What can the government do with P3 billion?
Certainly a lot more hospitals, classrooms and public infrastructure that would benefit the Filipino people for generations. Yet illicit tobacco trade continues to rob citizens of these societal benefits.
The government has sounded the proverbial alarm bells. With still more than a month before the year 2024 ends, Philippine authorities already seized over 1.1 billion sticks of illicit cigarettes in coordinated raids across the country since January. This number translates to P3.5 billion of lost government revenues when computed at an excise tax rate of P63 per pack — a historic haul that has nearly doubled the 599 million sticks seized in 2023.
The seizure has renewed attention on the thriving black market for tobacco in the Philippines, where the trade’s sprawling reach continues to undercut public health efforts and cost the government critical revenues. This is a painful blow to public finances already strained by the demands of mounting healthcare and infrastructure costs.
The country’s porous borders, once used as means to facilitate open trade, have enabled criminal syndicate groups to organize at scale and sidestep scrutiny from regulatory authorities
Exploiting loopholes in enforcement mechanisms and rampant corruption in certain branches of the government, the tobacco black market has entrenched itself deeply in the Philippines. As prices soar for legitimate brands, cheap counterfeit and smuggled options have become the de facto choice for millions of smokers, especially among the country’s low-income smokers.
The hidden price of illicit tobacco
Each year, the Philippines loses billions of pesos in potential revenue to untaxed tobacco. Under the country’s “sin tax” law, excise taxes on cigarettes have steadily increased as a means of curbing smoking and funding healthcare, climbing to P63 per pack in 2024. But the higher taxes have had an unintended effect: Creating a prime opportunity for smugglers to offer their wares at a fraction of the cost of legitimate cigarettes.
The Philippine government lost P25.5 billion in taxes from tobacco smuggling last year, according to the Bureau of Internal Revenue (BIR), as it sought to intensify its enforcement of tax compliance on the tobacco industry.
“[Illegal tobacco] trade has greatly affected our collection on excise taxes on tobacco products,” Venus T. Gaticales, BIR Excise Large Taxpayers Field Operations Division chief, told reporters on the sidelines of a forum. “For last year, [the] collection [for] 2023, compared to 2022 collection, there is a decrease of about P25.5 billion or 15.91 percent.”
The P3.5 billion in lost taxes from the seized billion sticks is only part of a bigger picture. According to Albay Rep. Joey Salceda, the Philippines loses approximately P30 billion annually to smuggled and counterfeit cigarettes. While recent crackdowns like the billion-stick seizure represent progress, they are but isolated victories in a broader struggle, one that pits the government’s ability to tax and regulate against an increasingly savvy network of smugglers.
These “underground sticks” dodge the strict excise tax laws and, as a result, are sold at a fraction of the price of legal brands. Selling as low as P40 per pack compared to the minimum price of P100 pack for legitimate brands, it has become an affordable and appealing option for penny-pinching smokers. But for the government, the loss of revenue is devastating, especially when these funds are crucial for healthcare and poverty alleviation programs.
And the government has every reason to be alarmed. After all, every illicit cigarette that evades taxation chips away at the potential funds that could go towards healthcare, education, or even further anti-smuggling operations.
To combat the market shift, both the Bureau of Customs (BoC) and the Bureau of Internal Revenue have stepped up their surveillance and enforcement efforts, resulting in several notable seizures in the past year. However, some economic experts argue that the increasing prices of legal cigarettes have fueled the growth of the black market.
Economist and columnist Bienvenido Oplas, president of think tank Minimal Government Thinkers, wrote in his 6 June column: “The major beneficiaries of high tobacco taxation are the smugglers, criminals, terrorists, and their protectors in government. The availability of more illicit tobacco means people are smoking more (cheap, illegal) tobacco, not less. This is actually happening.”
Oplas illustrates the declining tobacco tax revenues as the tax rate increased. The last time revenues increased the same time as tax rates was in 2021, when at P50/pack, taxes revenues were at P176.5 billion. From 2022 onwards, tax revenues have been decreasing at a steady rate. With tobacco tax revenues at P160.3 billion at a tax rate of P55/pack in 2022, and revenues at P134.9 billion at a tax rate of P60/pack in 2023, Oplas opined that the likely tobacco revenue this year, at the current rate of P63/pack will be somewhere in the vicinity of P120 billion — a whopping 32 percent decline from the 2021 tax take.
Smugglers adapt and expand
Despite these successes, authorities are fighting an uphill battle against a sinister industry that is adept at evading detection.
The Philippines, with its vast coastline, poses a unique logistical challenge for customs officials tasked with intercepting illegal goods. Smugglers routinely use unpatrolled seaports, hidden compartments in commercial shipments, and fast, agile boats to transport goods from nearby countries where cigarette taxes are lower.
Most of the unregistered and unregulated cigarettes flooding the market are manufactured in factories in Indonesia, Vietnam, Cambodia and India where production costs are lower and regulations are looser.
Once they arrive onshore, they are quickly moved through a network of warehouses, distributors, and retailers, reaching the smallest corner stores in big cities and remote towns alike.
