World No Tobacco Day and smuggling

May 31 is World No Tobacco Day. This year, the theme of the celebration is “We need food, not tobacco.” The 2023 global campaign aims to shed light on how tobacco farmers can shift to alternative sustainable crops amidst the global food crisis.

Food shortages experienced globally due to the Russia-Ukraine conflict are exacerbated in the Philippines because of misguided food policy, poor resource allocation, subpar infrastructure, extreme weather events like typhoons, and corrupt importers and smugglers. Basic goods are becoming inaccessible to ordinary Filipinos — an October 2022 World Food Program survey showed that one out of 10 Filipino households are food insecure.

Given the struggles of our local farmers, this year’s World No Tobacco Day emphasizes the need to shift away from farming tobacco, one of the main crops in the northern regions of the Philippines.

Tobacco farming is unsustainable and traps our farmers in a cycle of debt and poverty. In an interview conducted by Action for Economic Reforms with tobacco farmers in Bacnotan, La Union, in 2021, farmers said that they are left with no choice but to farm tobacco despite the toll it takes on their health. The lack of access to water in their province makes it difficult for them to shift to planting rice.

In the 2021 interview, the farmers pledged support for now-President Bongbong Marcos. “’Yung sinasabi nila na si Marcos daw ay tutulungan niya ’yung mga magsasaka. ’Yun ang gusto namin (They say that Marcos will help the farmers. That’s what we want),” they said.

More than a year after the interview, Marcos has not only won the election but also sits as the Secretary of Agriculture. Unfortunately, he has been largely unsuccessful in alleviating the issues of the agriculture sector, as manifested by the sugar importation scandal and onion fiasco happening within the span of a few months.

Worse, high inflation persists, mainly because of high food prices arising from tight supply.

Smuggling contributes to our agriculture crisis. Our law against smuggling is weak, and enforcement is also weak. It is therefore crucial that our policymakers make the necessary reforms to curb the rampant smuggling of goods.

On May 2, the Senate Committee on Agriculture led by Senator Cynthia Villar held a hearing for Senate Bill 1962, amending the Anti Agricultural Smuggling Act of 2016.

However, a bill passed in the House (House Bill 3917 filed by Congressman Sandro Marcos) and pending in the Senate (Senate Bill 1812 filed by Senator Lito Lapid) taken up in the same committee hearing takes advantage of the issue of smuggling of essential agricultural goods to propose the inclusion of tobacco smuggling in the new bill. The bill raises penalties on the smuggling of tobacco, including raw tobacco, heated tobacco products, and manufactured cigarettes.

Tobacco smuggling, and illicit trade of tobacco as a whole, is a serious issue, mainly because it erodes the revenue the government should be receiving through tobacco taxes. The Bureau of Internal Revenue (BIR) Commissioner Romeo Lumagui said that for the first four months of 2023, the government’s excise tax collection had a shortfall of 20%. Tobacco products are among the commodities that are subject to excise taxes. The BIR Commissioner also said tobacco illicit trade “is a large part of that shortfall.”

A 2021 policy paper written by Myrna S. Austria and Alyssa Cyrielle B. Villanueva from the School of Economics, De La Salle University, using methods drawn from other studies, “provided strong evidence of illicit trade in the country during 2009-2017.” Austria and Villanueva nevertheless pointed out: “Non-price factors are considered more important determinants of illicit trade. These include corruption, the presence of informal distribution networks, and weak regulatory frameworks.”

Further, growing illicit trade dampens the effect of health policies put in place to lower tobacco consumption such as sin taxes. Hence illicit trade is a barrier to reducing the number of diseases and deaths associated with smoking.

However, the tobacco smuggling bill approved by the House of Representatives and the counterpart bill in the Senate filed by Senator Lito Lapid (Senate Bill 1812), though claiming to address illicit tobacco trade, are weak. Simply raising the penalties for smuggling tobacco products does not sufficiently address tobacco smuggling.

Senate Bill 1812’s provisions focus solely on penalties without addressing the enforcement of said penalties. Penalties are only as effective as the probability of perpetrators to get caught, which can only be increased through improvements in enforcement. Worse, simply raising the penalties could have the unintended consequence of encouraging bribery and collusion among smugglers and enforcers.

If the bill seeks to curb the growth of illicit tobacco trade in the country, it needs to focus on improving the quality of enforcement and governance, as these factors are what truly affect the pervasiveness of tobacco smuggling.

A case study which shows that enforcement is a vital tool in curbing illicit trade is the successful case filed against Mighty Corp., then one of the two largest domestic players in the tobacco industry in the country, for tax evasion through the usage of fake tax stamps. Thanks to the efforts of the BIR, Bureau of Customs (BoC), and the Department of Finance (DoF), Mighty was shut down, P30 billion was collected as its tax settlement, and it was later acquired by Japan Tobacco, Inc. Mighty’s shutdown signaled that companies would less likely engage in illicit trade if they felt threatened by a higher probability of being caught, which would come at a monetary and reputational cost.

It is also legally unusual that SB 1812 lumps products in their finished form, such as heated tobacco products and manufactured cigarettes, with raw, unmanufactured agricultural goods. Tobacco products, although derived from an agricultural product, obviously deviate from the Anti-Agricultural Smuggling Act’s original intention, which is to stabilize prices and ensure food security.

The issue of tobacco smuggling, while salient, is not one that can be appropriately tackled by simply amending the Anti-Agricultural Smuggling Act to raise penalties for smuggling tobacco. The way to strengthen any anti-illicit trade measure, whether for tobacco or staple food products, is by ensuring that enforcement is strengthened. For Senate Bill 1812 this can be done by introducing a more exhaustive system of labeling, tracking, and tracing tobacco products in the Philippines, as well as reporting contraband or counterfeit goods, all integrated into a public database. The effectiveness of this system is also contingent on the constant and quick coordination between enforcers in the BIR, BoC, and local government units, to ensure that smugglers are apprehended and punished accordingly.

In this regard, the Austria and Villanueva study cited above can guide our legislators. To quote Austria and Villanueva: “The study recommends that the increase in illicit trade should not be an excuse not to increase the excise tax on cigarettes. Instead, the ongoing tax policy reforms should be part of a comprehensive program to lower cigarette consumption and must be accompanied by the following: a.) strengthening tax administration and enforcement should be given priority so that the required taxes are paid and collected prior to the release of the cigarettes from the place of production and ports; b.) government institutions involved in the entire system should be strengthened to prevent corruption, informal distribution channels, and organized crime networks; c.) a coordinated approach in combating illicit trade with the country’s neighbors, particularly China, Vietnam, and Indonesia, should be pursued; and, d.) the rehabilitation of smokers who are struggling to quit smoking should be given equal importance.”

So be it.

Pia Rodrigo heads the health policy team of Action for Economic Reforms.