Cigarette transport restrictions may ease as smuggling rampant amid COVID-19 lockdown

Restriction on transport of legal tobacco products may be lifted following reports that cigarette smuggling, mostly through Mindanao, has become rampant while the entire country is waging war on COVID-19.

Finance Secretary Carlos G. Dominguez III on Monday (April 20) said lifting transport restrictions on tax-paid cigarettes was “under consideration because the absence of cigarettes encourages illicit trade.”

Cigarette industry sources explained to the Inquirer that while there was no outright ban on sales, the manufacture of these so-called “sin” products had to stop during the lockdown imposed in Luzon and other parts of the country.

The country’s two biggest tobacco producers,  PMFTC Inc. and JTI Philippines, halted domestic production, although they both retained a “very small” skeletal workforce to churn out exports.

Also, transport and delivery of cigarettes were not allowed across checkpoints as these were not considered as essential items.

“By this time, retailers’ stocks are depleted,” a source said—and smugglers were taking advantage of a shortage in supply of tax-paid cigarettes.

In a report, cigarette manufacturers said that “as a result of the enhanced community quarantine, it is likely the supply chain of illicit traders had also been disrupted.”

“Intelligence reports indicate that foreign workers in illicit factories returned home in late January,” the manufacturers said.

“Because of the coronavirus outbreak, these foreigners stayed in their own country and local illicit factories remained non-operational,” they said.

“The same intelligence reports also note that the acquisition cost abroad of illicit whites rose from $80 to $150 per master case in February, as illicit traders scrambled to buy inventory in anticipation of supply shortages due to the outbreak of COVID-19,” tobacco firms said.

“Shortly before the March 16 lockdown, intelligence reports showed that illicit traders were ramping orders from foreign sources of illicit cigarettes which cause prices of imported cheap contraband (illicit whites such as Fort, Two Moon, Union, and DnB, etc.) to surge to $150 per master case,” they added.

But another industry source said that even as acquisition cost of imported illicit cigarettes was on the rise, they still remained cheaper than those in the formal market.

“Post-enhanced community quarantine, the tobacco industry projects that there will be a resurgence of illicit trade,” the source said.

“The enhanced community quarantine resulted in job losses and a decline in incomes, which favor the consumption of low-priced and tax-unpaid illicit products,” industry players warned.

They warned that “because of its long coastline and proximity to illicit tobacco products from neighboring countries, Mindanao will be a hotbed for the resurgence of illicit trade.”

“From April 1 to 15 alone in the midst of widespread lockdowns throughout the country, there were three seaborne enforcement operations in different parts of Mindanao,” they said.

“These illicit operations were jointly thwarted by the Armed Forces of the Philippines (AFP) and the Bureau of Customs (BOC),” they noted.

Last week, the BOC said it intercepted almost P8.3-million worth of smuggled cigarettes in Zamboanga City.

Cigarette manufacturers noted that “in 2019, the legitimate tobacco industry counted that there were 1.8 enforcements per week” but at the height of lockdowns from March to middle of April, “there were 10 enforcement actions or 1.6 raids per week.”

To address this problem, the tobacco industry urged “vigilance against illicit trade through sustained surveillance and enforcement activities by the government in partnership with the private sector to optimize tax revenues.”

Also, they sought to “allow the resumption of the production of exciseable products such as tobacco and alcohol so that excise taxes and value-added tax (VAT) may be generated by government to fund social welfare programs and for consumers not to turn to illicit products.”

Department of Finance (DOF) officials had said they expect illicit trade shooting up alongside higher cigarette taxes.

Under Republic Act (RA) No. 11346 or the Tobacco Tax Law of 2019, cigarette excise increased to P45 per pack effective Jan. 1, 2020.

Edited by TSB