legal products.

At the National Committee on Intellectual Property Rights, we work to disrupt the counterfeit trade at its source with close coordination and rich investigations. Investigations into illicit trade activities are crucial to understanding their scope and identifying effective countermeasures.

A whole-of-society approach, involving coordination among customs, law enforcement, health agencies and the private sector is essential to ensure the success of the government’s tobacco control policies and the sustainability of its public health initiatives.