TOBACCO TAX ADMINISTRATION AND ENFORCEMENT International Tax and

TOBACCO TAX ADMINISTRATION AND ENFORCEMENT International Tax and Investment Center July 2014 Elizabeth Allen

COMPONENTS OF TOBACCO TAX ADMINISTRATION TAX POLICY LEGISLATION TAXPAYER IDENTIFICATION AND REGISTRATION TAXPAYER SEGMENTATION AUDIT AND INSPECTION PARTNERSHIPS TAXPAYER SERVICES ENFORCEMENT

TAX POLICY KEEP IT SIMPLE – Minimal exceptions KEEP IT CONSISTENT ENSURE TRANSPARENCY CONSULT INDUSTRY WHEN CONSIDERING CHANGES AVOID SUDDEN TAX HIKES – large tax hikes in Romania, Lithuania and Malaysia were followed by increases in illegal trace to 30% or more. KEEP RATES COMMENSURATE WITH AFFORDABILITY

TAXPAYER IDENTIFICATION AND REGISTRATION Register according to published criteria. Issue a unique taxpayer identification number. Link the excise taxpayer number with the identification number for all other taxes for the same legal person. Maintain electronic record of applicants refused or revoked excise taxpayer registration. Capture taxpayer key designatory details on an electronic register e. g. name of business, office address, contact details, address of each set of premises, name of responsible person etc. Review taxpayer details annually and update taxpayer register upon notified changes. Ensure input is auditable. Link taxpayer register with tax return issue, payment and compliance record using taxpayer number.

TAXPAYER SEGMENTATION WHY SEGMENT? WHAT SORT OF SEGMENTATION? BY SIZE BY PRODUCT BY PAYMENT BY COMPLEXITY OF STRUCTURE OR OPERATIONS BY REGION BY COMPLIANCE HISTORY

LEGISLATION KEEP IT SIMPLE KEEP IT CURRENT PROVIDE FOR SECONDARY LEGISLATIVE CHANGES e. g. to determine return and payment requirements INFLUENCE ENFORCEMENT LEGISLATION e. g. Offences and penalties

AUDIT AND INSPECTION Audit Approach Risk based by segment and cycle Professional - based on understanding the business sector Sample by segment Co-ordinated across all taxes and customs Aim is to improve taxpayer compliance Inspection Unannounced at any time 24/7 Physical as well as transaction based Results of audit and inspections update risk profiles

PARTNERSHIP APPROACH TO COMPLIANCE Modern tax enforcement is a partnership – but not an equal one! Revenue Authorities/Customs support voluntary compliance by: Explaining tax requirements, official approach and expectations; Maintaining a reasonable penalty and appeals process; Helping taxpayers those who make genuine mistakes; and Taking robust enforcement civil penalty and criminal action against those who deliberately defraud the revenue.

PARTNERSHIP APPROACH TO COMPLIANCE Taxpayers role in the partnership includes: Commitment to compliance - rendering accurate tax returns and timely payments; Willingness to co-operate with officials - providing training on business processes, information about trade sector trends and technological developments; Willingness to provide intelligence to officials about illicit trade; and Demonstration of strong internal management and anti-corruption controls.

TAXPAYER SERVICES INFORMATION Brochures/leaflets in user-friendly language; Taxpayer seminars and surgeries; Website and telephone enquiry line CONSULTATION Before deciding on significant changes in tax structure or introducing a new tax or levy TRANSPARENT AND EASY COMPLAINTS AND APPEALS PROCESSES REWARD COMPLIANCE

PAYMENT AND DEBT MANAGEMENT Require electronic returns and payments; Potential for special accounting and payment terms for small excise operators; Bonds/Securities required for excise operators to be called in in the event of default unless an extended payment period agreed in advance; Reduce payment period to shortly after the end of the accounting period – maximum 15 days.

REVENUE ENFORCEMENT Work with Customs and Local Authorities to ensure that smugglers, counterfeiters and those who do not declare or who under declare domestic production are investigated and subject to civil/criminal action; Maintain specialist intelligence and investigation resources including using mobile task forces, scanners and sniffer dogs; Work with Police and Local Authorities to conduct campaigns e. g. wholesalers, retailers, distributors; and Ensure appropriate training and awareness for customs staff about excisable goods.

SPECIAL REQUIREMENTS FOR EXCISE CONTROL Being an excise taxpayer should be a privilege not a right; Highly taxed excisable goods are prime candidates for illicit trade – undeclared domestic production or smuggling of legitimate or counterfeit products so effective control of the legal supply chain should release resource to tackle the illicit supply chain; Excise controls need to be a combination of physical controls, professional audit and 24/7 inspection; Effective excise control requires skilled resources who understand the revenue weaknesses in business processes and have the tools to deal with them; and Excisable goods are often imported, exported or in transit – these need to be controlled effectively at borders so they are not diverted to undeclared domestic consumption.

