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ITSA’s Responses to Questions Posed by RENATA’s Communications Agency

09 July 2019

ITSA’s General Secretary provides Costa Rica-based Red Nacional Antitabaco group (RENATA) with insights into best practices for the governance and operation of secure track and trace systems, by answering the following questions posed by RENATA’s communications agency.

  1. What are the best practices that ITSA promotes for tax traceability systems?

The best tax traceability systems are based on a secure approach that is completely independent from economic operators, including manufacturers and importers of taxable products;

A secure traceability approach is one that combines multiple visible and hidden physical security features with digital security and functionality, since track and trace technology, when used alone, is not an authentication solution.

The security features should be procured from a supplier that is fully independent from the industry, so as to counter the risk of non-compliant manufacturers manipulating the elements for their own benefit;

Furthermore, these independent suppliers should offer adequate security from a full supply chain perspective – including the sourcing of raw materials, the production and distribution of security features, and the final inspection of those features in the field – in compliance with international standards.

Combining the unique identifier for track and trace with the security features on a tax stamp will allow all elements to be produced in a high-security environment and will provide a robust counterfeit-resistant solution that is more cost-effective and easier to examine that scattering different elements over the surface of the product.

The authority purchasing the system should ensure that the procurement process is open and transparent, using a request for information (RFI) as the first step in the process, followed by a request for proposal (RFP), which is an invitation to tender.

  1. What is the difference between logistic traceability and fiscal traceability?

One significant difference is that of security. Logistical traceability systems are at less risk of being manipulated by parties within the distribution chain than systems used to track and trace excise products such as cigarettes and alcohol – as well as other products exposed to illicit trade.

To increase the security of track and trace systems, additional security features (both physical and digital) can be integrated into the system to ensure that illicit traders are not able to, for instance, generate their own, functioning, unique codes, nor copy existing codes, nor access confidential information contained in or linked to those codes.

  1. If a government wants to increase tax revenue, why is fiscal traceability a good option?

Secure traceability with high-security tax stamps can be used to ‘cast a floodlight’ onto illicit practices by, for example:

  • Maintaining an accurate and objective measure of what has been produced by each manufacturer;
  • Tracing a product to a particular site or retailer to allow enforcement officials to gather information on common distribution routes and practices and the role that manufacturers play in smuggling networks.

By reducing illicit trade activities, fiscal traceability systems automatically generate an increase in tax revenues. Experience shows that, even after only one year in operation these systems have allowed tax collections to increase by between 20% and 50%.

In the case of Ecuador, for example, before implementing its SIMAR traceability system, the Ecuador tax administration authority (SRI) performed an analysis of the results and benefits generated by different fiscal traceability programmes operating worldwide, which can be found at http://www.sri.gob.ec/web/guest/simar.

Fiscal traceability systems are recognised today as a public best practice and are endorsed by international organisations such as the WHO, IMF and World Bank.

  1. Who should be the owner of the tax tracking system and the stamps for the system to be efficient?

The issuer of the tax stamps and the owner of the information generated by the traceability system must be the respective government authority, which is often the national tax and customs authority.

  1. Do you know of any system of self-control through traceability that has managed to increase tax collection in a country?

I don’t know of one, no.

  1. Do you know of any country that has made fiscal traceability through a public-private partnership for tax control of tobacco or liquor? Is this possible?

If you mean by ‘public-private partnership’ (PPP) a contractual relationship between a government authority and a private independent solution provider for tax stamps and track and trace systems, then there are a number of countries and jurisdictions that have done this, as it can be an effective way of bringing together specialist private sector expertise and the government’s own capability, depending on the circumstances.

There are some points to beware of, however, in particular where such a partnership is advocated by the tobacco industry itself – often as a means for the industry to retain oversight of certain control functions. Governments consequently need to ensure that any control system is properly independent and that PPP is not used as a way to avoid proper procurement practice. Any PPP should therefore be implemented through an open international public tender process following an extended mapping of existing solutions.

Another form of PPP can be found In Mexico, for example, where the current tobacco control system has been influenced by the tobacco industry through a public-private commission named Mesa de Combate a la Ilegalidad. The system is now being questioned by a lot of experts for its lack of independence regarding the tobacco industry, its lack of transparency and its lack of results in terms of illicit trade reduction and tax revenue increases.

The influence of the tobacco industry in this public-private commission can be considered as a violation of FCTC article 5.3. In general, the taxpayer should not be able to self-regulate by providing its own control solution or defining the conditions under which it will be controlled, as this creates a clear conflict of interest.

  1. Regarding the monitoring and tracking of tobacco products, what are the roles and responsibilities in compliance with the FCTC protocol?

Governance requirements to determine roles and responsibilities for the establishment of track and trace system are articulated both in the FCTC and the Protocol and are driven primarily by the need to prevent conflicts of interest and to reduce the risk of fraud by the tobacco industry.

FCTC Article 5.3 requires Parties to protect tobacco control policies from commercial and other vested interests of the tobacco industry. Protocol Articles 8.2 and 8.12 require the tracking and tracing system to be controlled by the Parties and state that obligations assigned to a Party ‘shall not be performed by or delegated to the tobacco industry’. Finally, Article 8.13 of the Protocol requires each Party to ensure that ‘its competent authorities, in participating in the tracking and tracing regime, interact with the tobacco industry and those representing the interests of the tobacco industry only to the extent strictly necessary’.

  1. What are the key technical requirements related to the tracking and tracing of the WHO FCTC and Article 8 of its Protocol to eliminate illicit trade in tobacco products, specifically taking into account the requirement to interact with the tobacco industry only when strictly necessary?

The WHO FCTC is yet to issue specific technical requirements as these need to be developed by a dedicated working group. However, ITSA has provided technical insights into different operational activities that need to be carried out, distinguishing those where collaboration and interaction with the tobacco industry is strictly necessary and those where it is not. These activities are summarised in the table on page 9 of this document.

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