Argentina Takes Tobacco Evasion by the Horns

Earlier this year, in an update on Latin America in this same newsletter, we posited that Argentina’s AFIP (Administración Federal de Ingresos Públicos), the government institution in charge of the country’s tax policies, would be toughening up its stance against illicit tobacco trade and tax evasion.

Although AFIP has stated that tax evasion is around 40%, the local press has estimated that nearly 90% of tax stamps currently in the market are either counterfeit, or authentic but illegally applied on contraband product.

Whatever the correct figures, the accepted reality is that evasion control has been uncertain at best. Manufacturers declare cigarettes produced according to existing regulations but AFIP does not have an unequivocable system with which to reconcile what has been declared, produced and effectively taxed.

Matters further escalated when, in December of last year, AFIP reported on the results of a multi-million peso sting based on tax declarations submitted by several tobacco companies. The results of this operation caused an uproar among those companies that were generally more closely monitored. The companies felt they were the only ones complying with the law, reporting actual production figures and paying the correct amount of taxes.

The mobilisation of private companies was yet another input into the decision made by the AFIP to conclude an agreement with CMA (Casa de Moneda Argentina – the Argentine state printer) to define an alternative to the existing tax stamp system, as a way of addressing tax evasion.

After investigating market alternatives and suppliers for the level of services required, in a joint press conference in late April, AFIP and CMA commented on their successful partnership to provide and launch a modern tax stamp and traceability system.

According to initial calculations, AFIP expects that the new system will allow tax revenues to increase by about 40%. The signing of the agreement took place at AFIP headquarters and was attended not only by representatives from AFIP and CMA, but also, more tellingly, by tobacco-producing companies and national media.

At the conference, AFIP President Carlos Castagneto told a news source that ‘this new instrument will be very important in a sector where we find a lot of tax evasion and avoidance’. He also remarked that the system will be welcomed by many tobacco companies as it will ensure that producers will now find it difficult not to comply with existing legal confines. In the view of AFIP, the system will create a more ‘equitable and fair’ playing field for all those intent on paying their taxes.

Diego Oller, Chief Production Officer at CMA, stated that the updating of the current tax stamps will follow modern traceability trends by creating a ‘phy-gital’ solution that will use the best of both secure printing and digital capabilities, in order to ensure the authenticity and traceability of each product. The new stamps will, however, maintain many of the physical characteristics of the existing ones so as not to modify their current applicability on tobacco production lines.

The final product will be a stamp offering four key improvements:

1. It will be applied and activated (for traceability purposes) on the same production lines as existing stamps (which do not carry an activation function).

2. CMA will print the stamps in-house using optically variable inks as a first level security feature.

3. There will be embedded security elements in the substrate and a data matrix code for second level security inspection.

4. There will be an additional security feature for forensic inspection by AFIP and CMA officers.

In addition, AFIP agents will have access to a digital app for verifying the authenticity and traceability of the activated stamps in the field, and consumers can check the authenticity of the cigarettes they are purchasing with a public app.

Both AFIP and CMA expect that the success of the programme, which should be operational within six months, will allow Argentina to pursue its application on other items subject to special taxes, such as alcohol.