The brands seized range from unknown labels (called “illicit whites”) to counterfeit versions of well-known cigarettes, often sold in sari-sari stores at prices well below 50 percent of market rates. They are most common in North and Central Luzon, Palawan and Mindanao.
According to Euromonitor, the national illicit incidence rate of tobacco products in the Philippines stands at 14 percent with some areas in Mindanao reaching up to 60 percent — a testament to both the affordability of black-market options and the widespread distribution network established by smugglers. Most small retailers buy in bulk, seeing only profits from low-cost, high-demand product, and blind to the harms of illicit wares.
The scale of illicit tobacco trade has elevated it beyond a petty crime. It is now an organized criminal enterprise, complete with believable brand names, glossy packaging, and even counterfeit tax stamps to deceive consumers. Such counterfeiting blurs the lines between legitimate and illicit, creating an additional challenge for authorities.
Police have traced operations to syndicates that use tobacco smuggling as part of a diversified portfolio, which can include drug trafficking, human smuggling, and a source of funding for terrorism.
Just this early November, the Philippine National Police — Criminal Investigation and Detection Group (PNP-CIDG) confiscated P2.4 billion worth of counterfeit cigarettes and smuggling equipment in a two-day operation conducted in Valenzuela City and San Rafael, Bulacan. Meanwhile, 155 trafficked individuals were also rescued from the illegal factory in Bulacan.
Despite the intensified crackdown, tobacco smuggling remains highly profitable and therefore resilient. For one, smugglers can quickly adapt to law enforcement tactics, finding new entry points and distribution channels to bypass detection. Moreover, the Philippine archipelago — with its extensive coastline and porous borders — is notoriously difficult to monitor.
Smugglers often exploit weaknesses in regional cooperation, moving shipments between Southeast Asian nations before they make their way to the Philippines. Since cigarette prices vary significantly across the region, there’s a built-in incentive for smugglers to traffic products from low-tax jurisdictions into high-tax markets like the Philippines.
Noting the gap in a unified regional response, delegates from the Association of Southeast Asian Nations (ASEAN) member-countries and its partners jointly committed in June of this year to a strong coordinated regional response that could urgently address the growing threat of illicit trade, including the rampant smuggling of tobacco products. Chief among these initiatives was the signing of an agreement that would streamline customs procedures for trusted businesses across ASEAN to ensure faster and smoother trade, and combat smuggling and trade fraud within the region.
With ASEAN governments losing close to $3 billion in tax revenue from illicit tobacco products alone since 2017, the Transnational Alliance to Combat Illicit Trade (TRACIT) and the EU-ASEAN Business Council report states that addressing illicit trade remains an urgent priority for the region as it could thwart its goal of regional integration by 2025.
Toward a lasting solution
The billion-stick seizure is representative of the government throwing their full weight into the efforts to curb tobacco smuggling.
In September of this year, President Ferdinand “Bongbong” Marcos Jr. signed into law the Anti-Agricultural Economic Sabotage Act or RA 12022. The measure, long-awaited by stakeholders in the agricultural sector, is aimed at thwarting the entry of smuggled agricultural goods into the country by imposing harsher penalties for those convicted of smuggling, hoarding, profiteering and cartel activities involving agricultural products including processed and unprocessed tobacco.
“The passage of the Anti-Agricultural Economic Sabotage Act will set in motion transformative outcomes. It is a proactive measure to prevent the entry of smuggled agricultural products, ensuring that the correct duties and taxes are paid while imposing higher penalties on violators,” President Marcos said.
“This law shapes a stronger, more resilient agricultural sector that defends both our farmers and our consumers,” he added.
Unlike the old Anti-Agricultural Smuggling Act of 2016, large-scale smuggling of tobacco and tobacco-based products including cigars, cigarettes and heated tobacco products into the country is now considered as a non-bailable offense of agricultural economic sabotage.
Under the new law, a framework is also provided for more stringent cooperation between law enforcement agencies, including the BoC, the BIR and the PNP.
Tobacco farmers, one of the country’s most vulnerable farming sectors, hailed the new law as a crucial step in protecting the industry from smuggled tobacco. “With its implementation, we are hopeful that tobacco farming will receive adequate protection against the entry of illegal products… we hope the government’s action against smugglers will improve the state of Philippine tobacco and bring relief to our farmers and their families,” said Saturnino Distor, president of the Philippine Tobacco Growers Association, an organization which represents 50,000 tobacco farmers.
As officials continue to grapple with the complex drivers of this trade, there is recognition that a lasting solution will require a more nuanced strategy than simply raising taxes or increasing enforcement — one that allows the country to meet public health goals without pushing more people into the black market. As the government works to tighten the net around smugglers, the hope is that a combination of effective enforcement, public support, and sustained policy adjustments will curb illicit trade’s impact.
For now, the one billion illicit cigarettes seized will sit as both evidence of a hard-won success and a stark reminder of the road still ahead. In the fight against tobacco smuggling, every victory counts, but as the recent bust illustrates, the cost of the black market remains a burden carried by all.