Revenue losses from high — and faulty — tax rates on tobacco and vape products
“And if you examine our tax collection spreadsheet through the years, there is one entry common in all eras, and that is the heavy reliance on sin taxes. So much so that in 1912, when we were already under American rule, alcohol and tobacco combined for almost P9 million of total revenue take of P31 million. In short, vices financed the virtues of democracy the Americans were preaching.” — Finance Secretary Ralph G. Recto, Secretary’s Hour Toast Remarks, April 30
The Department of Finance (DoF) and the economic team keep looking for new revenue sources while plugging leaks in existing tax revenues. The excise tax for “sin” products is among the problematic revenues in terms of lack of consistency.
While collections from alcohol and sweetened beverage products continue to rise or flatline, collections from tobacco and cigarettes continue to decline. From peak revenues of P176 billion in 2021 when the tax rate was P50/pack, it declined to P160 billion in 2022 when the tax rate was P55/pack, and further down to P135 billion in 2023 when it was P60/pack. The main culprit for the trend is the illicit trade or smuggling of tobacco products, which are sold by smugglers, criminal syndicates, and terrorist organizations at low prices that are on average half of the price of legal (taxed) tobacco.
This year, the tax rate is P63/pack and the January-July collection was P71 billion. If this trend continues, the projected full year revenues would be only P122 billion (see Table 1).
Aside from illicit trade, there is the technical smuggling — or misdeclaration as being of cheaper value — of vape products. The Bureau of Customs (BoC) estimates that the government loses at least P5 billion/year in revenue because of the smuggling and illegal selling of vape products. See these recent reports in BusinessWorld — “BIR urges online platforms to carry only vape products with tax stamps” (June 16), “Seized vapes could be entering market — BoC” (July 30) — and the Philippine Star — “Government losing P5 billion in taxes from vape smuggling, illegal sale” (June 20), and, “Cigarettes, vapes found with P7.2 billion tax liabilities in H1” (June 21).
One cause is the misdeclaration of products. Perhaps we are the only country in the world that differentiates between nic salts and freebase vape liquids.* Nic salt is taxed at P54.60 per milliliter (mL) while freebase is P63 per 10 mL. This is a significant loophole since illicit traders would just declare their products as freebase to avail of the lower tax rate. If declared freebase, they are taxed P63 per 10 mL or P6.30 per mL vs. nic salt at P54.60 per mL (see Table 2).
The government has no testing facility to distinguish between freebase and nic salt. There is a need to harmonize the tax rates for vape liquids and make it just one instead of two to close the loophole since most if not all vapes in the market are nic salts anyway.
Almost no taxpayer declares their products as being nic salt, and almost 100% are declared as freebase and the corresponding lower tax rates are paid. There is a potential 90% revenue loss for the government if taxpayers misdeclare their products. Vapor products should all be considered nic salt for taxation purposes unless otherwise proven to be freebase through certification from an accredited laboratory. Proposals to harmonize the rates of nic salt and freebase into a single rate are good but will take legislation. An administrative solution is to classify all vapor products as nic salt by default.
These and related topics were discussed in the Kapihan sa Manila Bay with Marichu Villanueva at Café Adriatico in Manila on Oct. 2. The theme of the Kapihan was “Status of implementation of Vape Law,” and the speakers were Bureau of Internal Revenue Commissioner Romeo Lumagui, Jr., BoC Chief Investigation Division Customs Intelligence Leon Mogao, Jr., President of the Philippines E-cigarette Industry Association Joey Dulay, and this writer.
*According to Red Box vape, “freebasing involves converting nicotine from its naturally occurring ‘salt’ state into a much ‘purer’ form. This conversion increases the potency without affecting the dose, which is why it is popular among vapers as it is a more cost-effective solution.” Meanwhile, according to Eco Vape, “nic salts are made by combining nicotine with an acid to create a more stable and absorbable form of nicotine. The resulting e-liquid is smoother to vape and can deliver a higher level of nicotine without the harshness that can be experienced with high levels of freebase nicotine.”
Bienvenido S. Oplas, Jr. is the president of Bienvenido S. Oplas, Jr. Research Consultancy Services, and Minimal Government Thinkers. He is an international fellow of the Tholos Foundation.
