How governments can defend folks and generate extra income

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 – the time to quit is now and will help reduce major health burdens and socio-economic costs.

Unfortunately, 1.7 million Cambodians are still wasting their hard earned money on cigarettes, which are still very affordable.

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

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

The tobacco industry, of course, does not want Cambodians to quit smoking as it would jeopardize their profits. To ensure people keep smoking during the pandemic, it is in the interests of tobacco companies like Japan Tobacco International (JTI) to oppose meaningful tax reforms or tax increases that would make cigarettes less affordable.

Such tax changes are necessary in Cambodia, particularly to protect the young and poor who are most vulnerable to the health and economic pressures of smoking.

Instead, tobacco companies propose small and ineffective tax increases and scare governments with the myth that big tax increases make smuggling worse.

The tobacco industry even claims that illegal cigarettes are more harmful than legal cigarettes. In fact, legal cigarettes are just as dangerous as illegal ones. In Cambodia, 15,000 people die of cigarettes every year, regardless of their legal status.

Is there a connection between high tax rates and illegal trade?

The Cambodia Investment Case for Tobacco Control found that 18.5 million packets of cigarettes were evaded correct taxes in 2017, representing 6.9 percent of the UK market.

This is much less than the world average of 11 percent and much less when compared to some of Cambodia’s neighbors. In Cambodia, as elsewhere, illicit trafficking can be well controlled with stronger government oversight of the tobacco supply chain.

Malaysia’s 60 percent illegal trade is often led by the tobacco industry to deter other governments from raising taxes. This estimate is not supported by any transparent data. More importantly, Malaysia has not increased tobacco tax in the past five years while smuggling continues.

The illegal market narrative spread by the Malaysian industry clearly does not support the notion that higher taxes are the cause of smuggling.

Many countries that have increased taxes on tobacco products, such as Singapore, Australia and the Philippines, are generating higher revenues and reducing smoking despite the presence of illegal cigarettes in their markets.

The higher revenues can be invested in stronger measures to suppress the illegal tobacco trade in order to further reduce cigarette consumption. Countries that invest in supply chain control and enforcement have lower levels of illicit trafficking.

Although tobacco companies routinely blame tax increases for increased smuggling, the Organized Crime and Corruption Reporting Project alleged that JTI was involved in the smuggling of its own products, including “an ongoing pattern of smuggling” by JTI employees and dealers and actions by JTI executives to block investigations into block of smuggling.

A study of the European Union’s illegal trade deals with four large transnational tobacco companies, including JTI, identified three main concerns:

1. The agreements lack transparency.

2. The payments for seizures were so small and did not reflect the size of the illegal market that can be traced back to the real products of the companies.

3. The industry’s “Codentify” system does not meet the tracking and tracing requirements set out in Article 8 of the WHO FCTC Protocol on Illicit Trafficking.

Working with industry to fight the illicit tobacco trade threatens the government’s regulatory integrity; On the other hand, increasing tobacco taxes will save lives and stimulate the Cambodian economy with more revenue and fiscal space for the government. The government is losing more revenue because it does not apply higher and more effective tax rates.

What would a reasonable structure and level of tobacco tax be?

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

In addition, governments should employ specific or blended excise systems to promote health and revenue generation, while completely avoiding “tiered” and value (based on value) excise systems that benefit manufacturers but are detrimental to governments.

A recent study of the Cambodian tax system shows that government excise tax revenues could have been 443 percent higher, with an additional 811.9 billion riels ($ 198.2 million) raised between 2019 and 2020 if Cambodia fell on one Mixed tobacco tax system changed and tax rates increased since 2019.

In the Philippines, ad valorem and multi-tier specific tax systems recommended by tobacco companies led to falling revenues and rising smoking rates.

The sin tax reform of 2012 simplified the tobacco tax structure and increased the specific tax rate drastically. This led to a doubling of tobacco tax levies in the first year of introduction, significantly increasing the Ministry of Health’s budget and subsidizing state health insurance as part of general health insurance for the poor. The smoking rates also fell significantly.

Learning from the Philippines, Cambodia can move to a single, specific or blended tax structure, raise tax rates to levels that make cigarettes less affordable for Cambodians, and strengthen tax administration so the government can generate higher revenues and save hundreds of thousands of Cambodian lives.

The international trend is clearly towards countries turning away from ad valorem or tiered applications.

Is the tobacco industry having a positive impact on Cambodia?

The tobacco industry is different from other industries. Its products are addicting, deadly and harmful to society, especially the poor. Tax revenues and job opportunities of tobacco companies pale in comparison to the socio-economic and environmental losses the government pays due to tobacco addiction.

In 2016, direct health expenditure on tobacco-related diseases was Riel 237.2 billion, while indirect costs from lost productivity from premature death, disability and illness reached Riel 1.9 trillion.

Industry robs government and society by harming people and not paying enough taxes to cover the costs it inflicts on everyone.

The Cambodian government should exercise caution when lobbying 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.