The Latest from Latin America

There is a tremendous amount of activity afoot in Latin America, be it with new governments promising amazing changes amidst the reality of high inflation and worldwide economic instability, or simply because it’s time for existing governments to get back to work after the first real holiday season post-COVID.

Here are some examples of what has been happening in several countries in the region with regard to our area of interest.

Argentina

The last time Argentina was in the news about tax stamps, there was some expectation, but little hope, of imminent change in this market. But that is apparently about to change.

Late in 2022, the AFIP (Administración Federal de Ingresos Públicos), Argentina’s government branch in charge of executing tax policy, decided to change the calculation of its existing cigarette tax.

As is usually the case, there is a long history here.

Argentina began a campaign to reduce tobacco consumption in 2004, under the government of Néstor Kirchner, who quite logically thought that tobacco consumption might be reduced if a larger tax was applied to cigarettes, raising prices and, hence, lowering consumption levels.

This idea was turned into law in 2008, under Cristina Kirchner’s government but, since then, execution and enforcement has been very difficult. This is especially true with regard to local tobacco companies, who insisted that this new tax would be cumbersome for them, as opposed to large international tobacco companies who were used to this type of taxation and could cover the extra cost of the tax more easily than the locals.

The Supreme Court of Argentina nevertheless ruled, during Macri’s presidency (2015-2019), that the law should be enforced, and any outstanding taxes paid retroactively. But many companies continued to be non- compliant. Furthermore, enforcement was hindered by numerous motions put forward between 2016 and the present date, as well as by changes in government and the AFIP following the election of the current administration.

Just recently, however, in the last quarter of 2022, the new head of the AFIP decided to move forward with the Supreme Court’s ruling that all companies should pay the increased tax, and, more importantly, that the non-payment of said tax would be a hindrance to any and all tobacco companies who did not comply with a new system of traceability.

So, it looks like Argentina is gearing itself up for stricter control over existing tax stamps or to re-vamp its system completely. Something to look out for in the coming months.

Ecuador

As some readers might recall, SIMAR, the traceability system that Ecuador had been using for several years, was dismantled by government decree, and ceased to operate in April 2022.

Cigarette contraband is a significant issue in Ecuador, which was why it was so surprising that, prior to the change of government, the tax authority decided it was time to replace SIMAR (which stands for System for Identification, Marking, Authentication, Tracking and Tracing) with a new traceability model where each taxpayer was given the freedom to directly contract a tax stamp and traceability provider.

This change of model was made despite recommendations from the International Tax Stamp Association and other experts, as well as international best practices on tax traceability for both cigarettes and alcohol.

More recently, there has been a widely publicised health issue with adulterated liquor consumption in Ecuador. This could be directly tied to the government’s reduced capacity for control and the consumer’s inability to retain or even know the provenance of a product.

This is a direct result of the now potentially unlimited number of providers of tax stamp and traceability systems, making the recognisability of a contraband or counterfeit stamp/product practically impossible for the general populace.

As an example, several labels are known to coexist in the market with different verification methods, generating confusion and making verification difficult. In addition, several cases of counterfeiting of these labels have been detected in government operations due to a reduction in the security features of the labels compared to the strict, government-mandated, tamperproof labels under the previous system.

Labels have been found that are not properly attached to products, allowing for easy removal and re-attachment on illegal products. These genuine labels act as a seal of quality on products that have been altered, especially since some labels are stuck on the body of the bottle instead of being part of the cap closure.

In short, it is odd that Ecuador has chosen to stray from the path of control to one of more opportunity for the counterfeiter. It will be interesting to see how this year develops and if the government will decide to move back to a system that is free from conflict of interest with regard to private industries, both for liquor and cigarettes. Indeed, the absence of conflict of interest is a requirement of the WHO Protocol to Eliminate Illicit Trade in Tobacco Products, which Ecuador has signed and ratified.

Panama

Panama’s government has been discussing and, unofficially, promising a new tender for a modern tax stamp and traceability system for more than a year now. The tender was first rumoured for release in the second semester of 2022, then in the last trimester of the same year and now, at ‘any time’ during the first trimester of 2023.

Currently, imported products have a tax stamp manually placed on them in the national customs area, upon arrival in the country. Naturally, this leaves some room for improvement as, together with many of its neighbouring countries, Panama sees its fair share of contraband liquor and cigarettes. The new tender was meant to better control products within the country.

Unfortunately, the tender, which was supposed to modernise the existing tax stamp system, has yet to see the light of day and this may be due to the fact that Panama has been, since July 2022, suffering from general discontent with the government and its policies, sparking demonstrations on a regular basis.

The tax authority has, by association, come under additional public scrutiny. The fact that corporate tax evasion is close to 60% and that the small amounts of tax revenues that are eventually allocated by the government to items of general concern, such as education and public health, are seen as inefficient at best, or, by some, as a direct result of problematic tax collection and the subsequent mismanagement of public funds.

Sources say that the General Income Directorate is evaluating what improvements can be made to the tender prior to public launch to avoid further setbacks to its image.

Yet there is some promising news. In September 2022, the Panamanian Congress approved the draft of a new bill which will modify the existing law that determines the percentage of taxes allowed on cigarette consumption. This is a step in the right direction, as the passing of the draft implies that a tax to reduce the consumption of cigarettes and protect human health by reducing incidences of lung cancer in the general population should be enforced.

The regulation adds in its articles that the selective excise tax rate on cigarettes will be 50% of the selling price to the consumer, and that 25% of the total amount collected from the selective cigarette excise tax will be allocated to pensioners and retirees, a nod to the discontent of the general population.

Venezuela

Everybody in the region is talking about Venezuela’s rumoured re-entry into a sanction-less market in the second half of 2023.

In May 2022, the United States promised to lift more sanctions if Venezuela adhered to certain clear objectives, which sparked the hope in many that the next step would be to allow a freer market economy, where European and US technology and service providers could offer their wares to the Venezuelan government. This is yet to be seen, however.

On the other hand, cigarette and tobacco manufacturing continues in the country. Although there are privately funded organisations actively promoting the avoidance of cigarette smoking, the government has not made any public strides in this direction.

Additionally, there has been no change to the existing tax stamps that have purportedly increased cigarette prices by 71% since the relevant bill was signed in 2014 and published as law in 2015. Unfortunately, any data on the enforcement of said law is not available to our sources.

So, for now, Venezuela will remain a land of potential opportunity – or not.