A New Wave of Cigarette Smuggling

Whenever governments want to collect more revenues, their reflex action is to raise taxes on cigarettes and alcohol, the so-called “sin taxes,” because both are harmful to human health. The Philippines is no exception. Two bills have been filed in both houses of Congress that will raise local cigarette taxes by 83 percent. Local cigarette manufacturers say, however, that the street price may go much higher. After cigarettes, alcohol will be next. The government expects an increase of revenue from cigarettes. But it doesn’t always end up that way, as other countries that also raised sin taxes have discovered. On the contrary, their revenue collections actually went down in spite of the higher taxes. Why? Because of smuggling. When the prices of local products go up too high, smugglers come in with their cheaper products. Do you still remember the time when smuggled blue-seal cigarettes flooded the Philippine market some years ago and smugglers became filthy rich? Cigarette smuggling is now rampant in Malaysia and Singapore which had raised their taxes on cigarettes. They have both suffered revenue shortfalls because of the smuggling. The Philippines is even more vulnerable to smuggling because it has very porous borders, being an archipelago where smugglers can land their illicit products on numerous islands and islets. The main source of counterfeit cigarettes, which are smuggled to countries with high tobacco taxes, is Fujian’s Yunxiao County in Mainland China. It is currently dumping billions of fake cigarettes into countries with high tobacco taxes. The International Consortium of Investigative Journalists (ICIJ) reported that Yunxiao County produces half of China’s estimated output of 400 billion sticks of fake cigarettes a year. Chinese authorities are unable to stop some 200 illicit cigarette factories in Yunxiao, which operate literally “underground,” beneath buildings and hills. “Most factories are underground,” said a Yunxiao cigarette broker quoted by ICIJ. “They’re under buildings, unimaginably well-hidden, with secret doors from the basements.” Yet they are not paltry cigarette makers. Some factories employ up to 500 workers and generate over P4.3 billion ($100 million) in annual sales. In the last 10 years, fake cigarette production grew eightfold, making China the world leader in counterfeiting cigarette brands, according to ICIJ. The illegal industry fuels a multibillion-dollar global black market that targets countries in the American continent, European Union and Asia where cigarette taxes are high. As a result, billions in annual tax revenues are robbed from governments. Singapore and Malaysia both suffered major setbacks in revenue collections in recent years after they increased excise taxes on tobacco products, which drastically raised the street price of a smoke. The tax increases emaciated local cigarette manufacturing and induced the influx of massive amounts of fake cigarettes. Today, Malaysia is tagged as the world’s black market Mecca for tobacco, accounting for 40 percent of the country’s cigarette consumption. The Philippines may be next if a high excise tax regime is legislated next year. The Department of Finance predicts that local cigarette prices will go up by 83 percent should the sin tax bill, House Bill 3465 authored by Rep. Henedina Abad (Batanes) and favored by Malacañang, be enacted into law. Sen. Miriam Defensor-Santiago recently filed a counterpart bill in the Senate. The proposed sin tax increase is much higher than the recent increases legislated in Singapore and Malaysia. The Abad bill proposes to collapse the four-tiered excise tax system into one, effectively killing low-priced cigarette brands and equalizing the escalated prices of premium, locally made and imported brands. With HB 3465, the government hopes to generate an additional P60 billion in revenues. But Rep. Magtanggol Gunigundo (second district, Valenzuela City) is opposed to any plan collapsing the present four-tiered excise tax system. In China, authorities estimate that it costs only P8.65 (20 US cents) to produce a pack of fake cigarettes of any popular brand. Yet the same pack will sell for as much as 20 times more in the United States and the European Union. With the proximity of the Philippines to China, fake cigarettes could make a killing in the Philippines by undercutting the price of legitimate cigarettes. Mike Lopez, chair of Caucus for Philippine Competitiveness, said that the impending death of low-priced cigarettes will make way for cheap, smuggled cigarettes from China, as experienced by countries that raised excise taxes unreasonably. He said that Chinese smuggling syndicates are totally familiar with the Philippines. “One of the biggest names in fake cigarettes is Tony Tung, alias Tun Yan Yuk, who knows the Philippines like the palm of his hand,” Lopez said. Tung made millions smuggling legally produced Philippine cigarettes into China. But when China cracked down on his business in the 1990s, Tung trained his sights on counterfeiting popular cigarette brands instead. Charged with tax evasion and smuggling of cigarettes worth RMB600 million, Tung is a fugitive ranked by Chinese police among the Mainland’s most notorious cigarette smugglers.