Why illicit tobacco trade is a function of poor enforcement, not high tax rates

The headline story of BusinessWorld’s print edition on May 19 was: “PHL loses P141B to illicit tobacco trade.”

The story, authored by Isa Jane Acabal, was about a report published by the European Union (EU)-Association of Southeast Asian Nations (ASEAN) Business Council (or EU-ABC) on the growing illicit tobacco market in the region. The report, titled “Inside ASEAN’s Illicit Tobacco Market: Data Trends, and Emerging Patterns” (May 2026), did forecast that total illicit incidence (for illicit cigarettes and illicit vapes) in the region grew from 22% in 2024 (the base year) to 23.6% in 2025. It also forecast that by 2028, the total illicit incidence would reach 27.8% of the total market for cigarettes and vapes.

Illicit tobacco (both cigarettes and vapes) consists of contraband or smuggled products and local tax evasion products. They can be counterfeits (illegally manufactured imitating registered brands), illicit white products (legally manufactured but produced for illegal markets), illicit genuine products (registered products but diverted into illegal markets), and unbranded products (non-compliant products with regard to tax stamps, health warnings and other regulatory requirements).

For the Philippines, the forecast of the market share of illicit cigarettes in 2025 was 25.3% (compared to the 23.8% in 2024, the base year). For illicit vapes, the 2025 forecast was 85.6% of the market share (compared to the 2024 base year figure of 84.5%).

Among the ASEAN-6 (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam), Malaysia had the highest illicit cigarette prevalence in 2024, equivalent to a 57.2% share of its national market. The Philippines was a distant second at 23.8%, followed closely by Thailand at 22.6%. Rounding up the list, illicit cigarettes in Vietnam, Indonesia, and Singapore had a market share of 16.5%, 9.8%, and 5.4%, respectively.

With regard to illicit vapes, the numbers are most staggering. According to the EU-ABC report, in 2024, the market share of illicit vapes in Singapore, Thailand, and Vietnam was 100%. But this should be obvious because vapes in these countries are banned. In other words, regardless of the volume of illicit vape products — high or low — the market is completely or exclusively dominated by illicit goods.

For the rest of ASEAN-6, vapes are legal. But the market share of the illicit vapes is still staggering. In 2024, according to the EU-ABC report, the market share of illicit vape products in the Philippines, Malaysia, and Indonesia was 84.5%, 66.2%, and 54.8%, respectively. The plausible explanation is that regulation and enforcement are still immature while the market is rapidly growing. Nonetheless, the value and volume of sales for vapes lag behind those for cigarettes.

To be sure, the illicit trade is a public health concern. Among other things, the EU-ABC report said that “the growing scale of illicit tobacco trade in ASEAN-6… is anticipated to impact government revenues and social welfare programs… and pose health risks to consumers.”

At the same time, we should be worried over how the tobacco industry is using the EU-ABC report to serve its vested interests. A section of the EU-ABC paper is titled “Tax hikes drive price gap between legal and illicit tobacco.” We quote a part of this section: “ASEAN-6 markets remain vulnerable due to steep taxes or frequent tax hikes…. For example, in developing markets with excessive or frequent tax hikes such as Malaysia, the Philippines, and Thailand, among others, the illicit incidence is observed to be elevated.”

The subtle but misleading message of this section is that high tax rates drive illicit trade. But the report, anticipating that any of its controversial assertions will be subject to scrutiny and criticism, makes a caveat in its introduction. It says that “this paper presents an assessment of the tobacco market landscape in ASEAN-6 without seeking to establish a causal link between the potential factors discussed and illicit trade.” In other words, why emphasize the relation of “steep taxes or frequent tax hikes” to “elevated illicit incidence” when the paper itself is not “seeking to establish a causal link”?

Those reading the EU-ABC report should treat its content with caution. Critical thinking entails being skeptical.

In truth, the EU-ABC report is conflicted because Japan Tobacco International (JTI) is a member of the EU-ABC. JTI is the second largest tobacco company in the Philippines. JTI and Philip Morris Fortune Tobacco Co. (PMFTC) form a duopoly in the Philippines, having a combined 94% share of the legal market.

We observe that whenever the tobacco industry launches an aggressive lobby to dilute or lower taxes or to stop tax increases, it intensifies its propaganda that ties illicit trade to tax rates. This media blitz on illicit trade was observed in the months leading up to the filing of bills that were eventually consolidated and passed in the House of Representatives as House Bill 11360, a bill lowering tobacco and vape taxes, in February 2025.

