Illicit trade is a bane among our tax collectors. It deprives the government of billion pesos worth of revenues and the practice finds ways to circumvent product standards.
The illegal trade continues to pose challenges to the government. As an archipelago with porous borders that encourage smuggling, the Philippines is at the receiving end of illicit trade.
Importers and manufacturers also devise schemes to make big profits and skirt taxes at the same time. We’ve seen this before in the case of Mighty Corp., a tobacco company that ceased to exist after evading P37.88 billion worth of taxes by using counterfeit tax stamps.
The illicit trade is prevalent in the e-cigarettes sector as well. While the government implements laws imposing excise taxes on various sin products (including e-cigarettes), the persistence of illicit trade on “vapor nicotine and non-nicotine products” shortchanges the government on its intention to collect excise taxes to fund the country’s universal healthcare system.
The private sector and the academe are naturally alarmed by revenue losses from excise taxes. The Federation of Philippine Industries estimates the illegal trade practices cost the Philippine government P26 billion in 2022. A recent study from the University of Asia & the Pacific (UA&P) projected a P43-billion loss over the next four years, if the government would not reinforce its enforcement of anti-smuggling laws.
Popular e-cigarettes
The growing popularity of vapor nicotine and non-nicotine products, or e-cigarettes, has apparently emboldened sellers and manufacturers to resort to the illegal practice. Acting on an intelligence tip, the Bureau of Customs (BOC) raided a Valenzuela City warehouse storing 14,000 illegally-imported boxes of e-cigarettes.
The raid confiscated around 1.4 million pieces of 10 ml disposable e-cigarettes marked with Flava labels. The quantity of confiscated products amounts to almost P700 million in value and P728 million in taxes.
The House Committee on Ways and Means, meanwhile, has received independent reports that certain products in the market contain higher nicotine content, contrary to the formally registered amount. Among these e-cigarettes are Flava products and Chillax.
Per their labels and registration, these products merely declare freebase nicotine. However, third-party test results show they also contain nicotine salts and benzoic acid. The misdeclaration has significant implications because excise tax rates for freebase nicotine and nicotine salts are different.
Per the 2020 NTRC Research Journal, the 2023 excise tax rates on freebase nicotine and nicotine salt stand at P60 per 10ml and P52 per 1ml, respectively.
The Committee on Ways and Means of the House of Representatives conducted two investigation hearings, in aid of legislation, on the developments on Nov 28 and 12 Dec 12, 2023. The committee said it would issue a report shortly recommending the filing of criminal charges based on prima facie evidence presented during the two hearings against the unscrupulous industry players involved on the issue.
Universal health care
The early detection of the alleged illicit trade practices of Flava Corp. and partner Denkat Trading Philippines augurs well for the government’s tax collection drive to fund budget priorities like healthcare.
Albay Rep. Joey Salceda in a House report correctly points out the evils of illicit trade and its adverse impact on government social services and the whole business community.
“Eighty percent (80%) of revenues from vape sin taxes are spent towards universal health care and government hospitals. So, the health impacts of smoking vape aside, tax evasion in this product, is stealing from our hospitals and our sick,” he says.
The excise taxes of P728 million on Flava’s products would cover a significant part of the P10-billion budget cut for the Department of Health (DOH) for 2024.
In addition, since these confiscated e-cigarettes were not officially declared, there is no assurance about their quality and compliance to health standards. Given the continued prominence of counterfeit products, these illegally imported e-cigarette products might contain dangerous substances and ingredients considered toxic to humans.
To sum it up, government agencies must undertake steps to ensure fairness and equity in the implementation of business laws and send a message to all other businesses involved in illicit trade practices that the long arm of the law excuses no one.
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