Press Release— Action for Economic Reforms— 29 May 2012

CLAMOUR FROM the tobacco lobby that the Abaya excise tax bill would spur a smuggling frenzy has only cast smokescreens, instead of meaningful debate, around the sin tax reform issue. Supporters of HB 5727, government agency chiefs said today, can rest easy that the bill’s approval will not trigger a sharp spike upwards in illicit tobacco trading.

“For the longest time, companies like PMFTC have warned that tampering with our excise tax system would spark an ‘exponential rise’ in cigarette smuggling,” said Commissioner Ruffy Biazon of the Bureau of Customs. “Yet their arguments generally collapse when confronted with solid evidence.”

Despite the approval of an amended Abaya sin tax bill at the Congress Ways and Means Committee, PMFTC and its allies have continued to upbraid the bill for failing to espouse “gradual and reasonable” hikes in cigarette taxes. In a recent statement, PMFTC president Chris Nelson alleged that the modified HB 5727 would pave the way for a surge in illegal market activity, which he argued would cost the government up to P170 billion in revenues yearly.

“Ironically, PMFTC and its allies have ignored how the prices of their own products would fare over time compared to that of other ASEAN countries,” Biazon asserted. “Should HB 5727 become law, the price of our country’s most popular tobacco brand— Fortune International Filter Kings— would rise to P35.26 per pack by 2014. But this is still lower than the 2009 prices of top-selling cigarettes in Cambodia (P52.36), Indonesia (P64.68), Thailand (P103.84), Malaysia (P146.08) and Singapore (P365.2).”

“We have every reason to expect that cigarette smuggling will continue to flow out of, rather than into, the Philippines,” maintained Biazon. “If our cigarettes stay cheaper than those of our neighbours, sneaking tobacco goods into our country would largely remain unprofitable for would-be smugglers. PMFTC employs faulty logic when it hints that a tobacco black market threatens to erupt in our midst.”

“The smuggling concerns often voiced by tobacco industry supporters are a clear case of red herring fallacies,” said BIR Commissioner Kim Henares. “Cigarettes prices aren’t the main determinant of how much smuggling takes place; it’s the quality of governance that really matters.”

Except on few occasions, nations that have jacked up tobacco taxes have undergone little or no perceived changes in smuggling activity. According to the World Bank, the Swedish ($4.58 per pack), UK ($4.16), and Singaporean ($2.24) governments managed to contain illicit cigarette trading to only 2% of total domestic sales in 1995 due to honest, effective, well-designed public interventions.

In sharp contrast are countries which, due to slapdash state action, have suffered exorbitant levels of illegal goods trafficking. In 1995, Vietnam owed as much as 28% of its domestic sales to that of smuggled merchandise, despite having less than half of the tobacco prices of the Philippines during that period ($0.10 versus $0.22 per pack respectively).

“These numbers confirm that we can pass the Abaya sin tax bill without needing to fear smuggling, so long as we redouble efforts on governance reforms. This is exactly what we in the BIR and the Bureau of Customs have been doing. We’re now enacting what may be the most successful administrative reforms in over twenty years, and we’ll soon be implementing a new tax stamp system on cigarettes. This will help curb whatever smuggling and tax leakages we currently experience,” Henares contended.

“The bottom line,” added Biazon. “is that we can pass HB 5727 while stemming whatever trafficking ‘backlash’ groups like PMFTC claim there will be. We have nothing to lose from this bill, customs-wise. The Abaya sin tax reforms, and our own pursuit of better governance are already going hand-in-hand in the quest to raise revenues for the government— but more importantly, to protect the health and lives of millions of our fellow Filipinos.”