Weak enforcement drives illegal cigarette trade, new study finds

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By Francis Allan L. Angelo

A new nationwide study has revealed that the illicit tobacco trade in the Philippines is primarily driven by weak enforcement and governance gaps rather than high tobacco taxes.

Conducted by Action for Economic Reforms (AER) and the Economics for Health of the Johns Hopkins Bloomberg School of Public Health, the research challenges long-standing claims by the tobacco industry regarding the causes of smuggling.

The findings were based on surveys of more than 1,000 sari-sari stores and an audit of over 7,500 cigarette packs across eight key cities.

These cities included Dagupan, Navotas, Quezon City, Pasay, Batangas, Mega Cebu, Zamboanga, and General Santos.

Results indicated that the prevalence of illicit cigarette sales in Luzon, the Visayas, and Metro Manila remains low.

However, the study identified Southern Mindanao as a critical hotspot due to its geographical location and weak enforcement mechanisms.

In Zamboanga City, nearly 80 percent of cigarette packs were sold at prices below the applicable tax rates.

Furthermore, up to 96 percent of inspected packs in Zamboanga had fake or missing tax stamps.

General Santos City also showed high rates of illicit activity, with 38.5 percent of packs sold below the combined applicable taxes.

Additionally, 85.4 percent of packs in General Santos exhibited tax stamp violations, while 58.6 percent were unregistered brands.

Daffodil Santillan, the AER’s lead researcher for the study, emphasized that these regional disparities disprove the argument that uniform national taxes are the root cause of smuggling.

“The results disprove the tobacco industry’s narrative that high taxes cause smuggling,” Santillan said.

“The evidence shows the real issue is weak law enforcement and regulatory oversight, especially at ports and borders,” Santillan added.

“Lowering tobacco taxes will only make cigarettes cheaper and Filipinos sicker,” Santillan warned.

The study established that the legal floor price for cigarettes was set at PHP 114.60 per pack during the data collection period.

This amount was computed based on PHP 43.32 in production costs, PHP 60.00 in excise taxes, and PHP 12.28 in Value-Added Tax (VAT).

Transactions priced below the sum of the excise tax and VAT, calculated at PHP 71.42 per pack, constitute outright tax evasion.

While violations in Mindanao were rampant, violations involving prices below the applicable tax rates in cities outside Mindanao peaked at only 7.5 percent in Batangas.

The study also highlighted specific brands involved in these violations, such as Cannon Menthol 100s and Fort Menthol 100s.

Packs of these registered brands were found entirely without tax stamps in Mindanao cities.

Unregistered brands of foreign origin, such as Duo, Famous, Gajah Baru, and Bravo, were also prevalent in the region.

The Bureau of Internal Revenue (BIR) has estimated that the government loses approximately PHP 52 billion worth of revenues annually to the illicit tobacco trade.

Despite these losses, tobacco tax reforms have historically generated significant funds for the Department of Health (DOH).

The DOH budget rose from PHP 42.2 billion in 2012 to PHP 209.1 billion in 2023.

Senator Risa Hontiveros, Chair of the Senate Committee on Health and Demography, spoke at the launch to defend these fiscal and health gains.

“Tobacco tax reforms save lives and fund the healthcare of the most vulnerable Filipinos,” Hontiveros said.

“It’s time to protect public health and public revenues through stronger enforcement,” Hontiveros stated.

“Lowering taxes at this point, when our economy is struggling and [the] government needs revenues, may not be a good idea,” Hontiveros concluded.

The study comes amid legislative debates over House Bill 11360, which proposes lowering tobacco excise taxes.

AER warned that such rollbacks would reverse a decade of progress, noting that adult smoking prevalence had previously dropped from 29.7 percent in 2009 to 19.5 percent in 2021.

However, recent data show a disturbing rise in smoking prevalence to 23.2 percent in 2023.

Local government officials emphasized the need for uncompromising local action to combat smuggling.

Zamboanga City Vice Mayor Beng Climaco highlighted the importance of accountability and coordination during the launch.

“During my term as Zamboanga City Mayor, I led an uncompromising campaign against smuggling in Zamboanga City, initiating investigations into Customs officials and over the disappearance of smuggled sugar and rice from warehouses, demanding full accountability,” Climaco said.

“As Regional Peace and Order Council Chair for two terms, I also coordinated with law enforcement agencies down to the Barangay and personally oversaw midnight operations and confiscations, underscoring my firm resolve to protect the city from illicit trade and corruption,” Climaco added.

To address the issue, AER recommended upgrading the current tax stamp system to a comprehensive track-and-trace system independent of the tobacco industry.

They also called for the licensing of all tobacco retailers, including sari-sari stores, to ensure compliance.

AER urged the government to empower the BIR to suspend or close the business operations of violators.

The group also recommended tightening coordination among Customs, the BIR, and local governments in enforcement hotspots.

Finally, the study suggested strengthening international cooperation with neighboring countries to stem illicit trade at the source.