In October, the International Tax Stamp Association (ITSA) wrote to Julio Castilla Peláez, President of the Costa Rican Chamber of Commerce (CCCR), responding to an article in the La Nación newspaper titled ‘Traders reject attempt to revive plan to label and monitor liquor’.
The article referred to a previous plan by Costa Rica to implement a tax stamp and track and trace system on domestic and imported alcohol. The plan had originally been approved by a legislative assembly committee in July 2019, but had been immediately opposed by the Vice Minister of the Treasury, and subsequently blocked.
Now the plan is being revived and approval for its implementation is again being sought in the legislative assembly. But with this revival has come renewed criticism of the plan, including from the Director of CCCR’s Observatory of Illicit Trade (OBCI).
In the La Nación article, the OBCI claims that adopting a tax stamp system ‘will boost smuggling, since this system has proven ineffective in nations like Brazil, Ecuador and Mexico, as well as in Costa Rica, where it was implemented at the Depósito Libre Comercial de Golfito (a duty-free commercial centre).’ Furthermore the article states that ‘… those who are against this initiative, like traders, claim that the high cost of contracting a service to that end goes beyond profit’.
In responding to these claims, ITSA sought to correct what it sees as a number of misleading statements and errors, particularly those related to the cost of acquiring and operating a traceability system based on what are referred to in the article as ‘smart’ tax stamps.
The response started out by emphasising that traceability systems – which combine material and digital security features and functionalities – had in fact proven very effective in protecting tax revenues across the world, as well as in authenticating and providing proof of origin of a broad range of goods.
As far as the failed tax stamp and traceability programme at the Golfito centre was concerned, ITSA advised that this failure had been due to the way in which the programme had been designed, as well as to fact that no international recommendations for traceability systems – in particular those provided in ISO 22382:2018 – had been applied. Specifically, the Golfito stamps lacked any material and digital security and were without any coding, thereby making them easy to reproduce and counterfeit.
Another crucial failing was that the printing of the stamps and the administration of the system had been undertaken by the economic operators (traders) themselves, rather than by an independent third party and specialist in the field. Independently managed systems are crucial to the reliable operation of a traceability solution, but in the case of the Golfito programme, economic operators were placed in charge of their own self-regulation, which was like putting a fox in charge of a henhouse.
ITSA went on to point out that the claim in the article that excise tax control systems based on product traceability had not been effective was totally erroneous and at odds with the growing opinion of independent experts, who had properly researched the effectiveness of such systems. Indeed, both the World Bank and International Monetary Fund recommend that tax and customs administrations implement traceability systems as part of a modernisation programme for increasing tax collections and preventing tax evasion, smuggling and illicit trade.
As far as the cost of tax stamp and traceability programmes was concerned, ITSA advised that this cost was in fact much lower than opponents of control schemes were suggesting and usually did not represent more than 0.5% of the price of controlled products, with an international average of $0.01 per unit of product. Indeed, this cost was very low when set against the typical tax revenue increases that resulted from traceability schemes, which ranged between 15% and 50%. Furthermore, any evaluation of cost also needed to be weighed against other economic and social benefits accruing to such schemes.
Moreover, concluded ITSA, in all the countries where product traceability schemes had been implemented, continuous improvements to those schemes had subsequently been introduced and the schemes had been maintained through multiple contract periods – which was a strong sign that governments and tax authorities were experiencing substantial benefits from them.
Tobacco industry involvement
The heavy resistance by traders in Costa Rica to implementing tax stamp and traceability systems to regulate their production and supply chains is not unique to this country and should not come as much of a surprise. Let’s face it: does any economic operator, anywhere in the world, ever really welcome the prospect of increased controls and regulations with regard to their business?
What is of more concern, however, especially for public health organisations, is the strong criticism of traceability systems by members of the Costa Rican government, and the influencing forces behind such criticism.
In fact, the criticism has been linked to a strengthened alliance between the government and the tobacco and alcohol industry, whereby the tobacco industry, in particular, is reported to be influencing government opinion and public policy, both in Costa Rica and other countries, via the activities of a front group called TRACIT. One report, published earlier this year by Gabriela Zamora Sauma for aDiarioCR.com, describes how the tobacco-funded TRACIT is trying to influence tobacco control policy in Costa Rica.