The argument that higher taxes drive illicit trade is specious. What matters, according to global evidence, is good, consistent, and rigorous enforcement of rules — combining intensified surveillance and campaigns, severe penalties, and, more importantly, the probability of getting caught and convicted. In this light, we offer a 2024 Philippine study conducted by Action for Economic Reforms (AER) and Economics for Health (EfH) at the Johns Hopkins University Bloomberg School of Public Health on illicit tobacco trade which debunks the false argument that high taxes determine the rise in illicit tobacco trade.

The 2024 AER-EfH study utilized a retailer survey conducted in sari-sari (sundry) stores in eight study areas (Navotas, Pasay, Quezon City, Batangas, Dagupan, Mega Cebu, General Santos, and Zamboanga) and empty pack audits with the authenticity of tax stamps validated by the Bureau of Internal Revenue to determine the prevalence of the illicit trade of cigarettes based on three indicators: tax stamp violations, smuggling of unregistered brands, and pricing below the sum of excise and value-added taxes.

The results of the study showed that in the study sites in Luzon and Visayas, illicit trade is low and manageable (as low as 0% for cities like Pasay, Quezon City, and Dagupan). What skews the average is an outlier — Mindanao (based on the results from General Santos and Zamboanga, with the highest illicit trade prevalence being 96.3% of cigarettes in Zamboanga having fake or missing tax stamps).

The unevenness in illicit trade prevalence between Luzon and Visayas, on the one hand, and Mindanao, on the other, rejects the claim that high tobacco tax rates explain the rise in illicit trade, given that tobacco tax rates are applied uniformly nationwide. Instead, it shows that the most effective deterrence lies in strong institutions and enforcement.

To strengthen enforcement, the AER-EfH study recommends a comprehensive, user-friendly track and trace system independent of conflict of interest with the tobacco industry to secure the entire supply chain of tobacco; closer regional cooperation to stem illicit trade at the source; expanding the Bureau of Internal Revenue’s authority to close down businesses with excise tax violations; deputizing local police to conduct raids and sharpening coordination between local government units and national agencies.

The AER-EfH study also offers a nuanced description and analysis of the illegal cigarette market in the Philippines. The national average of illicit trade incidence in the EU-ABC report does not capture the nuances and peculiarities of the Philippine illicit tobacco trade and is based on surface-level data.

The EU-ABC’s estimate of 85.6% of the vape market in the Philippines being illicit should be subject to further scrutiny and questioning. The higher illicit incidence not only in the Philippines but also in other ASEAN members suggests that the regulation of new and emerging products is still elementary and immature. Yet, this high illicit trade incidence is being used as an argument by the tobacco industry and captured legislators (mostly from tobacco-growing provinces) to effectively lower vape taxes through House Bills 5207, 5212, and 5364.

EU-ABC’s estimates of high illicit trade of vapes would only further drive home the point made in the AER-EfH study that price is not the main driver of illicit trade. The fact is, vapes tend to be priced lower than cigarettes. The excise tax rates for vapes are much lower than the rates imposed on cigarettes. The illicit vape trade, like the illicit cigarette trade, is a function of weak enforcement, not high prices.

Thus, although the AER-EfH study covers only cigarettes and does not cover vapes, its recommendations on good enforcement apply to both cigarettes and vapes.

Further, the EU-ABC study did not break down illicit trade by indicator. It is vital for an independent study to characterize the vape market in the Philippines to guide policymakers in designing regulation.

One issue that needs to be thoroughly investigated is the pattern that vape companies are exploiting the gap between tax rates of nicotine salt (P60.29/mL) and freebase (P6/mL) by misdeclaring their nicotine salt products as freebase products. The Department of Finance (DoF) reported in the Feb. 23 House hearing on vape taxes that most of the vape market is paying the lower freebase rate. Another pertinent question to answer is if illicit vapes in the Philippines are unregistered brands, products without tax stamps, or underpriced products, and how these products enter the market.

As Congress starts deliberating on tobacco bills, our legislators need to be vigilant about the industry’s propaganda and reject claims that vape taxes are too high and must therefore be lowered.

Health and tax reformers are united in this call: vape taxes must be unified at a higher rate at least equivalent to cigarette tax rates, to promote revenue gains, to adhere to simplicity and clarity of tax administration, and to avert the looming “vapedemic” that targets the vulnerable Filipino youth.

The EU-ABC study claims that they are concerned over illicit trade because of its impact on “government revenues and social welfare programs… and health risks to consumers.” This can be achieved by increasing tax rates on tobacco and vape products, not lowering them.

Filomeno Sta. Ana III and Pia Rodrigo are co-authors of the 2025 Action for Economic Reforms-Economics for Health study “Illicit Tobacco Trade: Findings from Sari-Sari Store Surveys and Empty Pack Audits.”