One can hardly read the news today without coming across an article about illicit trade in tobacco and how it is making South Africa’s fragile economic situation even worse: A tobacco industry likened to a fragile china doll standing at the edge of Table Mountain in a heavy Cape Town wind. Jobs will be lost; whole communities will collapse — a classic gloom-and-doom mantra delivered with the precision of an industry that has seemingly endless resources to spend on public relations.
It is no coincidence that this message is being spread loud and wide across the land as SARS, after many years of inaction, is finally poised to address illicit trade in a meaningful way by attempting to introduce a replacement to the decades-old Diamond Stamp regime and through the introduction of stricter controls on tobacco supply chains. These measures are included in a recent SARS tender for production controls and track-and-trace for tobacco products.
Illicit trade is indeed a problem, but in order to solve it we must understand the facts — and not the industry self-interest-based rhetoric.
Big tobacco’s behaviour and related public relations campaign should come as no surprise. It comes straight out of its playbook used around the world to prevent governments from enacting meaningful change that actually clamps down on illicit trade. The big tobacco industry invented illicit trade in its own products many years ago. This is not an opinion, but a fact reflected in hundreds of lawsuits and court settlements — many still ongoing today — and billions of dollars in fines as a result of its direct involvement and complicity in illicit trade.
Still today, it is estimated that 98% of all illicit tobacco are products of legitimate tobacco manufacturers. Illicit trade in tobacco equates to selling a product without paying the correct amount of the excise taxes and VAT, which in SA in 2019 amounts to about R19.20 a pack. Africa is particularly vulnerable to transfer pricing and other tax avoidance schemes used by the tobacco industry to avoid paying its fair share of taxes.
This has been documented in a recent report by the Tax Justice Network. According to the report, BAT alone has siphoned off more than a billion dollars in taxes from a few developing countries:
“Tobacco companies make a lot of noise about paying tax, but the nearly $1-billion that British American Tobacco shifted out of developing countries in a single year into one UK office — and the life-changing tax it avoided on that profit — tells a very different story.”
Excise taxes on tobacco are high for a good reason — they are intended to balance out the negative health impact and public health cost of tobacco usage to government. So, this tax evasion by tobacco companies is a shameless tactic to avoid taking responsibility for the considerable health harm that their product causes.
The Tobacco Institute of South Africa (TISA) has been very effective at positioning itself as both the victim and saviour when it comes to illicit trade. It has attempted to claim the economic high ground, talking about job losses, farmers, and the negative impact on poor communities as a result of higher taxes and stricter controls. It has sponsored two research projects with questionable methodology and findings, to point the illicit trade finger at smaller competitors, and to paint itself as blameless. This is merely a tactic to obfuscate and delay any meaningful attempts to address illicit trade.
TISA first came out in support of SARS and its tender but later flip-flopped and issued a press release on the 21 May 2019, which echoes the industry’s global rhetoric that opposes any supply-chain regulation. It subtly promotes its own solution for controlling the very supply chains that it had been unable to police itself. Indeed, the TISA press release is loaded with half-truths and unverifiable statements too numerous to respond to in a single article, but here are a few that stand out:
“SARS intends to appoint a single service provider for an unprecedented eight years to implement a system which will impact on wholesalers, retailers, distributors and manufacturers, at significant cost and without consulting the value chain stakeholders… It will impose excessive and impractical regulatory burdens on small retailers.” (TISA Press Release 21 May 2019)
First, no single retailer or informal trader will be impacted in any way by the solution. In South Africa, we have the concept of “duty at source” which essentially means at the point of manufacture and or import. The technology will be deployed in the production environment to monitor how many packs are produced and will extend to only a few key points in the supply chain. Contrary to TISA scare-mongering, SARS is not going to require any tuck shop, informal trader or shebeen to have an internet connection and high-tech scanner.
“These are complex, hi-tech systems that must be able to plug into the existing, as well as future technology used by SARS, retailers, wholesalers and manufacturers so data can be shared in real time.” (TISA Press Release, May 21, 2019).
True, track-and-trace systems do encompass technology, but this technology is already all around us, deployed in some form or another across virtually all industries from fast-moving consumer goods such as toothpaste to hi-tech products such as laptops and cellphones. Essentially, it involves four essential components that provides lawmakers with the ability to actually know where products originate from, where they are meant to be and whether the tax has been paid.
This includes: (1) counting production — which any company that makes anything, does; (2) creating what amounts to a serial number to establish the unique nature of the units or packs being produced; (3) using security features — like the ones on banknotes — to ensure the product is genuine and not fake and that the taxes have been paid; and (4) capturing supply-chain events when the product moves to key points — like from the manufacturing facility to a warehouse. Almost every company from McDonalds to DHL to Ford does this as a matter of their normal business.
