Pan-Latin American Analysis: Part I

It is no secret that the world, and the Latin American region in particular, has faced many negative consequences of the COVID-19 pandemic. These include reduced movement of its workforce, government budget deficits and a rise in informality in many sectors, as people try to improve their economic options using all kinds of ‘creative’ ideas.

In addition, despite the benefits that many of us in the tax stamp environment are aware of, implementing a successful tracking and tracing system in any country is always a challenge. This is not just because tax authorities are usually loath to change the way they have always done things, but also because those about to be ‘tracked and traced’ certainly do not like the idea of their respective tax authority following their every step to eke out additional state revenues.

Nevertheless, in Latin America and the Caribbean, great strides have been made with respect to tax stamps and traceability and, hopefully, this brief overview will shed some light on these achievements.

In this first part of the Pan-Latin Analysis, my focus will be on Argentina, Brazil, Chile, and the Dominican Republic.

Argentina

In December 2019, Alberto Fernández, with ex-President Cristina Fernández de Kirchner as his vice-presidential running mate, became President of Argentina. Their electoral success brought the Peronist party back to power after a four-year centreright interlude during Mauricio Macri's presidency.

Mr Fernández' administration is proving to be a rather radical move away from Mr Macri's focus on improving economic indicators, reducing corruption, and aligning Argentina with a more neo-liberal and free-market-based economic model. As a result, Argentina has increased government spending tremendously, defaulting on debt and, once again, restructuring foreign bonds to the tune of almost $70 billion.

Although the government's need for quick inflows of cash might open the door to introducing a secure tax stamp strategy that could include cigarettes, alcohol and petroleum incomes, the government has yet to budge on potential solutions of this sort.

Over the years, several tax stamp providers have approached both CAMOAR (the state printer Casa de Moneda de la República Argentina) and the Federal Administration of Public Income (AFIP), the national authority responsible for executing policies and collecting tax and customs duties. However, the government has yet to make clear its intentions, if any, in this regard and the country continues to focus its policies on dealing with the pandemic.

As has been noted by some industry wags, Argentina is a permanent ‘work in progress’ country so we will have to wait for new developments to emerge to see what the future holds for tax stamp and traceability modernisation in Argentina.

Brazil

Brazil, as is well documented, has relied on special markings to contain the rise of illegal cigarettes and beverages for over a decade. One of its most important strategies was to monitor production volumes with an automated marking system supplied by SICPA, known as SCORPIOS for cigarettes and SICOBE for beverages.

The SCORPIOS system captures actual numbers of cigarettes produced using automated controls installed on the assembly lines of cigarette producers. The system has allowed the Receita Federal do Brasil (RFB), the Brazilian tax authority, to receive continual and accurate updates on cigarette production.

The data is stored on a centralized government database and law enforcement officers are provided with hand-held devices to authenticate cigarettes in the field.

In the first three months of operation, the SCORPIOS system generated $90 million more in tobacco excise tax revenue than originally forecasted, and the under-reporting of cigarette production by all authorised cigarette manufacturers in Brazil was effectively eliminated. Nevertheless, the smuggling of illicit cigarettes from neighbouring Paraguay, estimated by the industry to be close to 30% of the market, is still a large headache for the RFB.

Under SICOBE, a unique and secure code was printed directly on bottle caps on the assembly line, at speeds of well over 1,200 codes per minute. In late 2016, the government took the decision to stop the solution and to dismantle the SICOBE system, despite a law still in force.

A new system was launched by the RFB in 2019, relying on self-declarations from the industry, but its effectiveness is still unclear and it is apparently not as easy to manage as the automated control of production lines. More importantly, the system is difficult to inspect, allowing for a huge amount of potentially lost public revenues due to evasion.

Chile

Chile, which is the second country in Latin America that most complies with the WHO anti-smoking strategy, has recently published the first results of its new tax stamp and traceability system.

Debuting in 2019, after almost a decade of the starting and stopping that many complex government tenders experience worldwide, the SITRAF system is showing positive numbers, despite the expected negative impact of the COVID-19 pandemic.

According to Chile's tax authority the Servicio de Impuestos Internos (SII), SITRAF, which is also a SICPA system, helped the SII collect over $1.1 billion from national cigarette production and $41.8 million from imports.

In the case of domestic producers, the system consists of direct marking using security inks on each pack passing through the production line, and in the case of imported cigarettes, a traditional tax stamp, with specialized inks and a secure QR code, is used.

Both types of marking are based on a unique security code that is distinguishable using specific technological devices that the National Customs Service and SII have been provided with for their inspection needs. The markings make it possible for inspectors to distinguish counterfeit products from the originals as well as effectively verify the correct payment of taxes applied to specific products. As a result, the SII has also been able to improve the efficiency of its other taxes, namely income tax and VAT.

The information generated by either the unique marking or tax stamp is sent to the SII in a digitally encrypted format for data crossing and information analysis, thus allowing the SII to focalise its tax compliance actions. In addition, the system registers all national production destined for export, for control purposes.

In a recent newspaper interview, Carolina Saravia, Deputy Director of Inspection at the SII, maintained that ‘the SITRAF traceability system, which we implemented in the second half of 2019, has allowed us to have information that we previously did not have access to, especially with respect to the sales and production of cigarettes’.

