ACADEMIC CONTRIBUTIONS
The development of modern revenue controls on alcoholic beverages
Doug Godden and Elizabeth (Liz) Allen
Tax stamps are utilized by regulators in around fifty countries to safeguard alcohol tax revenues This article evaluates their effectiveness and highlights key factors that influence the success of tax stamps and related technologies It concludes that tax stamps alone are not an optimal solution; addressing illicit alcohol trade and protecting tax revenues necessitates a comprehensive approach that includes effective monitoring, control, and enforcement measures Additionally, avoiding high and discriminatory tax rates is crucial, as they can encourage illicit trade.
Modern electronic stamps can enhance enforcement and deterrence when integrated into a well-designed tax system However, they may also lead to negative outcomes, such as increased business costs that drive up prices and encourage avoidance of regulated channels Additionally, electronic stamps are vulnerable to counterfeiting and can facilitate other fraudulent activities, like refilling stamped bottles with illicit alcohol.
Stamps equipped with electronic communication features can assist authorities in identifying legitimate products within the distribution chain and allow consumers to verify authenticity These stamps have been linked to decreased illicit activities and enhanced tax revenue in some cases However, their effectiveness hinges on the establishment and upkeep of intricate logistics and IT control systems.
Before implementing any anti-illicit alcohol strategy, authorities must thoroughly understand the market's size and characteristics Effective anti-fraud measures should be evidence-based and tailored to the specific nature of the fraud Successful implementation relies on well-structured and adequately funded surveillance, interception, and deterrence efforts If enforcement is strong and the tax system is effectively designed, costly tax stamp schemes may be unnecessary without significantly impacting revenue Conversely, weak enforcement may render tax stamps ineffective.
Governments contemplating a new stamp scheme should evaluate alternative policies that may achieve the same objectives more cost-effectively This could involve implementing stricter licensing controls, advanced surveillance systems, increased penalties for illegal activities, and awareness campaigns targeting potential suppliers and consumers of illicit alcohol Additionally, allocating more resources to revenue, border, and police authorities is crucial Effective enforcement relies on collaboration among national and international agencies, as well as partnerships with the legitimate alcohol industry.
Governments must recognize that high tax rates can drive individuals towards informal activities, jeopardizing the formal tax-paying sector and reducing revenue This shift can lead to various issues related to illicit trade, including irresponsible drinking and the financing of crime Implementing a straightforward tax structure can enhance compliance and promote transparency.
The seven case studies in this paper illustrate a number of the points referred to above:
In 2015, the Danish government eliminated tax stamps on spirits, following the removal of similar requirements for wine in 2001 This decision was driven by the perception that tax stamps were outdated, overly burdensome, and costly for producers.
Turkey's tax stamp scheme has played a significant role in curbing illicit trade; however, recent trends indicate a resurgence in such activities This recovery in illicit trade is largely attributed to steep increases in tax rates and stricter regulations impacting taxed products.
In South Korea, the implementation of radio frequency identification (RFID) tags on whisky-based products has significantly increased costs for both the industry and regulatory authorities Despite this measure, there has been a noticeable decline in legal sales and the corresponding tax revenues.
In the UK, the implementation of a new scheme aimed at the spirits market has led to a decline in illicit activities This initiative is part of a broader set of enforcement measures, and opinions differ greatly regarding the effectiveness of the stamps used in this scheme.
In Kenya, the implementation of electronic stamps has played a role in reducing illicit trade; however, the associated costs to the industry raise concerns Additionally, the recent expansion of this scheme to include beer has intensified the financial burden, making it premature to assess the overall effectiveness of the initiative.
• In Colombia, despite a longstanding system of tax stamps for spirits, use of smuggled and artisanal products has remained stubbornly high, with legal spirits use falling.
In Morocco, the implementation of an advanced tracking system has been associated with a reduction in illicit activities overall However, its effectiveness in addressing alcohol-related issues remains unclear The high cost of legal alcoholic products compared to artisanal and smuggled alternatives has led to a recent decline in both legal alcohol consumption and tax revenues.
Our review indicates that tax stamps play a limited role in achieving their policy objectives To be effective, it is essential to first establish a solid evidence base on the illicit market Tax stamps should be implemented in conjunction with crucial policy measures, such as tax policy and a robust regulatory and enforcement framework Enhancing efforts to combat illicit trade and ensure tax compliance will significantly benefit from this comprehensive approach.
• Ensuring that the excise duty system is well designed—simple, non-discriminatory and with rates not set so high as to incentivise a shift into the informal market
To effectively combat fraud, it is essential to develop a strategy that includes a deep understanding of the illicit market, reliable and comprehensive data, a well-equipped monitoring and enforcement system, and adequate penalties to discourage illegal trade.
• Ensuring that tax stamps, if used, are difficult to counterfeit and not overly costly, and that procedures are in place to prevent other potential abuses of the stamp system.
Alcohol sales are subject to excise taxation, which is applied to the production or sale of specific products, unlike customs duties that are charged at import borders Excise duties are imposed inland, focusing on the sale or production of these goods Products with inelastic consumer demand, where price increases lead to a smaller decrease in demand, are ideal for generating revenue, prompting governments to establish high excise duty rates on them.