Easing COVID-19 curbs reignites illicit cigarette trade in Philippines

MANILA, Philippines — As cigarette prices go up every year due to mounting taxes, smugglers are having a field day in far-flung areas particularly in Mindanao, where as many as three in every five packs are cheap, but illicit.

“I think it should be noted that in Mindanao, illicit trade can reach up to 60 percent of the market. Mindanao is the super hot spot,” said PBA party-list Rep. Jericho Nograles, who investigated the prevalence of smuggled cigarettes during the 18th Congress.

An industry survey obtained by The STAR showed the market share of illicit cigarettes fell to five percent in 2020 from eight percent in 2019, a decline attributed to the closure of borders at the onset of the pandemic.

What appeared to be a collapse in the illicit trade, however, proved short-lived as soon as the government lifted restrictions on trade and travel. A separate survey reported that illicit incidence went up to 6.8 percent in the first half of 2021 from 5.5 percent in the prior semester.

Also, quarantine restrictions imposed in 2020 gave authorities the logistical advantage to go after smugglers. The Bureau of Customs (BOC) apprehended P5.77 billion worth of smuggled cigarettes as a result of the 204 raids it conducted during the year.

In comparison, the BOC seized only P2.68 billion in illicit tobacco from 79 operations in 2019, the year President Duterte signed Republic Act (RA) 11346, which increased cigarette taxes.

As soon as the BOC lost its edge though when mobility regulations were loosened in 2021, its confiscation fell to P1.72 billion even as it staged 131 busts during the period.

Thus, the government forfeited nearly P3 billion in excise revenues to the illicit trade: P197.19 million in 2019, P1.51 billion in 2020 and P1.03 billion in 2021.

However, Nograles said the BOC has yet to figure out how massive tobacco smuggling is as a business, especially in Mindanao. The legislator headed the technical working groups on illicit tobacco and agricultural smuggling under the House ways and means committee tasked to probe the illegal trade of farm goods.

The technical working groups, in their findings, said the government loses more than P28 billion to agricultural smuggling and another P60 billion to illicit tobacco every year. They found out as well that smuggled cigarettes accounted for up to 60 percent of the Mindanao market.

In interviews with The STAR, industry sources said the average cost of cigarettes swelled to P125 per pack after the excise tax escalated to P55 this year as scheduled under RA 11346.

However, sources said cigarette packs in Mindanao sell for as low as P38, a price Nograles confirmed he saw during the field studies his team conducted.

Nograles said cigarette packs retailed at that price can be presumed to be illicit for two reasons: first, they can be sold at P38 because they evaded the P55 tax, and second, they can be bought at a low price because they are made of cheap chemicals.

“The government slaps an excise tax of P55 per pack this year. How can anyone sell a pack at P38 then? It is illegal. Worse, local government officials – even members of the military and the police – in Mindanao smoke these illicit cigarettes,” the lawmaker said.

In Mindanao alone, industry data showed that the BOC captured 5.16 millions sticks of Fort, 3.23 million sticks of Canon and 2.44 million sticks of New Berlin brands last year. Similarly, the agency apprehended 1.89 million sticks of Champion and hundreds of thousands of sticks of New Far, YS, Bravo, Bros, Astro, Tradition, San Marino, Union, Royal Raina, Marlboro and Camel brands.

Narratives from government and private officials point to the same suspect: the farthest province south of the Philippines – Sulu.

According to sources, illicit cigarettes enter Sulu from Indonesia without going through the usual inspections, as they said some authorities are reportedly involved in protecting the dealings.

From Sulu, the containers will be transferred in loose cargoes to Zamboanga Peninsula, where smugglers will load them in trucks headed to Cotabato City and General Santos City.

On the other hand, a separate batch of illicit cigarettes will be stuffed inside pump boats owned by small-scale fishermen in the region. The fishing vessels will deliver the contrabands to Cebu and Palawan, each carrying about 1,000 master cases containing one million sticks in total.

“These pump boats can accommodate at least 1,000 master cases [and] they will bring the illicit cigarettes to Palawan, to Cebu, where they will be distributed to Luzon and Visayas. All of these items are paid no taxes at all,” a source said.

Nograles proposed that the government enhance its border defenses and improve the tax administration to plug the revenue leakage of P60 billion every year.

However, he fears the government will push through with another round of tax hikes on smoking products, a move that he warned could even worsen the revenue losses to tobacco smuggling.

By increasing taxes, Nograles said retail prices of authentic cigarettes will only soar to the point of driving smokers to buy illicit for their affordable cost.

In the end, the goal of raising revenues fails and the smugglers end up profiting. As much as the situation appears to hit a dead end, there are ways on how the government can gain more from tobacco firms without resorting to tax hikes.

(To be concluded)