She added that with this system ‘we can control the quantities and types of packs produced in each production line or brought into the country which, in turn, helps to guarantee tax compliance in this industry as well as a reduction in informal trade.

‘In the current social and health context brought on by the COVID-19 pandemic, we have focused our efforts on developing collaborative work with other institutions, such as the national customs authority, in order to reinforce control initiatives, and thanks to the information available from the existing system we can carry out automatic controls on producers and importers, verifying the correct payment of the specific tax on cigarettes as well as other taxes such as VAT and income.’

According to the SII – and citing a recent study carried out by MIDE UC (a non-profit R&D centre in Chile for measuring and evaluating various fields) – 21.4% of the cigarettes consumed nationwide are illicit, all of which are now readily identified as contraband products. In addition, according to information from the National Customs Service 15,133,674 packs were seized between January and November 2020, representing an estimated fiscal loss of close to $35 million. Furthermore, the system helped customs identify that 65.5% of the seizures were made in the northern part of the country, with the city of Iquique contributing 41% of the total.

The SII also reported that during 2019, 484,156,441 packs were marked and activated for the domestic market and 10,800,000 for imports. In 2020, activations totalled 514,639,534 packs for the domestic market and an additional 20,412,000 for imports.

Finally, another mechanism that the SII activated to improve its inspection was the e-Verifica mobile app, which allows people to check the validity of the tax code of the pack they are purchasing. The app reads the code, verifies its validity, and displays the information of the corresponding pack, allowing consumers to play a part in fighting illicit sales.

Although Chile will be going through presidential changes in early 2022, the government is aware of the potential benefits of extending the tax stamp system to its domestic production of wine, beer, and liquor. The expenses borne by the Chilean government would benefit from this additional tax income, which has been on the Ministry of Finance's radar for over 10 years, although without advancement.

Dominican Republic

The fight against the smuggling of alcohol, cigarettes and fuel has become one of the main tasks on the Dominican Republic's government reform agenda, a battle that has been long fought by the Dirección General de Aduanas (DGA) – the customs authority – and the Dirección General de Impuestos Internos (DGII) – the tax authority. The difficulty in evaluating tax evasion has been one of the drivers in promoting a traceability system, as there has been no certainty with respect to the numbers under discussion.

Notwithstanding this lack of certainty, official estimates for the last 5-6 years mention that, in particular, the government failed to collect DOR 1.5 billion ($26.3 million) from smuggled cigarettes. Between 2015-2016 alone, the DGA seized 259 million illicit sticks, with an additional 116 million in 2017 combined with over 2 million bottles of various types of liquor. The DGA also advised that in the first half of 2017, 638 million sticks were declared yet only 68.5 million were declared for the same period in 2018 – a shocking decline.

The drop appeared to be due to the effects of smuggling and, even though the government ruled out new tax reforms (as the private sector had made it very clear that they do not view any tax increases in a positive light), the loss of tax income continued to be relevant.

So, what options were available for state administrators to increase revenues without raising taxes?

The resulting strategy was that the DGII published an international tender in 2018, convinced that a modern traceability system would be the best answer to deal with tobacco and alcohol smugglers. The system would provide tax inspectors with more robust and precise control measures and would help to eradicate what some industry specialists were calling a ‘culture of illegality’ in the country.

The DGII's objectives were fourfold:

• Reduce unfair competition caused by illicit trade and evasion. 

• Diminish rates of tax evasion and avoid fraudulent alcoholic beverages and cigarettes, whether produced internally or imported.

• Protect legal brands by differentiating them from illegal ones.

• Empower the consumer and supply chain with an efficient tool to recognise the origin of the product.

The resulting system, launched by the DGII under the name TRAFICO (Sistema de Control y Trazabilidad Fiscal) was awarded to SICPA in March 2019.

The system is based on the unique identification of each product in order to control and track each stage of its commercial life cycle, from origin (production and import) to final destination (consumption). The system uses state-of-the-art, digital and physical secure technology, which allows interested parties to authenticate the validity, or not, of the marked products. The unique ID must be affixed to, or be part of, all production units and must appear externally on all beer, wine, spirits, and tobacco product packaging.

Another benefit of this system is that consumers can check, via an app called ‘Revisame’, or by text message to #7876, whether the product is legal or not. If the tax stamp or marking does not correspond to the image provided on the consumers’ own mobile device, they may use an anonymous complaints module to inform the DGII of the irregularity, at zero cost to the government. With approximately 800,000 consumer verifications carried out to date via the mobile app, this is a potent tool against fraud thanks to the involvement of the public in market surveillance.

The local industry, especially rum producers, confirmed that all these efforts have contributed to combatting illicit commerce head-on, which is essential to protecting the reputation of a country that produces valuable brands, internationally recognized for their quality, and that receives millions of tourists every year.

Most importantly, the government also aims to reduce the impact on the population’s health due to the consumption of adulterated alcoholic beverages, a major problem in the Dominican Republic, which caused 143 deaths in the first four months of 2021 alone. With this system the DGII is also hopeful that tax collections will increase from 12% to 15% compared to 2018 levels.