Governments need holistic solutions, not just tax stamps
By Telita Snyckers and Michael Eads
As we discussed in our previous article[1]withat least 117 countries being unable to meet the requirements under either the FCTC Convention or the Protocol in the foreseeable future, what should be an undeniably enticing opportunity for potential solution providers may prove to be a challenging and complex environment to navigate. Of the 117 countries that potentially need your help, any number of them probably don’t even know it, and many likely can’t afford it. The long-standing history and prevalence of tax stamps make them an ideal platform for FCTC implementation, but with two possible distractions: they are often thought of as simple tax collection structures, belying their potential value as a platform around which broader excise modernisation strategies can be developed; and with cheaper, less-sophisticated, less effective stamps and marks potentially diluting the value proposition around marking.
The same intractable challenges time and again
While the 117 countries certainly pose an opportunity, experience suggests that at least some level of scepticism is warranted. The tax stamp and secure printing industry appears to face the same intractable challenges time and again: solutions are pitched that never go to tender; tenders are issued but are never awarded; awarded tenders are challenged both in court and in the media; tenders are awarded for solutions that are never implemented; intentions to expand to other products never materialise; implementations are criticised as being ineffective; contracts are not renewed; and the tax stamp and secure printing industry ends up expending a considerable amount of resources on programs that never materialise.
Four key reasons for low implementation rates
There are arguably four key drivers that explain why tax stamp and secure marking programs meet with less success than they could (or should): absolute inertia at tax and customs agencies; agencies being at the mercy of industry-driven rhetoric around illicit trade and potential solutions; failing to leverage potential allies in the public health fraternity and academia; and a myopic focus that concentrates simply on pre-existing solution models that may not necessarily meet agencies’ overall needs.
Agency inertia
As we saw in our previous article[2], only 35 percent of agencies with obligations under the FCTC Protocol have or are considering implementing track and trace solutions[3]. Only 52 percent of them collect data on cross-border trade in tobacco products; and only 18 percent keep data related to the smuggling of tobacco products.
Agency inertia – when it comes to managing the risks around excisable products like tobacco – is understandable: For many agencies, excise duties constitute a very small part of their revenue take (in some countries as low as 2 percent of total tax revenues), and with nothing to suggest otherwise, large manufacturers are assumed to be compliant and are treated as strategically important taxpayers. There tends to be a limited understanding at agency level of the different faces of illicit trade in excisable products, and little appreciation of how they are often intricately interwoven with organised crime more broadly. Little effort has likely gone into assessing the revenue losses from illicit trade or developing a comprehensive strategy to counter illicit trade. Even assuming agencies clear these hurdles, they tend to be fundamentally unschooled in terms of technology in general or the role a secure marking solution could play in curbing illicit trade in particular; have a limited understanding of the revenue optimisation potential; or succumb to the pressure of what are often undeniably some of their biggest employers and taxpayers (as a result of capture, corruption or simple political pressure).
There is no burning platform jolting agencies out of their state of lethargy. Or if there is, may well be driven by an industry agenda focused on eliminating smaller competitors, with information, rhetoric and agendas largely being driven by big tobacco or their proxies (see for instance the series of events now playing out in South Africa, with a controversial illicit trade survey funded by big tobacco being used to lobby for the targeting of smaller local manufacturers[4].)
The tax stamp industry tends to be in the business of selling what often boils down to “ink and paper,” and not holistic solutions, not crafting a strong-enough business case to jolt agencies out of their torporous state.
Industry controlling the rhetoric
By far the majority of the rhetoric and arguments around illicit trade and curbing it comes from the well-oiled machinery of the tobacco[5]industry and its proxies and intermediaries, with industry rhetoric drowning out the voices of more independent academics and NGO’s.
This means that the public and policy makers most likely – but wrongly - believe that illicit trade is solely attributable to smaller local manufacturers and crime syndicates; that tax stamp programs are expensive and ineffective; that all tax stamps are easy to counterfeit; and that additional regulation simply increase levels of illicit trade as legitimate manufacturers struggle to compete; and that the increase in illicit trade will likely result in plant closures and job losses.
With little to balance this out in the media, this is the rhetoric that pervades, and the rhetoric that very often drives policy decisions. And as the tax stamp initiative traces its way through conceptualisation to the drafting of tender documents, the awarding of the tender, implementation and operationalisation, the attacks follow a fairly predictable course - one that could easily be countered with the right data points and factoids, but too often isn’t.
Instead of pre-emptively empowering agencies with the relevant data and research and factoids that consolidate the best of academic research on what arguments to expect from industry, and how to respond when industry pushes back (either through capture, corruption political pressure or aggressive media campaigns), much of it is relegated to the chronicles of academia, and hardly ever dusted off and given the prominence it deserves.
