Friday, December 23, 2022
Friday, December 23, 2022
Looking back over the year that was, a few key developments spring to mind, as captured in the following headlines:
New programmes adopted… but one dismantled
Illicit tobacco continues to soar and shift
Emerging technologies that could change the shape of tax stamps
ISO tax stamp standard comes of age – time for a review
Ground-breaking study spotlights track and trace breakeven cost.
2022 saw some countries introducing tax stamps or direct tax marks for the first time, including Oman, Congo and Botswana.
Other countries, meanwhile, including Ethiopia and Madagascar, set in motion tender processes for procuring tax stamp/ track and trace systems. We also heard that Nigeria, Sierra Leone, and Ivory Coast were in various stages of discussion with regard to introducing such systems, as was South Africa… after previously cancelling a tobacco track and trace tender back in 2020.
So, while there was a lot of activity in 2022 with regard to introducing new systems, especially in African countries, one country decided to ‘go the other way’, by dismantling its system.
That country was Ecuador, where the Servicio de Rentas Internas (SRI) decided to amend a key aspect of its SIMAR system (System for Identification, Marking, Authentication, Tracking and Tracing) for alcohol and cigarettes. Whereas the system had previously been centralised under one provider – including the provision of tax stamps – the new model now allows taxpayers to directly contract with their own provider, as long as that provider is in no way ‘related’ to the taxpayer.
SRI’s arguments for implementing this fragmented model were that it would reduce government costs and ‘democratise’ control of the system by allowing multiple providers to participate in it. This reasoning, however, goes against the recommendations of international organisations such as IMF and World Bank, which advise governments to maintain a ‘monopolising’ control over its different regulatory programmes.
An additional concern with the fragmented system is that it would lead to confusion among enforcement officials faced with identifying and authenticating a multitude of different tax stamps from different suppliers, all co-existing in one country!
It will therefore be interesting to revisit the situation in Ecuador next year to see how they are getting on with this new model.
In our 2021 TSTN review, we described how illicit trade had morphed into a new shape as a result of illicit networks having to fit their ‘business models’ around border closures and COVID-19 lockdowns. As far as illicit tobacco in Europe was concerned, criminals simply relocated their illicit production facilities from outside the EU into the very heart of the EU.
In 2022, EU illicit production facilities continued developing into localised, modern and sophisticated operations, calling for enforcement authorities to also become more localised, and to shift their focus to cutting off illicit production, using measures such as the track and trace of raw materials.
We also heard that a similar situation was developing in the Philippines, where the illicit production of certain cigarette brands had shifted into a freeport zone within the country, rather than being smuggled over the border.
In South Africa, meanwhile, the illicit trade in cigarettes not only changed shape but ballooned in size, thanks in large part to a total ban on cigarette consumption during lockdown. As a result of this ban, there is today a broad consensus that illicit tobacco, which is now hovering around a staggering 50-60% of the total market, has become deeply rooted in the country.
Although the South African Revenue Service (SARS) stepped up its efforts to curb illicit trade in 2022, illicit factories simply shifted their operations to neighbouring countries, where SARS policy and enforcement efforts carry no weight. This posed a fundamental challenge to SARS, especially since it doesn’t have track and trace in place on cigarette packs.
Throughout the year, Alan Hodgson, a regular writer for Tax Stamp & Traceability News™ has been looking at emerging technologies and developments that could impact the tax stamp and traceability industry, both in the form of opportunities and threats. These developments include digital printing, sustainability, smart packaging, smartphone validation, robotics in logistics, edge computing, distributed data systems, and new players.
Starting with digital printing, Alan said this is already becoming important for tax stamps and is likely to become even more so.
3D printing will also become more common practice for adding functionality, such as printed electronics, to product packaging, or directly on the product itself.
‘Printed electronics are the gateway into the Internet of Things (IoT),’ said Alan, adding that IoT was currently waiting for real 5G connectivity to be rolled out, which would connect products and services everywhere. The question is: when all of this happens, where does that leave tax stamps?
Alan also advised that smartphones could be approaching end of life – even though they are starting to have artificial intelligence built into them. But what will replace them? Alan saw an opening for head-mounted displays, with associated cameras, in the form of a pair of glasses.
‘It is a development we should be watching,’ he advised, ‘because if head-mounted displays replace smartphones for validating products and tax stamps, our industry needs to ensure that security features still exist that can be accessed and verified visually’.
In Alan’s opinion, the one single development that will make the biggest difference to our industry is new players entering the tax stamp and traceability arena. ‘They will most likely be technology driven, with a perspective directed towards IoT, artificial intelligence, big data, and mobile devices. They don’t have our historic security-oriented mindset, and we are potentially in their way’.
Food for thought.
In 2023, the ISO 22382:2018 guidance standard for the content, security, issuance and examination of excise tax stamps is due for its five-year review. Ahead of this formal process, the International Tax Stamp Association (ITSA) launched its own review, in 2022, with the aim of gathering input from tax stamp issuing authorities and suppliers on aspects of the standard they believed needed revision. This input will then feed into the formal review process for consideration by ISO.
ITSA felt that the time was right to revisit the standard, as there had been significant changes in the field since 2018. These include the use of new digital technologies and the continuing expansion of stamps to products other than cigarettes and alcohol.
It was also felt that, when the original standard was being developed and written, back in 2017/8, there had not been enough involvement by tax authorities in this process. After all, 22382 had been created for them, so they should have had their say with regard to the structure and content of the standard. ITSA now hopes to rectify this situation by involving tax authorities early on in the revision process.
Another suggestion with regard to tax stamp standards, which was raised a few times during the course of 2022, was that it might be appropriate to consider a parallel compliance standard for suppliers – ie. a standard that requires organisations to be inspected and audited. This is something ITSA will be looking into during 2023.
2022 also marked the first time, as far as we know, that an academic study* has been conducted to compare the cost of cigarette track and trace systems to the potential revenues generated from those systems. The previous lack of independent studies on this subject meant that governments were obliged to rely on commercial reports and the experiences of other countries.
The study comprised a simulation model for determining what the unit cost of a track and trace marker applied to cigarette packs needed to be for governments to recover all costs associated therewith.
The study was developed by the Research Unit on the Economics of Excisable Products (REEP), at the University of Cape Town, South Africa. The simulation model was applied to the South African cigarette market – which has no tax stamp or track and trace system in place. But, it can be adapted to other countries, as long as the appropriate data is available.
The premise of the model was that while track and trace systems incurred costs for implementation, they also generated additional revenue by diverting illicit cigarettes into the legal, taxed market. Therefore, there would be a track and trace price at which costs would be equal to the additional revenue generated by the newly taxed cigarettes. This was the breakeven cost.
In the case of South Africa, a marker cost of $0.26 per pack resulted in additional government revenue of $242 million, according to the model, which was exactly equal to the total cost of track and trace.
Therefore, the government broke even at this level.
This result was particularly interesting in that the $0.26 breakeven marker cost was many times higher than the cost of track and trace markers currently in operation (eg. $0.016 in Brazil and $0.023 in Kenya).
A strong argument indeed for South Africa to now move ahead quickly to implement traceability systems for quelling its rampant cigarette illicit trade.
On that note, it just remains for me to wish you a wonderful festive season in the company of family and friends, and a New Year full of happiness and success.
All the very best,
* https://tobaccocontrol.bmj.com/content/tobaccocontrol/early/2022/09/14/tc-2022-057550.full.pdf, Kirsten van der Zee, Corné van Walbeek, Hana Ross.