Suggestion 1: Formulate excise tax and health surtax policies for tobacco products based on the principles of transparency, moderation, predictability.
The tobacco industry has always supported excise tax and health surtax (HST) policies for tobacco products based on the principles of transparency, moderation, and predictability. However, in the past several years the Taiwan government’s policies and policy-making process have departed from these principles, seriously impacting the industry’s future prospects in Taiwan. It is hoped that the Taiwan government will carefully consider its formulation of future tobacco excise tax and HST policies and take appropriate measures to address the related questions.
According to past experience, the demand for low-priced illicit cigarettes increases considerably after the tobacco excise tax and HST are raised. Ministry of Finance data shows that the volume of illicit cigarettes seized by Customs and local governments rose markedly after the tobacco excise tax was raised in the past.
The “Advanced Enforcement Plan on the Illicit Trade of Tobacco Products” which the government has implemented calls for enhanced border inspections, stronger law enforcement, improved inspection efficiency, and better coordination among government agencies. Nevertheless, the illicit trade in tobacco products has continued to be a problem. Instead of smuggling in finished products, the latest trend is to use smuggled tobacco leaves to manufacture illicit cigarettes in production facilities in Taiwan, sometimes with technical support from experts from China.
According to the Coast Guard Administration, for example, the raid in January this year of a large-scale factory manufacturing illicit cigarettes led to the seizure of approximately 5,472 kilograms of tobacco leaves. If these has been turned into finished products, they would have represented approximately 390,000 packs of cigarettes with a retail value as high as NT$39 million.
While the heightened law enforcement efforts have been encouraging, they were unable to prevent a considerable amount of illegal products from entering the market before this factory was uncovered. Large amounts of illicit cigarettes are still making their way into the market.
Since HST is a special revenue stream for the government, the funds collected should be used only for the dedicated purposes stipulated by law. One percent of the HST funds is earmarked for cracking down on smuggling and counterfeit tobacco products and for preventing evasion of tobacco-related taxation. However, there have been frequent instances of misuse of HST revenue that should have been allocated for this purpose. A 2018 Control Yuan report, for instance, found misuse of such funds by some city and county governments. Due to this violation of the “dedicated use” principle, the competent authority – the Ministry of Finance – was censured by the Control Yuan for mismanagement of HST. Official letters were sent to the local governments instructing them to comply with the principle, but no personnel were ever dispatched to check on compliance.
Due to the failure to comply with the “dedicated amount for dedicated use” principle, plus the increase in the excise tax on tobacco products to serve as a source of revenue for long-term care insurance, the Taiwan market continues to be plagued by the illicit trade in tobacco products and its many negative side effects. To date, they have proved impossible to root out.
As reiterated in past White Papers, a transparent, reasonable, and predictable policy not only protects lawful tobacco businesses from harm caused by the illicit trade in uninspected and untaxed products, but it can also help achieve the government’s public health and fiscal revenue goals.
Re-examine the tobacco product excise tax and HST policies.
Enhance penalties for illicit traders.
Increase the use of relevant information platforms to pinpoint high-risk hotspots and targets for law enforcement.
Propose inspection measures targeting new forms of production of illicit products, such as large-scale factories
Produce awareness-campaign video clips urging citizens not to engage in the illicit trade of tobacco products and avoid purchasing illicit cigarettes.
Conduct research to understand the social, health, and financial ramifications of the widespread sale of illicit cigarettes.
Suggestion 2: Adopt effective and proportionate tobacco control measures.
The industry has consistently supported effective and proportionate tobacco control policies. However, several recent legislative proposals have been excessive.
The proposals include the Tobacco Hazards Prevention and Control Act (THPCA) amendment bill, which was proposed by the Executive Yuan and passed the first reading in the Legislative Yuan in December 2017. In addition, 26 other amendment proposals submitted by legislators have also passed a first reading.
These amendments have proposed several extreme measures, including requiring the area allotted for Graphic Health Warning (GHW) on cigarette packages to be increased to as large as 85%. Other proposals call for totally banning flavors and other tobacco additives, as well as terminating a business’s import and manufacturing permit should it violate relevant regulations three times within five years.
The industry opposes these proposals because they infringe upon the intellectual property rights of lawful businesses. They can also be deemed unconstitutional and risk seriously impacting legal investments in Taiwan. In the current unsettled international trade environment, these proposals need to be considered carefully before being decided on.
Taking the proposed enlargement of the GHW area as an example, the amendment would expand the current size from 35% to 85% of the total packaging – much larger than what is recommended by the World Health Organization’s Framework Convention on Tobacco Control. It would also force lawful manufacturers to reduce the area reserved for their trademarks to the remaining 15%, thereby restricting the use of registered trademark by lawful businesses.
Another example of an excessive proposal currently under consideration is the amendment to Article 7 of the THPCA. According to the draft amendment, “cigarette additives use techniques to add in floral, fruit, chocolate, mint and other flavors to reduce the harshness of cigarettes for those who smoke cigarettes for the first time. This will cause children and teenagers to become addicted more easily and reduce the addiction time from one year to half a year or just a several months.”
No empirical evidence is provided to support this claim. If enacted, the proposal would ban lawful businesses from using flavors and additives, blocking them from developing and innovating new products.
These two measures would prevent legitimate products from distinguishing themselves in the marketplace through distinctive packaging and product formulas. In addition, they may constitute a trade barrier and obstruct fair market competition, prompting consumers to turn to buying illicit cigarettes.
With respect to the proposed amendment seeking the “revocation of import and manufacturing license from businesses that have violated the regulations three times within five years,” the determination of these violations depends solely upon the individual discretion of the enforcement personnel in each county and city government, as the local governments have not passed any related penalty standards and definitions.
If this proposal is passed into law, serious problems will arise as a result of the subjective interpretations by law enforcement personnel. Ultimately, this lack of objective standards and definitions could result in lawful importers and manufacturers facing a complete suspension of their business. In fact, it could cause the entire lawful supply chain to be suspended, leading to unjustified job losses. The market would also be flooded with illicit cigarettes, causing serious harm to Taiwan’s regulatory regime, investment climate, and social environment.
The negative impact of these proposals would amount to a lose-lose situation for all parties concerned – the government, consumers, and lawful businesses. Taiwan’s international reputation as a sound place to do business would also be badly damaged – potentially discouraging other international companies from investing in Taiwan.
Regulate tobacco products in the same and consistent manner as other lawful products.
Conduct a comprehensive evaluation of the proposed THPCA amendments, assessing whether these policies would be effective in achieving the stated public health objective, including reducing the incidence of smoking. The government should carefully consider the proposals’ comprehensive impact on the lawful supply chain versus the development of illicit trade.
Convene public hearings before any of the THPCA amendment proposals are considered. All the related stakeholders affected by these policies should be allowed to express their views in a transparent manner.