Report links tobacco firms to illicit Philippine cigarette trade

By Joseph Bernard A. Marzan

MANILA — A new report by global tobacco industry watchdog Stopping Tobacco Organizations and Products (STOP) has raised concerns that tobacco industry practices may be contributing to the illicit cigarette trade in the Philippines, disputing industry claims that higher tobacco taxes are the main driver of illegal sales.

The report, “Complicit in Illicit? Tobacco Industry Tactics in the Philippines,” found cigarette packs of leading brands being sold without valid tax stamps or at prices too low to meet minimum tax obligations, suggesting possible tax evasion and supply chain gaps.

The findings draw partly on independent research by Action for Economic Reforms (AER) and Economics for Health, which conducted surveys of 1,000 sari-sari stores across eight major urban centers and audited more than 7,500 empty cigarette packs over 14 days.

Although tobacco excise taxes are uniform nationwide, the AER study found that illicit trade levels vary sharply by location, with relatively low rates in Luzon and Mega Cebu but significantly higher levels in General Santos City and Zamboanga City in Mindanao.

Researchers identified three main forms of illicit trade: cigarettes sold below the combined excise and value-added taxes, tax stamp violations on registered brands, and the sale of unregistered or smuggled brands.

In Zamboanga, 79.5 percent of sampled packs were sold below the tax threshold, while unregistered brands accounted for 58.6 percent of collected packs in General Santos and 47.5 percent in Zamboanga, pointing to enforcement weaknesses rather than tax policy as the key driver.

More than 90 percent of collected packs nationwide bore brands registered with the Bureau of Internal Revenue (BIR), indicating that most smokers purchase products made by major tobacco companies rather than obscure brands.

Tax stamp violations were found on packs bearing brands of Philip Morris Fortune Tobacco Corp. and Japan Tobacco International, raising questions about supply chain control and compliance, although it remains unclear whether the packs were counterfeit or diverted legitimate products.

Investigators also documented registered cigarette brands being sold below PHP 71.42 per pack, the minimum price at which excise and value-added taxes could plausibly be paid during the study period.

Such underpricing increases affordability, particularly among young and low-income consumers, while depriving the government of revenue intended for health programs.

“Increasing tobacco taxes has helped reduce smoking rates in the Philippines, so it is not surprising that the industry is trying to reverse these measures,” said Jorge Alday, director of STOP at Vital Strategies.

“Independent research shows that tobacco taxes are not the main driver of illicit trade and suggests the industry itself may be part of the problem. Cutting taxes would primarily benefit tobacco companies and risk undoing major health and equity gains. Filipinos deserve better,” Alday added.

Government data show tobacco excise tax collections declined between 2022 and 2024, while adult smoking prevalence rose from 18.5 percent in 2021 to 23.2 percent in 2023.

The BIR estimated government losses of PHP 25.5 billion in 2023 due to the illicit tobacco trade.

Since the Sin Tax Reform Act of 2012, tobacco taxes have helped raise the Department of Health budget from PHP 42.2 billion in 2012 to PHP 209.1 billion in 2023 and generated PHP 134.52 billion in revenues in 2024, much of it allocated to health spending and universal health care.

The STOP report also highlighted “overshifting,” a practice in which tobacco companies raise prices beyond what is necessary to cover tax increases, boosting profits even as consumption declines.

This pricing behavior, researchers said, suggests there is room to further increase tobacco taxes without harming revenues.

Dr. Allen Gallagher, co-director of the Tobacco Control Research Group at the University of Bath and a contributor to the report, said the solution lies in stronger enforcement rather than tax cuts.

“This report highlights the need for stronger enforcement, not lower tobacco taxes, to address illicit trade,” Gallagher said.

He added that ratifying the Protocol to Eliminate Illicit Trade in Tobacco Products and implementing an independent track-and-trace system would help authorities identify the source of illicit products and ensure tobacco taxes are fully collected.

Public health advocates warned that rolling back tobacco taxes could reverse gains in reducing smoking, keep cigarettes affordable, encourage youth uptake and deepen health inequities.

The Philippines is a signatory to the World Health Organization Framework Convention on Tobacco Control but has not yet ratified the Protocol to Eliminate Illicit Trade in Tobacco Products, an international treaty that establishes a global tracking system for tobacco products and strengthens measures against smuggling and counterfeiting.

The protocol, which entered into force in 2018, has been ratified by more than 70 countries.