From: FILIPINO WORLD VIEW By Roberto R. Romulo (The Philippine Star)
In November 2009, I wrote about this subject and I would like to quote portions which continue to be even more relevant in the Philippine context of today.
International trade has grown exponentially with the acceleration of globalization and the growing partnership between the business world and governments. The process has been greatly enabled by the development of information and communication technologies (ICT), which have dramatically blurred geographical barriers and aided trade on a massive scale.
With the impressive trade growth, however, illicit trade – in the form of counterfeit and smuggled goods – has also grown exponentially.
A worldwide scourge
In his book aptly titled Illicit, Moises Naim gives a succinct definition of illicit trade: “It is trade that infringes the rules – the laws, regulations, licenses, taxation system, embargoes and all the procedures that countries use to organize trade, protect their citizens, raise the standard of living and enforce codes of ethics.”
Based on this definition, one can understand why illicit trade is a scourge to the Asia-Pacific region and to the rest of the world. In its various forms, notably counterfeiting and smuggling, illicit trade is integrated into the activities of international crime syndicates and threatens the very fabric of globalization and the benefits of legitimate trade and exchange activities. The Asia-Pacific region, which has benefited greatly from the globalization process, has a great deal to lose from the continued spread of illicit trade within its territory – especially because a significant part of the trade not only enters the region, but originates here.
What has abetted the growth of this grey economy is the insatiable desire of consumers to buy goods at the lowest possible prices, without regard to their source. Technological advances, combined with the liberalization of trade and financial services, have facilitated the emergence of criminal networks that control parallel market activities and have the capability to produce consumer products of all kinds.
Smuggling in the Philippines
It would be naïve of me to think that the readership is not aware of the evils of smuggling even as many will confess that they do indeed indulge in purchasing smuggled goods such as automobiles, appliances, medicines, cosmetics, fashion items and cosmetics. There is the desire of all, particularly the government agencies, to plug the leaks which allow the entry of smuggled goods. However, wittingly or unwittingly, there is pending legislation which in effect encourages smuggling of cigarettes.
Before I proceed further, I hasten to inform you that I am the victim of heavy smoking. My doctors inform that I have emphysema despite the fact that I quit smoking 20 years ago. Nothing upsets me more than seeing my children smoke. Until my dying day I will harangue them with lectures on the evils of smoking. Ideally, manufacturing and the sale of cigarettes should be legally banned from the Philippines. But that will never happen in my life time, perhaps never.
Cigarette tax
However, I am informed that House Bill 5727 (passed by the House on June 6) would increase the tax rate in an unprecedented fashion. For example, I understand the tax on lower priced tobacco products accounting for over 60 percent of the market would increase by more than 708 percent after two years implementation. On the other hand I am told it may be 500-percent increase in the lower products. I have also been told other percentages which are equally steep. One must bear in mind that there is a correlation between a steep excise tax increase and a corresponding increase in smuggling of cigarettes. If the tax bill is approved by the Senate in its current form, it will be a revival of the “blue seal” cigarettes of the past. For those who don’t remember what “blue seal” meant: it was untaxed and smuggled.
The World Bank stated: “The potential for smuggling tobacco can limit increases in tobacco tax rates. When setting tax rates, consider the risk of smuggling, the purchasing power of local consumers, tax rates in neighboring markets, and the ability and effectiveness of tax authorities to enforce compliance.”
It is my understanding that Panama did indeed place a steep tax increase in the past three years. As a result, the tobacco “black market” has grown rapidly and it currently accounts for over 60 percent of the total market. Contrary to expectations smoking prevalence rates have not declined. More importantly, organized crime is thriving reaping huge profits at the expense of taxpayers and the government.
I also learned that Singapore increased excise tax on tobacco by 135 percent between 2000 and 2005. The results did increase revenue initially but a steady decline ensued due to illicit trade. In 2006, then Finance Minister Lee Hsien Loong stated: “I seriously considered raising tobacco duties, but have reluctantly decided against it because we are already seeing revenue declining, not because people are smoking less but because smuggling has gone up.”
In Malaysia, there was a consecutive steep hike in tobacco tax rates since 2002. It resulted in one of the highest illicit commerce incidences in the world. The government decided to freeze excise rates this year. The Prime Minister of Malaysia made the following statement in October 2011: “We can’t increase the price of cigarettes sharply when the use of illegal cigarettes has reached 40 percent. ….If there is a sharp increase in the price of cigarettes, the percentage of those who smoke illegal cigarettes will continue to rise.”
The World Economic Forum noted in 2011 that illicit trade is a major source of revenue for terrorist groups and transnational criminal networks. According to Framework Convention Alliance (2008), recent studies estimate that over 600 billion cigarettes a year is illicit resulting in annual government revenue losses of over $40 billion.
Even as I continue to support the government’s desire to increase revenue, I respectfully submit that what I have just stated is food for thought and serious deliberation by the Honorable members of the Senate. We should learn from the mistakes of our neighbors.
