Sin tax to abet smuggling, say US business groups

Business Mirror

 Fernan Marasigan / Reporter

Two top American business groups echoed apprehensions by some Filipino legislators that the Malacañang-backed sin-tax reform bill would abet smuggling, undermine the government’s revenue growth targets and subsequently pose serious threats to national security.

The US Chamber of Commerce and the US-Asean Business Council have asked Speaker Feliciano Belmonte Jr. to consider the supposedly counterproductive and deleterious impact of House Bill (HB) 5727 that seeks to impose 1,000-percent to 1,500-percent tax increase on alcohol and tobacco products.

The bill’s principal author, Liberal Party Rep. Joseph Emilio Abaya of Cavite, earlier said that smuggling would be an inevitable aftermath if the proposed law is enacted.

But he clarified that allegedly rampant smuggling of counterfeit and low-priced cigarettes and liquors should be addressed by the Bureau of Customs and must not serve as a deterrent to the agency’s bid to reform the tax system.

“Clearly, it is not zero smuggling [that we are seeing] and, if you get this tax reform in, there will still be smuggling.  It will happen but I think it is better addressed by the BOC,” Abaya told reporters during a briefing on the controversial measure.

The two US business groups said HB 5727 “would only cause a surge in the consumption of contraband products.”

They added that the bill specifically would increase the tax on lower-priced cigarettes, which account for over 60 percent of the market, and by 1,500 percent the tax on low-priced alcohol products.

“We are told there are signs that smuggled cigarettes have already made limited inroads in parts of the country, but with the right stimulus, this situation could rapidly grow into a massive nationwide phenomenon,” the chamber
and the council said.

The US Chamber of Commerce is the world’s largest business federation, representing over 3 million businesses of all sizes and industries, both in the United States and in markets where these businesses operate around the world.

The US-Asean Business Council is the premier business organization based in the US that focuses on Asean. It represents leading US businesses based in the Asean markets and represents US business broadly on issues that impact on the business environment.

Asean (Association of Southeast Asian Nations) groups the Philippines, Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Vietnam and Thailand.

The chamber and the council also told Belmonte and Liberal Party Rep. Isidro Ungab of Davao City, chairman of the House’s Ways and Means Committee, that experiences across the world prove the legitimacy of their concern that steep excise increases leading to a sharp decline in consumer affordability often result in consumers shifting to the much cheaper, uncontrolled illicit products.

They cited the World Bank’s advice against drastic tax increases that said, “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 the tax authorities to enforce compliance.”

The bill seeks to replace the current multi-tier tax system for alcohol and tobacco products with a unitary-tax rate that would slap a 1,000-percent excise tax increase on low-priced cigarettes and 1,500-percent tax hike on low-priced alcohol products.  The spikes would make these products more expensive than premium brands.

“We acknowledge the government’s interest in both additional tax revenue generation and in further protecting public health. That said, we would urge a cautious approach to excise-tax policy and the avoidance of excessive hikes in tax rates,” said Myron Brilliant, senior vice president of the US Chamber of Commerce, and Alexander Feldman, president of the US-Asean Business Council, in their joint letter to Congress.

They cited Panama, Singapore and Malaysia, which all imposed radical tax increases on tobacco products, but later had to contend with economic woes brought by rampant cigarette smuggling and other forms of illicit trade.

In all these cases, Brilliant and Feldman said, there were no marked declines in smoking, owing to the proliferation of smuggled cigarettes in the market, thus, defeating the governments’ purpose of reducing tobacco use to raise the quality of public health.

In a separate letter to Finance Secretary Cesar Purisima, the chamber and the council said experiences of the three countries showed that “exorbitant tax increases on tobacco products will stimulate persistent and corrosive growth in smuggling and other illicit trades, which only fuels organized criminal activity and its consequences.”

In both their letters to Congress and the DOF, the chamber and the council encouraged Manila to work with the tobacco industry and other stakeholders “in an effort to find an outcome that takes into account the range of legitimate considerations herein, including the millions of people that are economically reliant on the sectors that are implicated by the excise-tax regime.”

The House of Representatives is expected to deliberate on the tax system for tobacco and liquor products when

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