Support the BIR, strengthen the law to fight illicit trade

The illicit tobacco trade has been a hot topic particularly among lawmakers lately, albeit overshadowed by slightly more scandalous talks of alleged foreign espionage, leaked drug intelligence reports, and leadership shuffles in powerful places. But that doesn’t make it any less important or urgent.

Worth noting is a bill filed by Representative Joey Salceda that strengthens existing law for more effective enforcement to curb the illicit tobacco trade.

Despite the progress made since the landmark passing of the Sin Tax Law of 2012, the Philippines is still heavily burdened by the health and economic costs of tobacco-related diseases such as lung cancer, heart disease, and stroke. The Department of Health calculates that these illnesses cost the government at least P188 billion yearly, and that the illicit trade threatens to balloon such expenditures further. The effect of the illicit trade of cigarettes and vape products is two-fold; by evading regulatory measures designed to limit access and consumption, these products bypass food and drug safety standards while shrinking the government’s already shaky tax base and universal healthcare fund.

Estimates from the Bureau of Internal Revenue (BIR) put forgone revenues from the illicit tobacco trade at approximately P60 billion in 2023 alone — that’s P60 billion that could have been spent improving or expanding access to the country’s healthcare services. In a time of heightened inflation, declining excise tax collections, and the refusal of the Department of Finance to bolster our coffers with new or raised taxes, these losses are even more troubling.

The recent uptick in illicit trade — a threat to both our fiscal and public health puts into stark contrast the intensified tax administration campaign of the BIR. The agency has since risen to the challenge of plugging revenue leakages through comprehensive internal restructuring and the introduction of key reforms to the tax collection system. In a forceful show of political will and the BIR’s commitment to meeting national tax targets, Commissioner Romeo “Jun” Lumagui himself has spearheaded operations to apprehend and build strong cases against illicit traders.

Evidently, the BIR is doing its best with what little resources it has. But to effectively fight illicit trade, it needs more than just the regulatory power afforded by its own revenue regulations and issuances.

And the heavy work of fighting illicit trade cannot be simply left to the revenue-collecting agencies.

Without the necessary backing of legislation and institutionalized mechanisms, systems, and data-driven protocols, law enforcement agencies will be hampered in pinning down the illicit traders. Our agencies will be doomed to play catch-up to illicit trade’s many forms to elude arrest and conviction.

The decline of volume of sales of tobacco products may be attributed to a rise in consumption of new products like vapes and electronic cigarettes, which in the main are contrabands or counterfeits.

The access to cheap illicit products leads to increased consumption of harmful, substandard products and higher prevalence of smoking-related diseases, thus jeopardizing if not reversing the substantial health gains made possible by sin taxes. The first to be hit by illicit tobacco trade are the poorest sectors of society.

The tobacco industry is using the illicit trade as an excuse to prevent tax rate increases. Or for that matter to defer the implementation of the existing law’s automatic adjustment of tax rates to inflation.

This is a dangerous and simplistic approach to policy making. The result will make all tobacco products cheaper, leading to higher harmful consumption. At the same time, it will further erode revenues. Further, scholarly studies from all over the globe have shown that higher prices or taxes are not the key determinant of illicit trade; rather illicit trade is more a function of poor tax administration and weak governance. Good enforcement of the rules is the key.

The fight against illicit trade cannot be an isolated effort of revenue-collecting agencies, namely the BIR and Bureau of Customs. Such a far-reaching and complicated problem requires a whole-of-government approach that properly equips different agencies with the tools, data, and structures necessary to strengthen enforcement and accountability.

The recent filing of House Bill (HB) 10329 or the Anti Illicit Tobacco Trade Bill by Representative Joey Salceda, Chairman of the House Ways and Means Committee is a way forward to strengthen and enable good enforcement. The HB contains specific provisions which increase the stakes for accountability at all points in the tobacco value chain, encourage inter-agency collaboration and information sharing, and impose heavy penalties based on degree of involvement in illicit trade. The bill can be improved by adding provisions for citizen participation in monitoring taxes and prices, prevention of conflict-of-interest in the implementation of the tracking and tracing system and clearer definition of regulated products.

We are hopeful that the HB will be strengthened, not watered down. We are hopeful that the technical working group sessions to be chaired by Representative Stella Quimbo will facilitate the passage of the bill in the House of Representatives. And we are hopeful that the Senate will likewise approve a counterpart bill and pave the way for a unified bill of both Houses of Congress that the President will sign into law.

Therese Hipol is a policy researcher for Action for Economic Reforms’ fiscal and health policy team.