SUPPLY CHAIN SECURITY WHY DO WE NEED IT? If the global supply chains for excise products can be secured then it should be easier for enforcement authorities to detect both the point at which legitimate products are diverted to the illicit market and the criminals who trade in them. 14

SUPPLY CHAIN SECURITY WHAT DOES IT INCLUDE? Processes and methods to enable manufacturers and revenue administrations to secure the legitimate supply chain. Measures required of all participants in the supply chain to prevent diversion of legitimate products and production machinery into illicit trade channels. Measures to promote responsible business conduct and secure the revenue. 15

SUPPLY CHAIN CONTROLS AT THE WHOLESALE AND RETAIL LEVEL? Special licences for wholesale and retail outlets to sell cigarettes or alcohol products should be additional to any other licences required for businesses. Licensed premises should be inspected to ensure tax has been paid on all tobacco products sold and that the health and consumer protection legislation is complied with. Two strikes and “out” policy. 16

A GLOBAL PROBLEM NEEDS A GLOBAL SOLUTION Fighting the global problems of Money laundering, terrorist financing and bribery requires a joined-up cross border approach worldwide. Coverage needs to include all forms of illicit payments. There needs to be increased exchange of information between tax administrations, the FIU, other law enforcement agencies, and a joined-up approach across all taxes and duties. This approach has strong political support as indicated in the latest statements from the G 20.

WAY FORWARD? We must find a way of achieving greater cross tax consistency in applying valuation rules for transfer pricing and tariff/customs purposes. Dialogue between the WCO, OECD and ITIC might explore options to achieve greater certainty for government and business, secure revenue and reduce compliance costs. How far could transfer pricing documentation be accepted for customs purposes - or could Advance Pricing Agreements be extended to customs? A practical way forward might be to develop joint tax and customs audits.

INTERNATIONAL CO-OPERATION REQUIRES International standards for data exchange, for the track and trace technology and for so that data on global movements of products can be exchanged in real-time across continents and countries Track and Trace systems to be accredited independently against an international standard so that Governments, industry and consumers can be assured that systems are fit for purpose. One size does not fit all! Beer may require a different solution from spirits or cigarettes. 19

AND CONSISTENCY States that are parties to the United Nations Convention on Organized Crime (UNTOC) and the United Nations Convention Against Corruption (UNCAC) can apply consistency in their treatment of criminal offences that are dealt with by a number of different international instruments.

UNTOC – CRIMINAL CONDUCTS Criminalization of participation in an organized criminal group – Article 5 Criminalization of the laundering of the proceeds of crime – Article 6 Criminalization of corruption – Article 8 Criminalization of the obstruction of justice – Article 23

UNCAC – CRIMINAL CONDUCTS Bribery of national public officials (art. 15) Bribery of foreign public officials, officials of public international organizations (art. 16) Embezzlement, misappropriation or other diversion of property by a public official (art. 17) Abuse of functions, purpose of obtaining undue advantage (art. 19) Bribery and embezzlement in private sector (arts. 21 & 22) Laundering of proceeds of crime (art. 23)

NATIONAL ENFORCEMENT REQUIRES Track and Trace systems that can be 'extended' or 'integrated with' tax/volume verification solutions and authentication to monitor and control the volume of products manufactured to verify the correct taxes due and/or paid; and which use covert and overt identifiers to detect genuine products from those which are counterfeit; and mesh easily with existing IT systems for enforcement and mutual assistance. 23

PAPER TAX STAMPS v UNIQUE DIGITAL IDENTIFIERS Paper Tax Stamps: Provide passive authentication: cannot track and trace aggregated packages open to theft e. g. in Kenya easily counterfeited providing consumers with false confidence in the product use proprietary systems often with high prices and little flexibility, leaving Governments and/or industry has no alternative thus presenting a barrier to new entrants in the industry. Digital coding systems to an international standard: Provide active verification with: greater protection for consumers & retailers a large data source to analyse illicit trade issues and trends comparatively inexpensive unit cost choice for large and small industry players Cost should not be prohibitive for small players in the alcohol or tobacco products industry. 24

TACKLING ILLICIT TRADE - A COMPREHENSIVE STRATEGY COMPREHENSIVE MEANS: Outcome not output based – shared high-level target to reduce illicit trade Shared across: All public sector stakeholders – Ministries, State/Local Authorities include Health, Education, Trade, Consumer Protection - NOT JUST ENFORCEMENT Legitimate industry operators/Chambers of Commerce Other revenue and enforcement authorities – in the region and in third countries Interpol, WCO and similar international bodies.

REQUIREMENTS FOR A COMPREHENSIVE ANTI-ILLICIT TRADE STRATEGY ON GOING POLITICAL COMMITMENT AND VISION Balanced tax and tobacco control policies Resources to pull together the comprehensive approach and manage day-to-day interfaces Research to estimate extent of illicit trade in each product sector on an annual basis and impact of official actions Ongoing monitoring and publication of annual reports Mutual assistance provisions supported by a practical process for exchanging key data Internet based declaration and movement processes with shared risk tools, notification and mandatory action and feedback. Use intelligence! Robust anti-corruption policies and PRACTICES. A public awareness campaign.

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