TRACIT is short for ‘Transnational Alliance to Combat Illicit Trade’, a group launched in 2017 in New York as ‘a private sector initiative to enhance business collaboration with governments and intergovernmental organisations to mitigate the social and economic damage of illicit trade’. Currently, the group includes four alcohol manufacturers and one tobacco manufacturer (Philip Morris International) among its 13 members.
The report cites Michél Legendre, Associate Campaign Director for Corporate Accountability’s tobacco campaign, who points out that the grouping of tobacco with other industries and presenting a front entity is an old interference tactic of the tobacco companies.
The report also cites Dr Eduardo Bianco, Technical Director of the Centre for International Cooperation on Tobacco Control in Uruguay, who states: ‘the tobacco industry uses TRACIT to reach out to governments and international organisations, in a ‘more credible’ way than if it did so directly. This allows it, indirectly, to be part of government bodies in charge of combating illicit trade, or advising them, something it cannot do openly since it is forbidden by an express provision of the FCTC and its Protocol’.
And a third citation comes from Dr Allen Gallagher of the Tobacco Control Research Group of the University of Bath, UK, who says: ‘in addition to its attempts to influence the Costa Rican government, TRACIT has fueled industry-friendly policy changes throughout Latin America, in Asia, the Middle East, Europe, and Africa’.
In the case of Costa Rica, a key strategy used by TRACIT to influence policy change has been to strengthen the presence of the private sector within the country’s Joint Commission Against Illicit Trade. The commission was established in 2014 by former President Laura Chinchilla and integrated five government entities, including the ministries of health and finance, and police and customs.
However, in 2016, the government of Luis Guillermo Solís reformed the decree to allow the Costa Rican American Chamber of Commerce (Amcham) – whose members include British American Tobacco and Philip Morris – and the Costa Rican Union of Chambers and Associations of Private Enterprise (UCCAEP) – whose members include AmCham – to be part of the commission. Indeed, Amcham’s representative within the commission was Gerardo Lizano, former Manager of Corporate and Regulatory Affairs at British American Tobacco Central America. In addition, the only company invited to the commission sessions was Philip Morris Costa Rica, states the aDiarioCR.com report.
Teresita Arrieta, Vice President of Costa Rican anti-tobacco group Red Nacional Antitabaco (RENATA), claimed at the time that including AmCham and UCCAEP in the commission was in violation of Article 5.3 of the FCTC, which states that ‘in setting and implementing their public health policies with respect to tobacco control, parties shall act to protect these policies from commercial and other vested interests of the tobacco industry in accordance with national law’.
For Dr Nydia Amador of RENATA, the participation of AmCham and UCCAEP was: ‘equivalent to having the merchants warned of how the government will control them. With industry representatives on this commission, the government is losing the ability to control the illicit trade in certain products’.
In 2017, over 20 international organisations requested former President Solis to exclude representatives of Amcham and UCCAEP from the commission, on the grounds that they could not be both judge and party. But the ministry of finance told RENATA that the commission’s technical committee had confirmed the legitimacy of the chambers within the commission, as it didn’t only focus on tobacco but on industries in general. Therefore, it looked like the chambers were there to stay.
Tailored traceability system… or preferably no system at all
The aDiarioCR.com report points out that one of the major objectives of the tobacco industry with the tactics described above is to prevent countries from installing fiscal traceability systems to control the production and import of tobacco products, or, failing that, to at least ensure that such systems are tailored to the industry’s interests (by, for instance, allowing it to implement, and manage elements of, its preferred systems).
For Legendre, the report ‘Protecting the Tracking and Tracing System of the Tobacco Industry’, published by the STOP (Stopping Tobacco Organisations & Products) initiative funded by Bloomberg Philanthropies): ‘shows that the industry is still involved in smuggling. Therefore, it has a clear interest in controlling the tracking and tracing systems, because this allows them to continue this involvement with impunity, evading taxes and avoiding possible litigation’.
It remains to be seen which direction Costa Rica – as well as other countries and regions on TRACIT’s radar – will take in terms of traceability systems for both tobacco and alcohol. Although the country may ultimately decide not to implement anything at all on alcohol products, it will be obliged to implement track and trace on tobacco by 2023, in line with its obligations as a party to the FCTC Protocol.
Given that no technical specifications are currently available from the FCTC Secretariat with regard to the tobacco track and trace system, the possibility remains that Costa Rica may opt for a system that will to some extent be chosen for it by the tobacco industry – even though such a system may not be in line with the spirit of the Protocol.