Enabling legal frameworks for secure tax stamps and traceability

Enabling legal frameworks for secure tax stamps and traceability

Telita Snyckers, Michael Eads

INTRODUCTION

A tax stamp program has the potential to significantly disrupt illicit trade and excise-related non-compliance – but only insofar as it is supported by a responsive, empowering legislative framework that gives an agency the flexibility and powers it needs to do so.

Legislation can only deliver on these outcomes if a rigorous legislative design process precedes it, which is the focus of this article.  

Excise agencies are creatures of statute– they can act, regulate and enforce only insofar as they are empowered to do so in terms of legislation. If the legislation is weak, the solution is weak. Governments that are contemplating either establishing a new, or transforming a traditional tax stamp regime into a modern, secure tax stamp and traceability program, have a few key issues to consider from a legal perspective. The efficacy of any tax regime is highly dependent on the underlying legislative framework. No amount of clever solution design or technological wizardry can adequately make up for a poor legislative foundation.

DRIVERS SHAPING THE FUTURE OF TAX STAMP PROGRAMS

There are a number of drivers likely to shape the future of tax stamp programs, which put pressure on policy makers to revamp existing legislation in order to adapt and establish the flexibility required to underpin this evolving field. These include:

·       Governments’ expanding mandates -To balance revenue generation, trade facilitation, border protection and consumer health and safety across a broader range of activities, in an increasingly fluid environment and ever-tightening fiscal climate;

·      The profitability, growth and sophistication of illicit trade -Much of the growth in illicit trade is attributable to organized crime syndicates finding ways to introduce illicit products into legitimate supply chains, and to blur both the origin and chain of custody of goods;

·      Consumers are demanding safe, genuine products, and looking for solutions that let them validate the choices they make;

·      Technologythat allows government to utilise information related to revenue management in more innovative ways; 

·      Expanding regulatory and industry-drivenmandates  -The rise in the number of regulatory initiatives related to the pedigree, provenance and critical supply chain events for various types of goods, and including the World Health Organisation’s Framework Convention on Tobacco Control Protocol on Illicit Trade in Tobacco Products (“FCTC Protocol”) and the European Union’s Tobacco Products Directive (“TPD”); and

·      An increase in industry-driven supply chain integrity initiatives that run the risk of developing organically, eventually resulting in a series of disconnected systems that are more difficult to integrate over time, unless managed strategically by government. 

CONSIDERATIONS RELATED TO DRAFTING BESPOKE LEGISLATION

Drafting regulations to underpin a secure tax stamp and traceability program requires a significant amount of customization in order todeliver bespoke legislation thatis specifically tailored to the agency and its unique requirements. One cannot simply transplant law wholesale from another country or jurisdiction.

A full traceability regime requires the development of bespoke, tailored legislation – simply because legislation is not a copy and paste exercise: 

·      There is no global model tax stamp or supply chain security legislation;

·      There is a dearth of examples of legislation expressly aimed at securing full FCTC compliance, exacerbated by the lack of guidance from the FCTC Secretariat insofar as supply chain-related provisions in the Protocol are concerned;

·      Legislation has to be responsive to the agency’s objectives, mandates, demographics, compliance cultures, and external legislative frameworks. What works in one jurisdiction may not be appropriate or effective in another; and

·      Different agencies have different operational capabilities, and particularly smaller administrations may simply not have the capacity to implement or enforce provisions that a larger administration may find easy to do.

THE LEGISLATIVE DESIGN PROCESS

The purpose of promulgating new legislation is not to simply introduce a “thou shalt mark” obligation. It needs to:

·      Secure a system of regulation that has the necessary powers, obligations and discretions, and checks and balances to make it (near) impervious to fraud, manipulation, arbitrage and interpretive loopholes;  

·      Sufficiently empower the agency to deter, prevent, detect, assess, remedy and punish non-compliance and fraud; and

·      Be responsive to where real risk lies; flexible enough to allow the agency sufficient discretion to adjust its operations from time to time; give effect to agency and government objectives; and be relatively technology and product agnostic.

Legislation can only deliver on these outcomes if a rigorous legislative design process precedes it,which includesan assessment of the agency’s environment, developing explicit objectives, ensuring alignment with the solution design, assessing what legal powers the agency requires to give effect to its objectives, and only then crafting an appropriate legislative and regulatory framework.

DEVELOPING EXPLICIT OBJECTIVES THAT ARE RESPONSIVE TO THE AGENCY’S ENVIRONMENT 

Any legislative design has to start with an assessment of the agency’s environment,including an assessment of the prevalence and manifestations of excise fraud, reviewing the legal obligations imposed on the administration, considering the agency’s operational maturity, and understanding how the agency could benefit from international good practice. 

There is no solution that can stop all types of fraud or non-compliance, so it is important that the agency truly understands the problems they are trying to solve.  Typically, this involves conducting a thorough diagnostic or environmental scan, as well as assessing the agency’s overall strengths and weaknesses. Without a solid business case, there is little chance that a solution will be able to withstand resistance from well-entrenched status quo interests.  

Key questions an administration needs to ask in terms of understanding its environment include:

·      How prevalent are the different types of excise fraud, and at what cost to the fiscus?

·      Given existing operational capacity and maturity, what can practically be implemented? 

·      Does the agency have specific non-negotiable obligations (e.g. under the FCTC Protocol / TPD)?

·      What is allowed in terms of existing legislation?

