Philippines lost nearly P16-B on illegal cigarette sales in 2013 - study

Posted at 06/05/2014 2:53 PM | Updated as of 06/06/2014 3:20 PM

MANILA – Some local cigarette manufacturers are not paying the correct taxes, contributing to a potential revenue loss for government of P15.6 billion in 2013, a study from the Oxford Economics and International Tax and Investment Center reported Thursday.

The UK and US study, "Asia-11 Illicit Tobacco Indicator," showed that the consumption of domestic illicit cigarettes nearly tripled to 17.1 billion in 2013 from only 6.1 billion in 2012, making up 90 percent of total illicit consumption.

Domestic illicit cigarettes are those produced to be illegally sold and consumed without paying applicable taxes.

“The problem with illicit cigarettes has to do with domestically-produced cigarettes from which the taxes are not being paid. There is also an increase in the amount of counterfeit cigarettes, but it is the 90 percent of domestic cigarettes that government should focus on,” Oxford Economics chief executive Adrian Cooper said in a press briefing in Makati City.

Oxford Economics chief executive officer Adrian Cooper and WBF chairman Peter Wallace

Cooper said the rise in local illicit cigarette consumption does not only indicate practices of tax evasion, it also undermines the public health goal of the tax reforms to make cigarettes less affordable.

"We understand this practice is currently the subject of a number of investigations, and we encourage vigilance and perseverance in addressing the issue," he said.

He added that the rise in consumption of local illicit cigarettes came after the price hike, particularly in the “super low-price” segment, which saw a 175 percent increase in price per pack.

Cooper urged government to crack down on the illicit trade of local cigarettes, but declined to name the cigarette manufacturers involved in the illegal trade.

“If action is not taken to stamp out domestic illicit cigarette production now, as taxes rise further then the potential profits for tax evaders and smugglers will only increase and there is danger there on the scale of illicit market here growing to be larger than we’re seeing in other Asian countries,” Cooper said.

“The laws are clear about what people should be paying on the cigarettes they are producing, so I think that it’s important that there is a rigorous audit of taxes being paid by cigarette manufacturers and that appropriate enforcement measures and monitoring are put in place, and people who are failing to pay taxes should be brought to justice,” he added.

Total illicit consumption in the Philippines jumped to 19.1 billion last year, up three-fold from the 6.4 billion illicit cigarettes consumed in 2012.

The study noted that tax losses in 2013 from illicit cigarettes jumped 497 percent to P15.6 billion from P2.6 billion in 2012.

Cooper said the tax reforms that have been implemented only resulted to a “modest decline” in overall cigarette consumption, and instead saw an increase in the consumption in illegal trade.

"The major impact of tax increases in 2013 was not to reduce overall consumption of cigarettes, it was to shift towards illicit cigarettes, and as a consequence have a very big impact on revenue losses that the government experiences because of this illegal trade,” he said.

Cooper also said that while the 114 percent increase in tobacco excise revenue in 2013 as a result of the tax reforms is laudable, “one cannot ignore the tax foregone as a result of this very rapid growth in the illicit cigarette trade, domestic illicit cigarettes making up the lion's share of this.”

Marlboro cigarette-maker Philip Morris, which commissioned the study, has alleged that local cigarette-maker Mighty Corp. of unfair business practice by producing more than what it declares to the government.

The chairman of Wallace Business Forum, Peter Wallace, said government is still investigating if Mighty Corp. is involved in illicit trading.

“I believe that Secretary Purisima has asked this company to be investigated… The Bureau of Customs has closed down their Customs warehouse but I believe that the investigation has not yet been concluded as to whether this company is a major supplier of these illicit cigarettes,” he said.