The tax stamp and secure printing industry has an opportunity to fundamentally shift the paradigm of considerations that shape public opinion and policy makers’ decisions. The result can only be more informed decision-making, with more tax stamp programs being implemented.
Failing to leverage potential allies in public health and academia
We remain astonished at the relative disregard the public health community has for the tax stamp industry. What should be an obvious partnership is instead characterised by distrust and almost no interaction. Where the tax stamp industry should have a seat at the table when it comes to developing and implementing secure marking solutions for cigarettes as part of something like the FCTC Protocol, it does not, and is instead pertinently excluded - even as observers during the 2017 MOP1 and COP8 meetings (made all the more egregious because the tobacco industry is known to have had a voice through proxies, as is evidenced by e.g. the Dirty Ashtray Awards handed out to some countries for parroting industry rhetoric.)
The tax stamp and secure printing industries are undoubtedly the single best and most uniquely positioned to deliver on some of the Protocol’s most fundamental objectives. Instead there is poor if any communications and no formal structures for two parties who should be allies to come together. The result may well be the tobacco industry’s solution paradigm (largely based on Codentify/Inexto) being implemented as a track and trace solution for governments. (There are already indications of this happening with the EC approving related entities as data service providers under the EC’s weak criteria for independence set out in the Commission’s Implementing Regulation (EU) 2018/574.[6])
If the collective aim is to eliminate the illicit trade in excisable products like tobacco (or even if only driven by a profit motive that seeks simply to increase the number of tax stamp programs implemented), the enmity and scepticism on the part of the global health fraternity needs to be far better managed. Arguably the best way to mitigate that risk would be by creating a network of allies working towards the same goal: reducing the illicit trade in cigarettes, through the use of proven technologies and strategies. In that sense, a partnership between organisations like ITSA and other trade associations, illicit trade experts, and something like the FCTC Secretariat seems like a natural fit. Unfortunately, the Protocol’s track and trace regime is largely developing without the inputs of subject-matter experts who have real-world experience in implementing tax stamp or secure marking programs, or more broadly in curbing illicit trade, simply playing into the hands of the very industry it was meant to control.
Solutions that only partially solve the problem
Tax stamps and secure marks are an inordinately important part of the ecosystem of solutions that help ensure better production control, traceability and overall compliance in respect of excisable products across the supply chain. But secure track and trace is only one element in an agency’s illicit trade strategy. In order to be fully effective, and provide a comprehensive service offering it needs to be augmented by strong business intelligence, data analytics, enforcement capabilities and oftentimes additional cargo tracking and container security initiatives.
This is not necessarily always immediately apparent to client agencies, who may well naively implement a secure marking and traceability solution believing it to be a panacea that does not require additional investment or capacity on the part of the agency.
This dilutes the effectiveness of tax stamps, secure marks and traceability programs across the board: how do you superimpose a generic solution if you don’t know what problem you are trying to solve? If your service offering only focuses on the secure track and trace component, but little else, how does that substantively translate into value-for-money for cash-strapped agencies? How does it actually improve not just production control for local manufacturers, but contribute to actually reducing the prevalence of illicit trade? And how does it help to mitigate rhetoric (very often planted by industry) that tax stamp programs are ineffective?
Focusing on broader outcomes
There is nothing wrong with being driven by a profit motive. There is nothing wrong with touting cost-effective solutions that maximise a company’s return on investment. But until the tax stamp/secure printing industry begins to develop holistic solutions that actually speak to illicit trade in very real terms it will continue to face the challenges it now does, and will continue to limit its potential success.
Never forget why we have tax stamps, secure marks and traceability programs: to ensure that taxes are paid on excisable products, rooting out illicit traders that benefits from not paying taxes and duties. The challenge in 2019? Do more than just sell stamps – empower agencies to make informed decisions, and sell holistic solutions that have a quantifiable impact on illicit trade and transforms the way in which agencies administer their excise portfolios.
Our next article explores just how that can be done by helping customer agencies better understand the problems they are facing, tailoring solutions to fit the problem taking agency capacity into consideration, help agencies position marking regimes within the context of a broader illicit trade strategy, and using tax stamp and fiscal marking programs as a platform to more broadly transform customs and excise administration.
[1]“117 countries may need your help. Some don’t know it. Many can’t afford it”, Tax Stamp News November 2018
[2]Ibid
[3]This number excludes countries who are not signatories to the Protocol. Moreover, only 78 percent of Parties submitted reports, which means that the actual extent of readiness is likely far lower than these numbers would suggest. http://www.who.int/fctc/mediacentre/news/2018/launch-global-progress-report-2018/en/
[4]For a brief summary, see e.g. http://www.tobaccotactics.org/index.php?title=South_Africa-_Country_Profile
[5]Although of course increasingly also alcohol, sugar and other manufacturers of excisable products.
[6]https://ec.europa.eu/health/sites/health/files/tobacco/docs/primaryrepositories_approvedproviders_en.pdf