Only once the agency has a deep understanding of its environment, can it begin to develop specific, explicit objectivesfor the program, which could include e.g. safeguarding revenue, combating illicit trade, and complying with FCTC or TPD obligations. Key questions an administration needs to ask in terms of setting objectives include:

·       What are the three or four single biggest objectives the agency hopes to achieve?

·       Which of these objectives are non-negotiable, imposed as a result of a legal obligation to secure compliance with specific rules?

·       Which of these objectives are aspirational and form part of a longer-term view, and which are important to the agency immediately?

·      How organisationally mature is the agency, and how sophisticated does the solution need to be?

·      To what extent does current legislation support the agency in achieving these objectives?

ASSESSING THE LEGAL POWERS THE AGENCY REQUIRES 

A traceability regime requires a number of building blocks from a legislative perspective. Some of the provisions are fairly generic (e.g. around licensing, debt and dispute management), while others require the introduction of new, tailored provisions. The precise legal powers an agency needs depends on its objectives, and grows in complexity as the agency’s objectives become more ambitious, but in general, tax stamp regulations require at least the conditions for release of goods, licensing, stamp specifications, liability for dealing in unmarked goods, and the like.  Insofar as the agency may have compliance with its FCTC or TPD obligations as an objective, it also needs to review the extent to which its legislation and practices meets the requirements of the Convention and Protocol. 

Alignment and engagement with non-traditional network partners (particularly where an agency is seeking compliance with its FCTC obligations)with whom the agency may not have an existing relationship, to manage overlapping mandates, interdependencies and pre-existing regulatory obligations including other government agencies (OGA’s) like the revenue agency, border protection agency, police, judicial system, consumer protection agencies, anti-money laundering authorities, the health department, etc. 

Equally important, though, is an understanding of the administration’s own legislationbeyond simply tax stamps, in particular in respect of officers’ powers, the limitations on the agency’s powers from a constitutional perspective, and other regulatory limitations or obligations that may be imposed on the administration (for example, data privacy rules and electronic evidence rules), and other legal instruments (e.g. customs union harmonization obligations; regulations around the placement of health warnings on tobacco etc.) 

Assessing the extent to which the agency is legally mandated to implement a traceability solution, empowered to enforce the obligations it seeks to impose; extent to which non-compliance is sufficiently criminalised; extent to which different rules would be required for different products; the impact that the specific solution would have on existing licensing requirements; system limitations the agency (and manufacturers) are likely to face; the impact on small, manual manufacturers who do not have automated manufacturing lines; and the impact of the solution design on existing import, export, transit and manufacturing processes; etc.

But perhaps equally importantly is to develop a legislative and regulatory framework that strategicallysets the agency up to counter typical legal challengesthat tend to emanate from industry and non-compliant players.

Key questions an administration needs to ask in terms of assessing its legislative gap:

·      In plain language, what are the key principles we want to introduce?

·      What legal powers do we require to give effect to this? 

·      What legal powers do we have currently? 

·      To what extent can we meet our objectives under existing legislation and discretionary powers, without requiring any changes in legislation?

·      Where amendments to legislation are required, what discretions and powers does the agency have to amend legislation itself, and what requires tabling in Parliament?

CRAFTING OF A LEGISLATIVE AND REGULATORY RESPONSE 

Only once the agency has established clear objectives, developed a high-level solution design and completed a legal gap analysis should is start crafting legislation. 

An agency may want to consider promulgating legislation in distinct phases, considering the limitations imposed under existing legislation, the time it would take to amend legislation, and the agency’s operational capacity. An agency could consider initially using existing legislation to institute basic controls; then retaining existing powers under primary legislation and changing only subsidiary regulations in-house to effect for instance production control measures; and then over time seeking to promulgate entirely new primary legislation to give effect to full traceability or to secure FCTC or TPD compliance. 

Key questions an administration needs to ask in terms of closing its legislative gap:

·      Does the new draft adequately give effect to the agency’s objectives, and protect it against fraud, arbitrage and subterfuge?  

·      Are there any other provisions in current legislation that are inconsistent with the proposed new legislation, and that would need to be repealed or amended? 

·      Could the agency benefit from phasing the promulgation of legislation? 

·      To what extent could timelines around the promulgation of legislation potentially impact on the planned delivery and implementation dates of the technology solution being considered?

What other (external) legislation potentially impacts on the solution design (e.g. the positioning of mandatory health warnings on cigarette packs, or legislation around the use of electronic evidence)

CONCLUSION

A tax stamp program has the potential to significantly disrupt illicit trade and non-compliance, to empower an agency to better meet its objectives, and to enable an agency to better target its resources – but only insofar as it is supported by a responsive, empowering legislative framework that gives the agency the flexibility and powers it needs. 

Implementing a full-traceability tax stamp program is a potentially audacious goal for any excise agency. It need not be, though, if agencies: 

·      View the program as an iterative journey, implemented in phases, and working towards a longer-term goal of full traceability over time;

·      Align the program with other good practices: entity-centric design, collaborative partnerships, whole-of-government solutions, standards-based solution design, and data-centric decision-making; and

·      Follow a structured process in developing empowering legislation, which is aligned with international good practice, but uniquely tailored to the agency’s specific environment. 

Supply chain security, and by definition, tax stamp programs, are an incontrovertible part of excise agencies’ futures. Without them, agencies will increasingly find it difficult todeliver on their ever-expanding mandates and respond to the ever-increasing threat from illicit trade.It is a journey that all agencies – regardless of size or level of sophistication – need to embark upon. But it is a journey that begins and ends with a robust, flexible legislative framework.