CITY OF SAN FERNANDO — Gone are the days when counterfeit illegal cigarettes were smuggled into the country.
With the discovery of illegal cigarette factories in Pampanga and Pangasinan recently, illegal cigarettes are now made and packed clandestinely in big operations run by foreign nationals and local syndicates inside the country.
These clandestine operations remain of the biggest problems to the source of livelihood to 43,960 farmers and about 300,00 other members of their families and about 1.56 million other industry workers and dependents, summing up to an estimated 1.93 million Filipinos who all depend on the tobacco industry.
Illegal cigarettes deprive government of revenue and are hurting the country’s legitimate tobacco industry. This recent development poses a serious concern for government and the tobacco industry sector and an urgent realization for the need to further efforts against illegal cigarette trade.
There is no current data on the number of illegal cigarettes clandestinely produced by syndicates in the country. There is, however, data on illicit domestic cigarette consumption. The “Asia-11 Illicit Tobacco Indicator” study showed that the consumption of domestic illicit cigarettes nearly tripled to 17.1 billion in 2013 alone. This is a big leap from only 6.1 billion in 2012.
Even the Oxford Economics and International Tax and Investment Center said that the potential revenue loss for government from illegal cigarettes was at P15.6 billion in 2013.
Illicit cigarettes are domestically produced cigarettes; illegally sold and consumed without paying applicable taxes depriving government of revenue and run in competition with legal, taxed cigarettes in the market. Smuggled cigarettes on the other hand are produced from international sources and shipped to the Philippines or vice versa.
The Oxford Economics and International Tax and Investment Center also said that tax losses in 2013 alone from illicit cigarettes was at 497 percent and went to P15.6 billion from P2.6 billion in 2012.
In 2015, Oxford Economics senior economist Oliver Salmon said that significant price increases over the last few years have led to the erosion of the legal market for cigarettes, with the illicit trade filling the gap.
The country’s total legal cigarette consumption is currently at 80.4 percent. This only accounts to an estimate of 82.3 billion cigarettes.
Big players in the cigarette manufacturing business have also joined in efforts to curtail illicit cigarette consumption. This as most of their popular cigarette brands are often the victims of counterfeiting.
Recent efforts
Just this May, Bureau of Internal Revenue (BIR) personnel, together with police officers, swooped down two warehouses on Wednesday, with one turning out to be a factory of suspected fake cigarettes, inside the San Simon Industrial Park here.
The raiding team was led by Revenue Officer Sonny Advincula, head of the BIR Strike Team, which was recently formed as the lead BIR enforcement activities on smuggled items and locally-manufactured counterfeit excisable products.
The first warehouse was found manufacturing filter rods, a cigarette component, the raw material of which is regulated by the BIR and National Tobacco Administration (NTA). The warehouse also yielded millions worth of tobacco raw materials as well as three cigarette making machines and 20 bales of acetate used for making cigarette filters.
About 33.5 million filters (enough to make 1.6 million cigarettes) were recovered from the first warehouse, the BIR said, adding that the operations of the said machines were not registered.
“These machines are supposed to be registered with the BIR so that their production could be imposed with the appropriate taxes,” Advincula said.
In the second warehouse, authorities recovered fake cigarettes and dozens of sacks and boxes of unprocessed tobacco estimated to be worth millions of pesos.
Last year, P2 billion worth of fake cigarettes were also seized inside four warehouses in San Simon Industrial Park. The confiscated materials bear the name of Mighty Corporation as well as its product, Marvel.
It can also be recalled that Mighty Corp. closed shop and its cigarette brands were eventually bought by Japan Tobacco International (JTI) as part of a settlement agreement with the government. JTI paid the government P30 billion to cover Mighty’s excise tax dues.
The Department of Finance reported that fake cigarettes worth over P1 billion, fake tax stamps worth approximately P175 million in taxes, along with raw materials, machines for cigarette manufacturing and other paraphernalia were seized by authorities in separate raids in Pangasinan, Pampanga and Bulacan in 2017.
The Pangasinan raid was the biggest. Officials discovered four warehouses found to be counterfeiting popular cigarette brands in Villasis, Pangasinan which led to the seizure of various materials for cigarette manufacturing and the arrest of 24 undocumented foreign nationals.
In Pampanga, a facility was found counterfeiting popular cigarette brands. Officials seized “5.5 million pieces of fake unused cigarette strip stamps worth approximately P175-million in excise taxes and VAT (value added tax).”
The Pampanga facility was reported to produce some 200,000 packs of cigarettes per day.
Just this October, P7.5 million worth of counterfeit popular cigarette brands were confiscated by customs officials in two warehouses in Cagayan de Oro City, one of the biggest confiscation of counterfeit cigarettes outside of the country’s custom ports. Officials confiscated hundreds of boxes of cigarettes brands, including Marlboro, Lucky Strike, Winstons, and Camel.
Just this year, there have been a dozen operations against illegal cigarettes resulting in arrests of vendors and distributors in Cabanatuan City in Nueva Ecija, Santa Cruz in Manial, Guguinto, Bulacan and as far as Zamboanga City, Cebu and even Tacloban.
Those arrested were charged for violating Section 155 in relation to Section 170 of Republic Act 8293, otherwise known as the Intellectual Property Code of the Philippines.
They could also be held for violating Republic Act 7394, or the Consumer Protection Act, and the National Internal Revenue Code, with penalties ranging from one year to 12 years imprisonment and a fine of up to P200,000 or both.
No BIR stamp, No Sale
In October 1, 2014, the BIR Revenue Memorandum Circular 72-2014 required all locally manufactured cigarette packets to bear tax stamps. Imported cigarettes were required to have the same stamps in 2015.
The BIR said that this allows government authorities to secure the distribution of cigarettes and also prevent and reduce illicit trade. It is, therefore, illegal for storeowners to sell unstamped cigarette packs.
The sale of cigarettes without necessary stamps is therefore considered illicit and opens criminal persecution against the individuals behind the sale and processing of such cigarettes.
Despite of this, illegal cigarette production continuous to be a problem as seen in different raids of clandestine facilities producing illegal cigarettes and the continuous sale of illegal cigarettes.
Unless government comes up with more concrete steps to reduce the sale of illegal cigarettes considerably, illicit cigarette trade will continue to be a deteriorating factor in the community as it reduces tax revenue intended for the national government and harms legitimate businesses of law-abiding tobacco manufacturers.
As of press time, fake cigarettes remain a big challenge to the country’s billion peso cigarette industry.
Huge illegal trade
BIR Revenue Region 4 said the apprehension of nearly 500 cases of cigarettes without tax stamps is an indication of a huge illegal cigarettes trade in Central Luzon.
Revenue collectors and National Bureau of Investigation (NBI) agents last year jointly seized 480 cases of cigarettes without tax stamps.
BIR Regional Director Jethro Sabariaga said the government was owed P7.2 million in tax stamps for the items.
The cigarettes were discovered in warehouse store of Collete’s PX Store in Cabanatuan City.
Under Section 172 of the Tax Code, the BIR may detain products when it has good reason to believe that the proper excise taxes were not paid.
The joint BIR-NBI Enforcement Team seized various illicit whites such as Two Moon, Farstar, D&B, Black Bat, RGD, Twin Star and Seneca, among others. It was not yet known whether the items were authentic.
Industry sources estimated the street value of the items at P6.25 million, if sold at P25 per pack.
Sabariaga said the presence of the warehouse is an indication of a bigger operation of selling cigarettes without the proper tax stamps.
Sabariaga said there have been a number of cases of cigarettes with unpaid tax stamps in the region since late last year. He added that more operations are underway to curtail the illicit activity.