Illicit tobacco sale and government revenue erosion a tall tale

The Southeast Asia Tobacco Control Alliance (Seatca) has contradicted the report of a tobacco industry research, funded by a giant cigarette firm, on the so-called illicit trade in the Philippines and 13 other Asian countries.

The giant tobacco firm that funded the second research on illicit trade of tobacco products in Asia, called Asia-14 Illicit Tobacco Indicator, was carried out jointly by a Washington-based group, International Tax and Investment Center, and a UK group, Oxford Economics.

Like its predecessor (Asia-11 Illicit Tobacco Indicator 2012), the recent pro-giant tobacco industry report is without scientific basis, Seatca said.

The Asia-14 report said the 341.2-percent excise-tax increase (from P2.72 to P12) in the Philippines on January 1, 2013, was the main driver of the alleged large volume increase in illicit consumption of 198 percent, or 18.1 percent of total consumption.

The alleged 89.8 percent of unlawful consumption and 16.3 percent total consumption in 2013 was attributed to domestic illicit consumption, which was estimated to have grown to 11 billion cigarettes, based on the Asia-14 report.

Like its predecessor (Asia-11 Illicit Tobacco Indicator 2012), however, the research findings are biased to favor an international tobacco company, Seatca said.

Seatca pointed out in their critique that the Asia-14 report failed to highlight significantly higher tax revenues after the 2013 excise-tax increase; for tobacco excise alone, the Philippine government collected P70.4 billion, higher by 113.7 percent compared to 2012. Excise revenue gains were therefore 454 percent higher than the Asia-14 reports estimated excise-tax losses in 2013.

Seatcas evaluation, in effect, disproved allegations that the Bureau of Internal Revenue (BIR) was losing revenues through illicit tobacco trade.BIR Commissioner Kim Jacinto-Henares earlier said the overwhelming growth in sin-tax collection was an indication of the inconclusiveness of the Asia-14 report alleging the fast-rising illegal-cigarette trade in the country.

According to the main reviewer of the research, Prof. Hana Ross, principal research officer of the Economics of Tobacco Control Project at the University of Cape Town, The Asia-14 report fails to provide scientifically sound and unbiased information to policy-makers and other tobacco market stakeholders.

The reason for this is simple. The figures and statistics it reports are products of either incorrect, unverifiable estimation methods applied to often questionable data from multiple sources that do not blend, Ross said, adding, The quality of the original data collection is questionable due to the lack of representativeness and possibly intended bias. Many secondary data come from sources with an obvious conflict of interest.

More seriously, the report is full of errors and mistakes, which is surprising given the commercial quality of the results. For example, the report does not make any distinction between smoking incidence and smoking prevalence, even though these are two very different concepts. It also confuses sales and consumption, two fundamental concepts on which the calculations are based, she added. She emphasized that: While illicit tobacco trade is a problem that requires government attention, it is often blown out of proportion and out of context by the tobacco industry in order to discourage governments from increasing tobacco taxes and implementing other regulatory measures.

Dr. Ulysses Dorotheo, Seatcas Framework Convention on Tobacco Control (Fctc) program director, said: Governments should reject partnerships and nonbinding agreements with the tobacco industry to solve illicit trade. Instead, governments should secure the supply chain in accordance with measures contained in the Fctc Protocol to eliminate illicit trade in tobacco products, which was adopted in 2012 by the 180 parties to the World Health Organization-Fctc.

The new report claims to take advantage of newly available data and improved methodology, and covers all 10 Association of Southeast Asian Nation (Asean) member-nations plus Australia, Hong Kong, Pakistan and Taiwan.

The other major concerns of the failed report are:

  • Different sources and methods are used across countries, leading to results that are not comparable to one another, yet presented for comparison, without acknowledgement of their distinctions.
  • As per Seatca critique of the Asia-11 report, no rationale is given for including or excluding countries from coverage in this report. The report excludes many of the regions largest cigarette-consuming countries, such as China, Japan and South Korea, while including Pakistan, geographically an outlier.
  • Many procedural approaches are either weak or lack sufficient description that would allow to judge their merits.
  • The quality of the original data collection is questionable due to lack of representativeness and possibly intended bias.
  • Many secondary data come from sources with an obvious conflict of interest. Beyond these weaknesses, the Asia-14 report, in many cases, fails to provide sufficient description of data used to generate the estimates. This lack of transparency makes it difficult, if not impossible, for the report to be fully analyzed or critiqued; it certainly prevents replication of the reports estimates and other statistics. Even the authors self-described attempt to provide more detail in the Annexes of the report falls short of the level of disclosure provided in academic studies and does not permit thorough evaluation.
  • The Empty Packs Survey, which is a crucial component of the IT Flows model upon which most of the report is based, does not fully disclose its sampling frame, the timing of data collection, the criteria for distinguishing legal and illegal packs, and other crucial survey parameters, even though the validity of data generated by the survey are very sensitive to such issues.
  • No information is provided about the packs that could not be classified as illegal or legal with certainty, and whether or not the collected packs are available for reinspection. The findings are selectively presented, highlighting examples of increasing illicit consumption, while neglecting to point out the declines or no changes in some markets.

In other words, Seatca said the data are presented selectively to support a particular point of view.

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