A chapter in a 2019 World Bank report outlined the International Monetary Fund's perspective on tobacco tax administration and illicit trade.1 The general concern in the administration of value-added taxes and excise taxes on tobacco is to carefully monitor the importation, manufacture, and distribution of taxed items. This control should be applied across the supply chain, from the fields where tobacco is grown to the point of entry to the final purchase by the individual customer. Clear legal frameworks and revenue administration services or functions are needed for such controls.
13A.7.1 Legal frameworks
The World Bank1 suggested a legal framework with the following key elements:
- Tobacco product categories and specific items subject to excise taxation must be precisely defined, taking into account likely substitution trends.
- The principles guiding taxation, the base, the rates, the method of calculation, and the precise point of taxation in the production/supply and distribution chain must all be clearly stated.
- The legislation must also serve as the foundation for particular excise administration and control processes aimed to reduce the heightened risk of fraud.
- Administrative and control measures need to be customised according to the unique characteristics of the local context at each level of the processing and distribution.
- In most countries, a centrally organised excise administration is in charge of managing and collecting excise taxes, including tobacco taxes.i Most governments impose excise taxes on imported excisable items in addition to customs charges. In exceptional circumstances, such as when excise revenue is substantial or the taxation structure is unusual, governments may have an excise service independent from the tax and customs administrations (as in the United States).
- In low-compliance contexts, the excise administration should conduct more physical and onsite checks (for example, inventory inspections), and equivalent administrative capacity is necessary. Firm audit capacities can often be adequate in a highly compliant environment.
13A.7.2 Administrative and control measures
The World Bank report1 also provided specific administrative and control measures to confront illicit trade in tobacco products as below.
- Only licensed and strictly regulated business entities should be involved in any step of import, manufacture, and distribution (including retail). The licence should include actual physical, administrative, and financial restrictions, and adherence to these terms should be monitored on a regular basis, with noncompliance harshly penalised, including suspension or withdrawal of the licence.
- Clear and full records should be kept, and information should be sent to the excise administration in a timely manner. Complete records and seamless information to the excise administration should be retained. Operators must maintain current records of production material flows and inventory. The licence and legislation must stipulate record content and format. These records should be submitted at regular intervals and/or available to the excise authority for remote and/or onsite control. The inventory records should match the physical inventory. It is crucial that economic operators provide records and information that aid in controlling both the operator and authorities. If the industry concentration or fiscal risks warrant, the excise administration might permanently oversee the industrial plant on site.
- Excise stamps and other marks on cigarette packets. This can help collect excise taxes, controls, audits, and enforcement actions at various distribution levels. The excise authority issues a tax stamp (or “banderole”) for the tax. The manufacturer or importer buys it and applies it to each product sold to prove excise tax (and value-added tax in some countries) payment. Stamps should have high levels of security like cash and passports. The high cost and low-quality stamps have led to counterfeit stamps and fraud in several countries, raising concerns about stamps' tax payment effectiveness. Due to these reasons, fiscal stickers with product-specific information (typically bar codes) have replaced tax stamps in many countries. Fiscal stickers help taxation, management, and auditing, but they are not proof of tax payment like stamps.ii
- Sophisticated marking systems for tracking and tracing. The requires producers to sign master cartons and packs to trace products along the distribution chain. To determine the authenticity and point of diversion of smuggled tobacco products, details such as date, time, and place of production, origin, intermediaries, and intended destination, and taxation status, need to be identified and controlled. Tracking systems require expensive infrastructure and may handle complicated transactions and distribution networks. To adapt to changing business practises, the system should be administered by a specialised organisation in conjunction with the industry, and the excise administration should always have access to all data.
- The legislation must specify payment and its related terms. After considering risks, technology, liquidity, and costs, payment options are chosen. Taxation usually occurs when the product leaves the manufacturer (or customs/tax warehouse for imports) before retail distribution. Such manufacturers and importers are limited and well-known to excise officials. Producers and importers often make declarations and pay taxes monthly on a pre-defined day after removing tobacco items from warehouses. The excise law should restrict excessive forestalling, stockpiling, and sale of stocks utilising earlier and lower-value tax stamps and limit their numbers and/or selling time. Define processes for damaged stocks, refunds, and other exceptional events.
- Transit, warehouse, and free zone activities are high-risk for fraud, hence particular precautions should be taken. Demand financial assurances equal to all duties and taxes. Limiting production and transactions and using physical controls such separating processing processes from sealed storage of taxed and untaxed items may also be done. Excise authority officials can directly control a part or the entire operation, such as escorting trucks or convoys across borders or using radio or satellite tracking systems for goods or vehicles.
- Authorities should severely limit duty-free and online sales. Duty-free stores sell exportable goods in a low-risk, convenient location. Thus, duty-free outlets should only offer tobacco to outbound travellers and be licenced only at airport and seaport exits. Duty-free businesses near land borders and inland should not sell excisable items. If required and possible, lower duty-free privileges within international norms. Internet cigarette sales and other hard-to-control outlets should be strictly regulated or banned.
- Licensees should be required to exercise due diligence, duty, and care. They create and operate internal control systems to avoid fraud and make their procedures visible. Operators must disclose suspicious incidents and help with authorities in fraud investigations, giving internal information on methods and operations.
i The report noted ‘In certain countries, in addition to federal or central government taxes, local governments (in the case of the United States, both state and local governments) are also entitled to impose excise duties on tobacco products using their own tax/excise services. Such arrangements require close coordination among the different levels of government.’
ii The report noted ‘Tax stamps must include a maximum retail price if an ad valorem excise on the final price is applied, otherwise the effective ad valorem rate would be lower than the statutory rate. This might in turn require additional legal and regulatory guidelines on price controls, as well as the administrative means to implement the controls or at least monitor the retail conditions. Fiscal stickers may also in these cases include a maximum price, but not necessarily.’
References
1. Dutta S. Confronting illicit tobacco trade: a global review of country experiences, in World Bank. 2019. Available from: http://documents.worldbank.org/curated/en/677451548260528135/pdf/133959-REVISED-2-v1-WBG-Tobacco-IllicitTrade-FINAL-v3-web.pdf.