Tobacco smuggling in Ecuador, a dilemma plagued by conflicting interests

RIO DE JANEIRO, BRAZIL – Tobacco smuggling is a palpable reality in the streets and stores of Ecuador, one of the countries with the highest prices per pack in the region. Still, the debate about its real impact on the market involves the tobacco industry’s interest in lower taxation.

Various reports fail to reach a unanimous conclusion on the extent of the phenomenon, compounded by conflicting interests and poor implementation of effective tax and health legislation.

Read also: Check out our coverage on Ecuador

One report states that up to 79% of cigarettes consumed in the country are of illicit origin, another 51%, but they agree that the Treasury ends up losing money.

FERTILE GROUND

The most alarming study, by the pollster Inmaver, requested by Philip Morris International (PMI), with cut-off last December, determined that 7.9 out of every 10 cigarettes consumed had an illegal origin.

Seventy-eight percent of the illegal brands are from Asia, mainly China, followed by 12% from Colombia, 6% from Paraguay, and the rest from other countries, according to the report.

Smugglers “have found very fertile ground in Ecuador because there is a 5 to 1 price difference,” Glenda Ruiz, director of external affairs for Itabsa and Proesa, local subsidiaries of PMI, told Efe.

Chinese brands are marketed illegally at an average of 1.5 dollars per pack of 20 cigarettes, while the legal ones cost $5.77, “of which 70% on average are taxes”.

The “excessive tax burden” on tobacco places Ecuador as the second country after Panama with the highest smuggling rates, criticizes the executive, who has proposed to reduce it to encourage legal sales (they have fallen “by 69 %”) since there is no “proportional decrease in consumption”, the primary objective of taxation for health purposes.

True consumption comes from the black market and, based on PMI estimates, the Ecuadorian treasury fails to collect US$3.78 per pack, about US$270 million annually and more than US$1 billion since 2015.

DISPARATE FIGURES

However, another estimate published by the Pontificia Universidad Católica del Ecuador (PUCE) lowers the percentage of tobacco consumed of illicit origin to 51%.

Its author, Tatiana Villacrés, commented to Efe that the prevalence of consumption among the Ecuadorian population has been progressively decreasing for decades and that “one of the reasons is the rise in taxes”, especially since 2011 when a tobacco regulation and control law was passed.

The researcher concedes that the largest number of illegal packs arrive from China. Still, her study reveals that the most sold brand -both in illegal and legal format- is Marlboro, produced by PMI, 95% of which come from Colombia and Mexico.

Similar independent studies in Colombia point to production far exceeding consumption, leading the researcher to ask: “Where is this surplus going? Our first hypothesis is that it is arriving illegally in Ecuador,” she said.

Given the plant closures in the two Andean countries, cigarettes of this brand allegedly began to arrive from Mexico.

The Tax Stamp & Traceability News portal recently warned that there had been an increase in the production and importation of cigarettes from Mexico to Colombia “in quantities that far exceed the amount of the brand legally entering Ecuador”, and that it was striking how the industry itself turned a blind eye to its unregistered penetration into the Andean country.

The Ecuadorian treasury has had two tax traceability systems, “SIGVEF” since 2015 at the service of Customs and “Simar” since 2017 in charge of the SRI (Internal Revenue Service). Still, smuggling remains out of control, fought insufficiently by the Police.

NEW LAW

Enrique Fanta, a Chilean expert in customs and taxes on special products, recognizes tobacco companies’ claims that “it is true (that) there are incentives for smuggling”, but at the same time, he assures that countries “are increasing both the penalties and the application of these so that it does not happen.”

Last Friday, an Organic Law that reforms several legal bodies to reinforce the prevention and fight against illicit trade, also known as the “Tobacco Law”, entered the official registry. Although it tries to tackle all illicit trade, it was largely promoted by the tobacco sector.

In addition to penalties and sanctions, it establishes a public commission led by Customs to combat smuggling.

This law does not go far enough for the tobacco sector since it was strongly sought to include compensation for the industry for the alleged damage caused by smuggling.

Along with the increase in smuggling, the smoking figures do not go down and cause 960 deaths per day in eight Latin American countries and entailing millions of dollars in health care costs.