Illicit cigarette trade still rampant in the Philippines, makes up a fifth of total sales

HONG KONG – Illicit cigarette consumption in the Philippines remains sizable with 19 billion cigarettes consumed in 2014, accounting for nearly a fifth of total consumption, according to a recent study by UK-based research group Oxford Economics.

In a briefing yesterday, Oliver Salmon, senior economist at Oxford Economics, said while total tobacco consumption fell three percent for a second consecutive year, the share of illicit cigarettes to total consumption rose to 19.4 percent last year, the highest level since 2012.

Salmon said “one in every five cigarettes originated from illegal channels,” depriving the state of much-needed revenues.

The tax loss from illicit consumption of cigarettes rose to about P22.5 billion, representing a 44.1 percent increase from 2013, he added.

The share of excise tax revenue losses as a proportion of total potential excise tax revenues increased to 20.5 percent. This is nearly four times larger than the 5.2 percent recorded in 2012 and above the 15.3 percent value estimated for 2013.

Salmon noted significant tax-led price increases have left the market exposed to the threat of cheap illegal cigarettes coming from other countries as well as counterfeits of well-known brands.

“Significant price increases over the last few years have led to the erosion of the legal market for cigarettes, with the illicit trade filling the gap,” Salmon said.

Legal domestic consumption is estimated at 82.3 billion cigarettes or 80.4 percent of total consumption

Salmon, however, expressed hope the volume of domestic illicit consumption would decline with the full implementation by the Bureau of Internal Revenue of the tax stamp system.

Under the Internal Revenue Stamps Integrated System, all cigarette must already be affixed with tax stamps starting December so that only stamped locally-made cigarettes would be sold beginning March 1 this year.

Under the BIR’s Revenue Regulation No. 9-2014, all cigarette packs must bear tax stamps before they are sold in the market.

“In line with the amendment of the National Internal Revenue Code of 1997, it is anticipated that the affixture of tax stamps will further improve tax administration and deter misdeclaration of removals” Salmon said.

Former Budget Secretary Benjamin Diokno, an adviser to the International Tax and Investment Center (ITIC) who reviewed the report, said the rise in the incidence of domestic illicit consumption for two consecutive years builds a compelling case for the imposition and strict enforcement of the BIR’s tax stamp program.

Diokno said the tax stamp program, if consistently enforced and monitored, should be an effective tool to bring down the incidence of domestic illicit consumption, as well as protect government revenues by plugging loopholes.

International Tax and Investment Center and Oxford Economics were contracted by Philip Morris to study the illegal cigarette market in 14 Asia Pacific region countries which include Australia, Brunei, Cambodia, Hong Kong, Indonesia, Laos, Macao, Malaysia, Myanmar, Pakistan, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.