Gaps in agency thinking – and opportunities to fill them (for Tax Stamp News, published by International Tax Stamp Association)
Telita Snyckers
CURRENT AGENCY APPROACHES HAVING A LIMITED IMPACT
The impact many agencies have on the illicit trade in cigarettes is generally quite limited: So, for instance an agency may note that it seized an impressive-sounding 1 billion illicit cigarettes over the course of a year. However, that translates into less than 1 percent of illicit cigarettes being removed from the market. This is not an isolated example - it is a pattern that repeats itself the world over, with only 0.7% of all illicit cigarettes being seized globally.
Agencies’ limited success does not just lie in their inability to detect and seize illicit cigarettes, but also in other indicators like the relatively limited progress with the implementation of instruments like the FCTC treaty. There has been no progress in the implementation of 7 out of 16 substantive treaty articles since 2014 (with the tobacco industry continuing to be the most important barrier in the implementation of the convention.)
Many substantive proposals aimed at curbing the tobacco industry’s powers and abuses have been tabled as part of international treaties - and have consistently been diluted: references to the industry abusing international trade and investment rules was deleted; all references to “tobacco industry interference” have been removed; proposals that the right to health takes precedence over any laws related to tobacco use, now simply acknowledge that the FCTC contributes to the achievement of health. The industry describes these as “tremendous outcomes.”
Technology-driven solutions, like tax stamps and traceability solutions, are the one consistent feature thatdoallow agencies to have a more positive impact.This makes it all the more important for tax stamp programs to become ever more effective tools in curbing the illicit trade in cigarettes – and gives tax stamp service providers a real stake in securing agency success.
WHY TOBACCO CONTROL STRATEGIES FAIL
Why are some agencies more successful in targeting illicit trade and others less so? Experience highlights a number of possible causes:
· The strategic importance of excise administration is under-valued. Excise duties are generally not a big money spinner for the average agency, as it does not affect the agency’s revenue bottom line significantly. However, illicit tobacco poses more than a public health and revenue risk – it has strong links to money laundering, counterfeiting, smuggling, organised crime and terrorism, offering a complementary source of income and a way through which to launder money. Agencies should make the illicit trade in tobacco a strategic priority not because of its revenue impact, but because it sits at the heart of criminality more broadly.
· The approach to managing risk is simplistic and unstructured. Few agencies have the required level of business intelligence and analytics capacities to identify the right consignments, issues and entities. Few agencies have a technically superior inspections and auditing capacity, or state-of-the-art scanning facilities capable of detecting co-mingled goods as they cross the border. And few agencies have the capabilities to look beyond just excise fraud, to more complex schemes around money laundering, thin capitalisation, transfer pricing and fictitious revenue schemes. The average agency generally has relatively little insight into how the industry operates, what tactics it deploys, and how sophisticated its evasion can potentially be. Policies are designed to regulate the legal market and known behaviours - and not the illicit market with its more opaque behaviours. For many, “risk management” is simply an audit control or post-clearance inspection.
· Agencies often view risk from a transactional, single-tax, siloed perspective. Audits and enforcement action tend to have a single-tax, single period view, looking for transgressions from a transactional perspective - instead of seeing companies for the complex and dynamic entities they are. The information submitted from a VAT, corporate income tax, payroll tax, customs and excise perspective should correlate, but often don’t. Exports declared should match imports declared to agencies in other countries, but often don’t. Agencies are often so focused on the minutiae of validating volumes declared that they fail to notice the billions being lost to more aggressive tax evasion schemes.
· The consequences of being caught are easily offset by the potential profits: A single untaxed smuggled container can make as much as $2 million profit(depending on the tax rates of the jurisdiction). Heroin trade yields a profit of around 1886% - untaxed illicit tobacco yields up to 4,200%.Illegally trafficked cigarettes now have a higher profit margin than cocaine, heroin, marijuana or guns. A penalty, or even a conviction, becomes a simple calculated cost of doing business that is easily discounted against the profits being made on other consignments. Despite its broad impact on health, crime, and taxes, lenient sentences are the norm; in some countries, cigarette smuggling is not even considered a crime.
· Even when agencies do find and seize consignments, they don’t follow the money trail behind it. Ultimately the illicit trade in cigarettes is about money. The profits have to be accounted for somewhere. The money has to be spent somewhere, or laundered somehow. While the detection and seizure of illicit consignments is critical, agencies need to follow the money. Who is this funding? Where is this profit being accounted for, or spent, or hidden?
· Agencies fall victim to industry rhetoric and industry agendas: They believe that the illicit trade in cigarettes is attributable largely to low-cost manufacturers, or cross-border smugglers based in neighbouring countries. They buy the false logic that tax rate increases drive illicit trade. They enter into partnerships with industry, giving it access to its law enforcement and policy making structures, because they believe that big tobacco is the innocent victim of illicit trade.
· Responsibilities for FCTC implementation are spread across a disparate range of government agencies: The FCTC Protocol was largely drafted by the medical community, for the medical community. Other key agencies who have a critical role to play in implementing some of the meatier provisions around traceability and criminality (like tax and customs departments) are often not fully engaged, do not appreciate the importance of the role they play, and view the protocol as a health-issue (if they are even aware of it).
OPPORTUNITIES FOR TAX STAMP SERVICE PROVIDERS
In and amidst the challenges facing agencies in curbing the illicit trade in cigarettes, lies a number of opportunities for tax stamp providers in how they pitch their products, and in the support they offer to agencies, including e.g.:
· Helping agencies to develop a business case on the importance of excise administration, beyond a revenue-generating line item in the budget;
· Developing solutions that integrate insights across a range of taxes – beyond just excise duty calculations (because the marking of cigarettes won’t just curb excise duty evasion – it could reduce corporate income tax evasion too). This would allow tax stamp providers to showcase how their solutions have the potential to uncover far more complex evasion schemes (like inflated sales volumes), beyond just tracking local production volumes, and developing business intelligence modules that provide insights into entities, and not just transactions;
· Assisting agencies with the development of strategies that incorporate tax stamps as partof a broader solution, rather than touting tax stamps as an entire stand-alone solution;
· Using their international experience to empower agencies to better understand industry tactics and how to counter them.
Tax stamp service provider successes are very closely tied to agency successes. If agencies fail, so do the service providers.
CONCLUSION
What agencies are doing is having a limited impact - almost without exception. What successes they claim to have - usually an increase in the number of seizures - are having a negligible impact on the extent to which tobacco companies across the spectrum are paying the taxes and duties they should.
More is needed to change the paradigm, by better understanding the industry and its tactics, understanding how industry behaviours lead to tax and duty losses, the industry’s intimate involvement in organised crime, and exploring opportunities around improving compliance across the industry. It is a journey that tax stamp providers – with their global experience and insights – are potentially well placed to help agencies with.