How governments can protect people and earn more revenue

29 July 2021

Source: The Phnom Penh Post

The Covid-19 outbreak has put families, the economy and the country under tremendous pressure. Protecting public health to save lives is more important and urgent than ever.

Smoking is a known risk factor for more severe Covid-19 symptoms – quitting smoking now is timely and will contribute towards reducing large health burdens and socio-economic costs.

Unfortunately, 1.7 million Cambodians still waste their hard-earned money on cigarettes, which remain very affordable.

Average cigarette prices in Cambodia ($1.42 per pack) are the fourth lowest in the world, and tobacco taxes are only 29 per cent of retail prices, compared to almost 50 per cent on average across other developing countries.

Indeed, the World Health Organization (WHO) recommends that all countries increase the share of tax to at least 75 per cent of the retail price of cigarettes.

Certainly, the tobacco industry doesn’t want Cambodians to quit smoking, because this would jeopardise its profits. To ensure people keep smoking during the pandemic, it is in the interests of tobacco companies, such as Japan Tobacco International (JTI), to oppose meaningful tax reforms or increases that would make cigarettes less affordable.

Such tax changes are needed in Cambodia, particularly to protect the young and the poor, who suffer the most from the health and economic burdens of diseases caused by smoking.

Instead, tobacco companies propose small and ineffective tax increases and scare governments with the myth that large tax increases will worsen smuggling.

The tobacco industry even claims illicit cigarettes are more harmful than legal cigarettes. In fact, legal cigarettes are just as dangerous as illicit ones. In Cambodia, cigarettes, regardless of their legal status, kill 15,000 people annually.

Is there a correlation between high tax rates and illicit trade?

The Investment Case for Tobacco Control in Cambodia found 18.5 million cigarette packs evading correct taxes in 2017, representing 6.9 per cent of the Kingdom’s market.

This is much lower than the global average of 11 per cent and much less compared to some of Cambodia’s neighbours. In Cambodia, as elsewhere, illicit trade can be well managed through stronger government oversight of the tobacco supply chain.

Malaysia’s 60 per cent illicit trade incidence is often cited by the tobacco industry to discourage other governments from increasing taxes. This estimate isn’t supported by any transparent data. More importantly, Malaysia hasn’t increased tobacco tax for the past five years, while smuggling continues.

Clearly, the illicit market narrative spread by the industry in Malaysia doesn’t support the notion that higher taxes are the reason for smuggling.

Many countries that have raised taxes on tobacco products, such as Singapore, Australia and the Philippines, are earning higher revenues and curbing smoking despite the presence of illicit cigarettes in their markets.

The higher revenues can be invested in stronger measures to suppress illicit tobacco trade, further curbing cigarette consumption. Countries that invest in controlling the supply chain and enforcement have lower levels of illicit trade.

Although tobacco companies routinely blame tax increases for increased smuggling, the Organized Crime and Corruption Reporting Project alleged JTI complicity in the smuggling of its own products, including “a persistent pattern of smuggling” by JTI employees and distributors and actions by JTI executives to block investigations of smuggling.

A study on the European Union’s illicit trade agreements with four major transnational tobacco companies, including JTI, found three key concerns:

1. The agreements lack transparency.

2. Seizure payments were so small and did not reflect the size of the illicit market attributable to the companies’ genuine products.

3. The industry’s “Codentify” system doesn’t meet tracking and tracing requirements outlined in Article 8 of the WHO FCTC Protocol on illicit trade.

Cooperating with the industry in cracking down on illicit tobacco trade compromises the government’s regulatory integrity; on the other hand, raising tobacco taxes will protect lives and boost Cambodia’s economy with more revenue and fiscal space for the government. The government is losing more revenue by not applying higher and more effective tax rates.

What would be a reasonable tobacco tax structure and rate?

International best practice – the WHO FCTC Article 6 Guidelines – recommends that when setting tax rates, governments should consider affordability, inflation and public health goals to make tobacco products less affordable over time.

Also, governments should apply specific or mixed excise systems to promote health and revenue generation, while entirely avoiding ‘tiered’ and ad valorem (according to value) excise systems that benefit manufacturers but are disadvantageous to governments.

A recent study of Cambodia’s tax system indicates that the government’s excise tax revenue could have been 443 per cent higher, with an additional 811.9 billion riel ($198.2 million) collected in 2019-2020 if Cambodia shifted to a mixed tobacco tax system and raised tax rates since 2019.

In the Philippines, ad valorem and multi-tiered specific tax systems recommended by tobacco companies led to declining revenue collections and rising smoking rates.

The 2012 Sin Tax Reform simplified the tobacco tax structure and drastically raised the specific tax rate. This resulted in a doubling of tobacco tax collections in the first year of implementation, significantly boosting the Department of Health’s budget and subsidising national health insurance as part of universal health coverage for the poor. Smoking rates also dropped significantly.

Learning from the Philippines, Cambodia can shift to a uniform specific or mixed tax structure, raise tax rates to a level that reduces cigarette affordability for Cambodians, and strengthen tax administration to enable the government to collect higher revenue and save hundreds of thousands of Cambodian lives.

The clear trend internationally is for countries to shift away from ad valorem or tiered applications.

Is the tobacco industry bringing a positive impact to Cambodia?

The tobacco industry is unlike other industries. Its products are addictive, deadly and harmful to society, especially the poor. Tax revenues and employment opportunities provided by tobacco companies pale in comparison to the socio-economic and environmental losses that the government pays because of tobacco addiction.

In 2016, direct healthcare expenditure on tobacco-related diseases amounted to 237.2 billion riel, while indirect costs reached 1.9 trillion riel due to lost productivity from premature death, disability and sickness.

The industry is robbing the government and society by harming people and by not paying taxes sufficient to cover the costs it inflicts on everyone.

The Cambodian government should exercise caution when lobbied by tobacco companies on this issue, as their only interest is to protect their profits.

Source: Southeast Asia Tobacco Control Alliance and Research Unit on Economics of Excisable Products (REEP), University of Cape Town, South Africa.