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Specialreport International Tax & Investment Center May 2017 SpecialReport The Development of Modern Revenue Controls on Alcoholic Beverages Executive Summary Tax stamps are used by regulators in are often required in order to prevent approximately fifty countries globally (see other fraudulent practices such as the Annexe A for list of countries) in an attempt refilling of stamped products with illicit to protect alcohol tax revenues. This report alcohol; assesses the effectiveness or otherwise of such • Stamps embedded with a means of systems and takes a closer look at the factors electronic communication may help the critical to determining the overall success of tax authorities identify legitimate product stamps and related technologies. in the distribution chain and enable We show that, in isolation, tax stamps are a verification by consumers. In certain sub-optimal policy choice from both an efficacy circumstances they have been associated and efficiency perspective. Instead, the goals with reductions in illicit activity and an of curbing illicit trade in alcohol and protecting increase in tax revenue for government. tax revenues require a much wider package of However, these impose considerable effective monitoring, control and enforcement costs on legitimate business and involve measures. High and discriminatory rates of tax the development and maintenance of should also be avoided as these incentivize illicit complex logistic and IT control networks trade. in order to be effective. At best, modern electronic stamps may make a Before introducing any anti-illicit alcohol positive contribution where they are an integral strategy, authorities should ensure that they part of a much wider system of enforcement have a full understanding of the size and nature and deterrence, and where the tax system is of the illicit market. Successful anti-fraud well-designed. But it is also possible for stamp strategies must be, ideally, evidence-based and schemes to be counter-productive. For example, targeted to the nature of fraud in the market, the ability to counterfeit stamps and re-fill and implementation will depend heavily on stamped bottles may allow illicit product to well-designed and well-resourced surveillance, be more easily passed off as genuine. And the interception and deterrence activities. Indeed, schemes can add significantly to costs in the if enforcement is sufficiently robust (and the tax legitimate industry, thereby exacerbating price system well designed), then potentially costly differentials with unregulated products and tax stamp schemes could be avoided altogether, incentivizing illicit activity in much the same way with little revenue impact. Furthermore, in some as high tax rates. circumstances, tax stamps will have little or no A report by: effect on illicit trade. More specifically, the evidence highlights a number of factors that impact their effectiveness: It follows that governments considering the introduction of a new stamp scheme should • The extra costs imposed on business carefully examine whether alternative policies creates upward pressure on prices. This could achieve the same or even better results serves as an incentive for some to avoid at a lower cost. That may mean stricter controls regulated channels – a counterproductive on licensing, more sophisticated systems of outcome of tax stamps; surveillance and control, enhanced penalties • Stamps can be susceptible to for illicit activity, awareness campaigns aimed counterfeiting and additional processes at potential suppliers and consumers of illegal alcohol, and/or more resources for the revenue, border combatting illicit trade, but costs to industry have and police authorities. Effective controls also require a become a great concern. It is, however, too early partnership approach across all enforcement agencies to judge the effectiveness of the scheme’s more nationally and internationally, and can be enhanced by recent extension to beer, which has exacerbated a partnership approach with legitimate businesses and the cost impact. trade associations. • In Colombia, despite a longstanding system of Furthermore, whatever systems of enforcement and tax stamps for spirits, consumption of smuggled control are put in place, governments should also and artisanal products has remained stubbornly remember the potential for elevated tax rates to high with legal spirits consumption falling. encourage informal activity at the expense of the formal • In Morocco, the introduction of an advanced tax-paying sector, thereby undermining revenues and tracking system is credited by some with encouraging the range of other problems associated containing illicit activity although it is not with illicit trade, from irresponsible drinking to the possible to detect a positive impact in relation funding of wider criminal activity. The overall structure to beer, wine and spirits. Against a background and the tax base are important considerations too. A where the cost of taxed and regulated alcoholic simplified, non-discriminatory alcohol tax structure set products is very high relative to that of artisanal at reasonable levels will help encourage compliance and smuggled products, legal consumption of and ensure transparency for both taxpayers and alcohol has fallen in recent years, accompanied governments. by a decline in tax revenues. The seven case studies in this paper illustrate a number Overall our review highlights that tax stamps make a of the points referred to above: limited contribution to achieving their intended policy • In Denmark, the government abolished tax stamps goals such as tackling illicit trade, growing revenue on spirits in 2015, having previously removed and building consumer confidence. To work well, the stamping requirements on wine in 2001. Stamps evidence base first needs to be established on the illicit were widely considered to be outdated and market and tax stamps should not be considered in unnecessarily burdensome and costly in terms isolation of other important policy levers including tax of administration to manufacturers, importers policy and a fit for purpose regulatory and enforcement and the Danish authorities alike. Viewed as a framework. simplification of tax administration, the Danish Success in curbing illicit trade and ensuring tax government signed off on the abolition and compliance will be assisted, and to a large extent agreed with industry that the requirement was facilitated, by the following: one of the past and not in keeping with modern best practice. • Ensuring that the excise duty system is well designed – simple, non-discriminatory and set at • Turkey’s tax stamp scheme is partially credited reasonable levels; with helping to reduce illicit trade. But more recently, illicit trade appears to have been • Setting excise duty rates at a level that means recovering, with many blaming sharp rises in the difference between the cost of taxed and tax rates and tighter regulations affecting taxed untaxed products does not provide a significant products. incentive to shift into the informal market; • In South Korea, a scheme involving radio • A broad strategy to tackle fraud in the industry frequency identification (RFID) tags has been that includes a robust understanding of the illicit introduced for whisky-based products only. This market based on credible and comprehensive has added considerably to costs for both industry data, a well-resourced monitoring and and the authorities and has not prevented legal enforcement regime and sufficient penalties sales volumes and associated tax revenues to deter the demand for and supply of illegal declining. product; and • In the UK, illicit activity in the spirits market fell • Where tax stamps exists, ensuring that tax stamps following the introduction of a scheme covering are difficult to counterfeit, and that procedures that category. However these were introduced are in place to prevent other potential abuses of as part of a much wider package of enforcement the stamp system. This needs to be appropriately measures and views vary significantly on the role balanced so that additional and unnecessary of the stamps. costs from the introduction of tax stamp regimes are minimised as much as possible for legitimate • In Kenya, the introduction of electronic stamps tax-abiding industry players. is regarded as having some benefits in terms of 2 1. Introduction In line with tobacco and automobiles, the sale of alcohol Illicit trade in alcohol: definitions has long been subject to excise taxation, charged on the production or sale of specific products. Unlike customs The definitions set out in the 2015 OECD report “Charting duty, which is charged at the border when products are Illicit Trade – Converging Criminal Networks”, for alcohol imported, excise duties are charged ‘inland’, typically on not reflected in the official statistics of the country of the sale or the production for sale of the relevant good. production, the country of consumption, or both, include: Informal alcohol: Products which are subject to excise duties tend to be characterised by their inelastic consumer demand— • Beverage alcohol produced outside a regulatory when price goes up, demand for the product falls framework, whose production and consumption less than proportionately—as this makes them good tend to follow cultural and artisanal practices. candidates for raising revenue. To maximise that Includes home production. revenue governments have often set high rates of excise • May be licit or illicit, depending on the
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