Illicit

We live in an archipelago with thousands of kilometers of undefended beaches. Therefore smuggling is easy to do – especially when revenue policies and enforcement capacity are mismatched.

I am old enough to remember the time when smuggled cigarettes were called “blue seal.” That was because they did not bear the required BIR stamp – even as they were openly sold in the stores.

Smuggling “blue seal” cigarettes must have been very lucrative and the risks of conviction must have been very low. The trade produced powerful political lords in provinces around Manila. Everybody knew what they did for a living although no one ended up in jail.

Eventually, domestic manufacturers wisened up. First they faked BIR stamps. That was too easy. They then began producing counterfeit “blue seals” and attached them to illicitly manufactured cigarette brands. That must have been doubly lucrative: fake cigarettes with fake stamps.

The fake brands with fake (foreign) stamps were “smuggled” back into our economy. This must have turned the smuggling industry on its head.

Government collections suffered. Consumers were left unprotected.

Over the past few years, government has repeatedly raised excise taxes on tobacco products. These revenue measures (called Sin Taxes) were relatively easy to enact. Few would argue with the public health benefits promised by such measures.

However, steeper excise tax rates is always an inducement to smuggle tobacco products – especially in an environment where there are large gaps in enforcement and only meager penalties for those apprehended. Today, the steeper tax rates and weak enforcement infrastructure made smuggling even more lucrative.

Government, on this matter, is losing on both ends. It is losing the revenue battle because illicit tobacco products proliferated. It is losing the public health battle because more people, not less, are consuming the products.

Tobacco excise tax collections plunged from P176 billion in 2021 to just P134 billion in 2024. Legal cigarette volumes fell from 69 billion sticks in 2020 to just 43.8 billion in 2024. As this happens, smoking prevalence increased to 23.2 percent – reversing 12 years of health gains.

Illicit tobacco now accounts for 18.2 percent of the market, representing a 240 percent rise over just four years. In Lanao del Sur, illicit tobacco accounts for a whopping 94 percent of the market. If this problem is not addressed with urgency, this will be how the whole economy will look like. Those who follow the rules and pay the right taxes will become extinct.

One regulatory official conceded: “The scale and speed of the illegal economy has overwhelmed our current enforcement systems.”

We have much to learn from Malaysia’s experience. The nation was once the regional leader in tobacco regulation.

During the period 2019-2020, illicit cigarette trade in Malaysia zoomed to 60 percent of the market. This was the highest rate in the whole world at that time. This crisis was created by a toxic mix of steep tax hikes, weak enforcement and poor inter-agency coordination.

From 2015 to 2019, Malaysia increased tobacco excise taxes by 130 percent, aiming to simultaneously reduce smoking and boost government revenues. It ended up failing on both ends. Legal sales plummeted by 35 percent while consumer demand dramatically shifted to untaxed products. Government revenue collapsed as the tobacco black market flourished.

As it is here, legal loopholes in transit and bonded zones allowed massive leakages of tobacco products meant for export. Conviction rates for smuggling were dismally low, producing a climate of impunity. Permeable borders made smuggling easy and a breakdown in coordination made this a relatively low risk crime. Kuala Lumpur had to react dramatically and drastically to address this problem.

We are rapidly headed to exactly the same tobacco Armageddon Malaysia experienced.

The agencies that ought to be involved in enforcement – the BIR, the Customs Bureau, the Department of Trade and Industry – operate in their own silos. The records show that only 0.06 percent of BIR seizures and 0.15 percent of Customs seizures led to convictions.

The last Senate hearing on the matter showed the Bureau of Customs, over the period studied, performed 1,296 seizures but won only two convictions. The BIR managed only one conviction out of 1,785 seizures. The lack of prosecutorial follow-through undermines all enforcement efforts.

In addition to lack of inter-agency coordination, there are numerous loopholes in standing policy. For instance, the dual tax system on vape products distinguishing between nicotine salt and freebase has led to a high level of technical smuggling. Traders simply declare their products in the lower tax category to evade paying government duties.

As the tobacco black market grows, its negative impact on everyone grows as well.

Illicit tobacco (and vape) trade displaces legitimate businesses, threatens public health and undermines government’s revenue efforts. When legal manufacturers and retailers close shop from unfair competition, jobs are lost. Corporate taxes decline. Legitimate jobs are lost.

Most of the illicit tobacco and vape products are, of course, not quality controlled. There is no one enforcing safety standards on them.

Senator Win Gatchalian has led a productive inquiry in his chamber revealing the extent to which the tobacco black market has grown and the numerous gaps in enforcement. But there is no champion in the Executive branch ready and capable of immediate action on this matter.

When we say government has underperformed in its responsibilities, this is exactly what it looks like.