Will higher taxes on cigarettes encourage smuggling?

From: Malaya Busines Insight

‘(T)alking about stopping smuggling and preventing this in a country of more than 7,000 islands are two different things.’

IT is clear to me that extremely high taxes on tobacco products will lead to unabated cigarette smuggling. Commissioner Kim Henares of the Bureau of Internal Revenue claims that such concerns are exaggerated. According to her, smuggling is not related to high taxes and high prices, but is a function of governance. With the administration treading the “tuwid na daan”, smugglers won’t have a chance. After all, tobacco is taxed heavily in other countries – i.e., Australia, Canada, and the USA – yet, there is no rampant smuggling or even any smuggling.

But talking about stopping smuggling and preventing this in a country of more than 7,000 islands are two different things. Add to that physical problem, an underpaid bureaucracy lacking in resources. While we can choose to believe that this administration is indeed treading a “straight path,” we should also acknowledge the fact that government resources are woefully lacking for catching smugglers. Proof of this is that we lose millions of dollars yearly that should have gone to the state’s coffers in the form of taxes.

For instance, smuggling of Philippine gold is rampant. The Bangko Sentral ng Pilipinas (BSP) reports that the total value of metallic mineral production in the country fell by 26 percent in the first half of 2012 owing to the alarming 95 percent decline in its gold purchases.

The Mines and Geosciences Bureau (MGB) reported to its main agency, the Department of Environment and Natural Resources (DENR), that this drastic drop in gold purchases began when the BIR started strictly imposing the collection of the 2 percent excise tax and 10 percent creditable withholding tax (CWT) in its purchases of gold from small-scale miners. Despite a new BIR regulation reducing this to 5 percent effective April 2012, the BSP’s purchases of gold from its small-scale buying stations in Quezon City, and the cities of Baguio, Davao, Zamboanga and Naga continue to drop.

MGB Director Leo Jasareno reports that total gold production dropped to 8,382 kilograms valued at P18.18 billion, from 22,804 kilograms worth P44.52 billion year-on-year, down by 14,421 kilograms. The BSP gold purchases accounted for a measly 786 kilograms in the first half of 2012 as against 15,003 kilograms in the previous period. This is a 95 percent drop.

This is happening even as the price of gold is at an all-time high. DENR Secretary Ramon Paje could make only one logical conclusion: “Given the continuing high price of gold and the increasing number of small-scale mining areas, the decrease in gold purchases by the BSP clearly indicates that gold outputs are going to the black market and smuggling activities.”

A Reuters report notes that up to 90 percent of small-scale gold production in the country is smuggled out and transported, through hand-carry luggage, to China.

Why would small-scale miners risk selling their gold to smugglers when then can just go to any of the BSP’s buying stations, as the law requires?

The only answer: High taxes dissuade small-scale miners from selling their gold to the BSP.

In its report, Reuters quoted Rex Banggawan, an accountant for a small-scale mining cooperative as saying: “All the production of small-scale mines, almost all, now goes to the black market, because there is no tax in the black market.”

How can the government encourage small-scale miners and traders to sell their gold to the BSP when the markup cannot even cover the taxes they have to pay? Gold traders in Tagum City in Mindanao told Reuters that if not for the tax, they would rather sell to the BSP than to the black market where prices fluctuate too much.

As the country continues to rapidly lose its gold production to smugglers, the Bureau of Customs can only say that the problem is so overwhelming it can do little about it. Henares, for her part, has thumbed down calls for BSP officials to lower taxes on small-scale gold mining and suggested instead that customs officials impose better measures to guard the country’s borders.

But Customs Commissioner Ruffy Biazon admits that his agency is helpless. The Bureau of Customs (BOC) only has 40 offices to cover all airports and ports in the country.

If this is the reality that we are facing, how then can the government curb the expected massive smuggling of cigarettes, which, is low-risk and easy to hide and transport?

The government wants to increase taxes on locally produced cigarettes by 708 percent to 1,000 percent, with the bulk of the tax burden borne by low-priced brands. Sixty percent of the production of our tobacco farmers is used in low-priced, low-grade Philippine cigarettes.

These excessively high tax rates have raised concerns over unabated cigarette smuggling, as has been the experience of countries, such as Malaysia and Singapore, which have imposed already high tobacco taxes.

Henares believes that smuggling is not related to high taxes and prices and is directly related to corruption in governance. She said so during a recent hearing conducted by the Senate committee on ways and means on the restructuring of the excise tax system.

But, Senate President Juan Ponce Enrile would have none of her theoretical assumptions. Basing his statements from his long experience in government, Enrile told her that extremely high taxes would not achieve the government’s goal of collecting more taxes from tobacco products.

Finance hopes to collect between P31 billion to P60 billion (depending on how high the cigarette tax hikes go) from its proposed restructured excise tax system on tobacco and alcohol products. Can it accomplish this goal?

Enrile warned finance and revenue officials at the hearing that it couldn’t get what it hopes to collect from high cigarette taxes because smuggling will eat up the government’s share of the revenues.

He said that the government couldn’t control cigarette smuggling even “if you employ the entire Armed Forces of the Philippines and the Philippine Navy.”

Smuggled cigarettes–the Harvey and Chelsea brands–are already being sold in the Mindanao black market for only P4.50 to P7.50 a pack, much lower than the legitimate lowest-priced cigarettes, which cost P10 to P12 a pack.

It will only be a matter of time before these black market cigarettes find their way to the rest of the country if the government succeeds in imposing its 708 percent tax hike on cigarettes, the highest ever in Asia, and possibly, the rest of the world.

Enrile warns: “You will have the entire Southern border of the Philippines a busy corridor for smuggled cigarettes,” with extremely high tobacco taxes.

Enrile wants the government to look for a “median system” that will serve its interest as well as the interests of the tobacco industry. “Median” in the sense that the tax system should be equitable, non-arbitrary and reasonable.

Kim Henares and her boss, Finance Secretary Cesar Purisima, should take Enrile’s advice rather than insist on imposing what they want and expecting other government agencies to do the impossible task of stopping the resulting smuggling for them.

The alarming rise of the illicit gold trade should serve as a learning experience for Cesar and Kim. But, are they willing to learn?


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