Suggestion 1: Adopt reasonable tax policies for tobacco products to prevent illicit products from harming the lawful tobacco product market and causing government revenue losses.
The tobacco industry has always supported excise tax and health surtax (HST) policies for tobacco products based on the principles of reasonableness, moderation, and predictability in order to build a transparent and open regulatory system. This approach will not only help to stabilize the lawful tobacco market and protect it from harm from illicit tobacco products, but will also assist the government in achieving its public health and fiscal policy goals.
The Ministry of Health and Welfare (MOHW) has pointed out in a press release that based on international experience, the effectiveness of efforts to prevent illicit trade is directly related to the strength of the inspection and management measures adopted by the inspection authorities. It also stated that the purpose of policies aimed at reducing unqualified and illicit tobacco products should be to rigorously enforce the law, not to keep tobacco-product prices low.
However, because the demand for tobacco products is inelastic, any unreasonable excise tax and HST policy would cause smokers to use illicit “cheap whites,” in turn exacerbating the problem of illicit trade. For example, when the excise tax was drastically increased by NT$20 per pack in mid-2017, the illicit trade problem worsened because of the price gap between lawful and unlawful products. The cigarette smuggling case by Presidential Office personnel in 2019 attracted considerable public attention to the problem of illicit trade.
Given the heightened incentive to engage in illicit trade after the excise tax adjustment, the Ministry of Finance has continued to implement its “Advanced Enforcement Plan on the Illicit Trade of Tobacco Products.” In 2019, a total of 23.2 million packs of unqualified and illicit tobacco products were uncovered, which was the third highest annual total in history and had the highest-ever market value of NT$1.35 billion. If the problem of illicit trade indeed hinges on the strength of inspection rather than tobacco prices, why has the illicit trade problem continued to worsen when the government has intensified its inspection in recent years?
In today’s market in Taiwan, a large number of smugglers continue to engage in the high-profile sale of illicit tobacco products. New forms of illicit trade, such as setting up of illicit cigarette factories locally, have also emerged. Although law enforcement authorities regularly have revised their inspection plans each year and taken proactive preventive measures, the smugglers’ illicit activities have never been effectively contained. It is clear that strict inspection alone cannot effectively prevent the entry of illicit tobacco products into Taiwan.
It therefore follows that any adjustment of the tobacco excise tax and HST policies should be based on the principles of reasonableness, moderation, transparency, and predictability. An overly austere policy has been demonstrated to be ineffective in achieving the goal of reducing the incidence of smoking; on the contrary, it has exacerbated the problem of illicit trade and caused the government to lose tax revenue, resulting in a lose-lose situation for the government and industry.
Carefully evaluate the potential impact of illicit trade and consider the effect on market stability when drafting tobacco-product excise tax and HST-related measures.
Increase the use of relevant information platforms to address the seriousness of the illicit trade of tobacco products and urge citizens to avoid purchasing tobacco products that are unreasonably priced or come from questionable sources.
Suggestion 2: Consider new types of crimes when revising industry-related laws and actively enforce the law.
To combat criminal activity and effectively regulate the tobacco-product industry, the Ministry of Finance (MOF) has made known its intention to amend the Tobacco and Alcohol Administration Act. Although revision could benefit the industry’s long-term development, the MOF’s proposed direction of change would not resolve the problems that the tobacco product market in Taiwan is currently facing.
The amendment drafted by the MOF in 2019 would increase the maximum fine for selling or transporting illicit cigarettes and alcohol from the current NT$6 million to $10 million. It also includes a new provision requiring tobacco-product manufacturers, importers, and sellers to use standardized names of tobacco products when issuing uniform government invoice, and later to introduce e-invoices in stages. The increase in the maximum fine is a positive suggestion, but the provision on standardization of tobacco product names would do little to achieve the purpose of facilitating the government’s inspection of illicit cigarettes, but would impose enormous administrative costs on lawful domestic tobacco businesses.
Based on past inspection practices, when businesses have been requested to provide duty-paid records for imported products, the illicit traders have always come up with ways to supply such records. The problem therefore cannot be resolved by changing the specification of the e-invoice or standardizing the e-invoice format. However, lawful businesses would face unnecessary costs in modifying their respective international warehouse logistics management systems.
The MOF needs to face up to the changing nature of the illicit trade. In addition to seeking to prevent illicit tobacco products from entering Taiwan, it should also increase its inspection of illicit domestic tobacco-product factories. Only then can the flow of illicit tobacco products in the Taiwan market be effectively deterred.
Undertake effective inspection measures to combat the newly emerged types of illicit trade, such as large local illicit cigarette factories.
When amending the Tobacco and Alcohol Administration Act, carefully evaluate the cost-effectiveness of the means proposed to achieve the goal of reform, convene meetings to communicate fully with industry to build consensus, and re-evaluate the tobacco-product name standardization rule to avoid unnecessary transaction costs for the lawful businesses.