Gov’t cracks down on illicit cigarettes trade

The taxman is cracking down on the illicit cigarette trade that has enticed unscrupulous traders to not only smuggle imported sticks but also manufacture locally sans tax registration.

In particular, cigarette industry sources said the Subic freeport zone had become a “hot spot” in both smuggling and producing illegal cigarettes that deprive the government of tax revenues. A source claimed that “one factor aiding smugglers is a recent Bureau of Customs (BOC) order extending indefinitely the usual 30-day period that a transshipment ship can stay in Subic.”

Asked to confirm, Finance Secretary Carlos Dominguez III said “our antenna is always up with regards to Subic, because as you know in the past, that place has been rumored to be the hub for smuggling of oil, so we’re watching it very carefully.”On its website, the BOC said “processed engineered fuel currently withheld at the port of Subic can be released” but “succeeding importations are not allowed.” The BOC memorandum was not accessible to the public.

As for illicit cigarettes, Finance Assistant Secretary Dakila Napao confirmed two recent raids undertaken by the BOC, the Bureau of Internal Revenue (BIR), and the National Bureau of Investigation in Subic where authorities seized not only tax-deficient cigarette sticks but also cigarette-making machines.

Sources said the BIR served a letter of authority to Hongcim International Corp., one of the Subic-based firms they raided in August due to reports of illegal cigarette manufacturing, on Oct. 14.

“The company was found to have machines used for cigarette production with no registration papers and no proof of payment of taxes” such that “operations of the company in its four warehouses were sealed/padlocked by the BIR,” sources said.

According to industry sources, Hongcim was allegedly operating an illegal cigarette manufacturing business due to its lack of BIR registration.

“The Subic Bay Metropolitan Authority has reported that Hongcim has not processed any ‘bring-in permit’ since 2020, and it is alleged that the machines the BIR recently discovered were brought into the Subic Bay Freeport Zone without securing the necessary permits,” an industry source said.

“The BIR has initially stated that its assessment would cost Hongcim billions in pesos of unpaid taxes. And unless Hongcim pays the assessed taxes, its facilities shall remain padlocked and sealed. Further, a criminal complaint on the violations of relevant tax laws had been readied by the BIR,” the source added.

Dominguez said illicit cigarette manufacturing was flourishing not only in Subic but also in other parts of the country.

The Finance chief said illicit cigarettes currently accounted for 7 to 10 percent of the domestic market, down from about 35 percent before the government cracked down on smugglers and local traders producing counterfeit products or affixing fake stamps.

For Dominguez, the dwindling share of illicit sticks in the cigarette market was “not good, but it’s a lot better than before.”

The BOC and the BIR “don’t catch everybody” engaged in illicit cigarette trade, “but the big majority, I think, are caught,” he said.

“As the tax on cigarettes increases, there is more incentive to smuggle. We’ve seen an increase in not only illicit cigarettes coming in but also small factories being set up. The manufacturers of cigarette-making machines have been able to miniaturize these so you can make it a business if you have 100 square meters of warehouse. I calculated—the payback is less than four months, so it was successful. It’s very tempting, so we’ll keep on looking for these [illicit traders],” Dominguez said. INQ