There is no magic required here, nothing hi-tech, it is in wide use across multiple industries and has been for years. If a car manufacturer can tell us exactly where each of the 30,000 parts, sourced from thousands of locations and suppliers are from, then tracking and tracing a pack of cigarettes is possible and achievable. It is not so complicated and does not require years of deliberation and consideration, as the tobacco industry repeatedly claims.
What it will do is make it harder for the tobacco industry to cheat the tax man and result in a huge contribution to SARS’ ability to combat illicit trade. SARS will collect more revenue and the public will benefit from the tobacco industry paying its full share of taxes. There will also be fewer cheap (untaxed) cigarettes available for sale so public health will improve and the country’s public health cost will go down.
New SARS Commissioner Edward Kieswetter was right to delay the tender to provide more time for everyone to take pause, since the tender was issued just four days before his first day on the job and in the same week as our national elections. The timing of launching such an important project is nothing short of curious.
First, SARS is right to pursue a secure fiscal mark to replace the totally useless Diamond Stamp regime. The current tender calls for a “tax stamp-like” fiscal mark that proves taxes have been paid. Finally, everyone will be able to see an illicit pack because it will not have the tax stamp on it.
The history of tax stamps predates the Roman Empire, and today they are still employed by nearly 150 tax jurisdictions around the world, including 46 of the 50 states in the US. Why? Because they work. Contrary to tobacco industry rhetoric, a highly secure tax stamp that contains both digital and material security elements is nearly impossible to counterfeit.
Second, SARS should implement the World Health Organisation’s (WHO) Framework Convention on Tobacco Control (FCTC) and its Protocol on Illicit Trade in Tobacco (ITP). South Africa has signed both treaties. The tender mentions the FCTC, but does NOT make it a requirement or subject to the tender evaluation scoring. That is a very big omission considering the obligations of an international treaty.
Third, the tender process must be open and transparent and key provisions need to be explained. There are curious requirements in this tender that are hiding in plain sight within its voluminous 350-plus pages. The Commissioner and his new team should prioritise ensuring that the solution is tailored to meet the unique illicit trade situation in South Africa.
TISA accuses SARS of “rushing” the process and a lack of engagement. Both are patently false. SARS has been working on the replacement of the Diamond Stamp regime for over 10 years and South Africa ratified the FCTC Protocol in 2005.
SARS has had extensive engagement with the tobacco industry through an advisory body (the SARS/TISA forum) that has met regularly for many years, with far less engagement with other stakeholders such as civil society. Indeed, if anything, SARS in their own way in which they deal with normal taxpayers may have over-engaged with the tobacco industry and assumed they are interested in doing the right thing.
The question we should all be asking ourselves is: Why has it taken SARS so long to get to this point? SARS transformed its entire tax regime from one of the world’s worst to one of the best in a period of time that defies modern-day information technology norms. Yet it is inexplicably taking more than a decade to even make the tiniest of changes to how it deals with illicit tobacco.
How can you operate among the world’s best when it comes to tax policy and administration in every other tax type, but literally be among the world’s worst when it comes to excise and illicit trade?
Some introspection may be required here.
SARS is no novice when it comes to technology, having one of the world’s most advanced electronic tax platforms, but tobacco and excise has curiously been left at the back of the bus for decades. TISA is right about one thing: SARS needs to be very prudent about awarding any large contract, particularly in this environment of State Capture.
But the need for prudence should not translate into any more delays or excuses for effective policies and technologies that have literally been staring them in the face for years. Nor does it mean that SARS should blindly follow the recommendations of an industry discredited around the globe for deliberately evading taxes and intentionally scuttling any attempts at controlling its own supply chains.
It is well within SARS’s technological comfort zone to tackle the illicit trade in tobacco. The country expects SARS to make wise choices and consider all options at its disposal and to act carefully, but speedily on them. This issue is not just about the illicit trade, or about optimum collection of taxes. This is about the health of South Africans and the need for us to stop the unnecessary annual death toll of 42,000 lives lost to tobacco each year.
The new commissioner certainly has his hands full and making the right decisions when it comes to combating illicit trade will go a long way to bringing SARS back to what it once was. DM
Michael Eads is the former Executive for Customs Modernisation at SARS and is a customs and excise specialist. He has conducted work on combating illicit tobacco for the European Commission, World Health Organisation NGOs and governments around the world.
Dr Hana Ross is a Principal Research Officer at the Economics of Tobacco Control Project at the University of Cape Town with 20 years’ experience in conducting research on the economics of tobacco control.
Savera Kalideen is Executive Director of the National Council Against Smoking.
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