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The departure of Philip Morris from Colombia

June 13, 2019

Last week, Philip Morris International (PMI) announced the closure of its production plants in Medellín and Barranquilla.

The article published in the magazine Dinero, states that the company attributes the decision on the increase of taxes on cigarettes that "triggered contraband to historical levels". Given this statement, we must be cautious because the tobacco industry (TI) in Colombia, as in the rest of the world, usually uses the illicit trade argument to discredit the measure of taxes.

TI tends to inflate illicit trade figures in an exorbitant way to create alarms and pressure states to desist the increment of taxes. As a benchmark there is the study of Maldonado et al (2019), in the calculation of the figure of illicit trade in cigarettes in 2017 was 6.4%, 11.6 percentage points lower than the one announced by the industry (18% ).

The reality is that the TI are the benefited of these figures increase. That is why the customs authorities in the world have faced the insistence of TI for their participation on tracking and tracing systems to "reduce" tobacco smuggling. IT shows themselves as the solution to the problem of illicit trade when they have been the cause of it, and it is not their interest to end illicit trade for several reasons (Gilmore et al, 2018):

1. Smuggled tobacco is sold at a lower price for not being taxed, therefore more is sold.
2. Smuggling sabotages the effect of tobacco control measures to reduce smoking. For example, the tobacco tax does not cover contraband products.
3. TI have used contraband as a vehicle to enter into closed or highly protected markets. Usually, smuggling is a sign that you must increase your investment in that market.
4. It is the best argument for tobacco control policies. Justifying the demand for illicit products is the problem, and not the offer.

With the decision to close the plants, the efectiveness of the objectives of tobacco taxes should not be question: reduce smoking (as its health system costs) and increase the revenue.

As announced by PMI, the announcement does not mean that the company will leave the country because "in the Colombian market they maintain a leadership on sales". PMI is presented as a victim but the reality is that its products are still marketed in the country.

Electronic cigarretes or their IQOS brand is an example of it. These products has allowed them to reach teenagers and even non-smokers under the new concept of "vaping". These products, which have not been accepted under the definition of tobacco products, are promoted in shopping malls and music festivals as an alternative to stop smoking, even if it is not proven.

The independent figures and this attack on tobacco tax by Coltabaco confirm the effectiveness of the measure to reduce tobacco consumption. TI is threatened by this measure and the figures show it: the proportion of heavy smokers (more than 10 cigarettes) increased from 37% in 2016 to 26% in 2017 (Maldonado et al, 2019).

This news then, should not be an argument to discredit the tobacco tax measure, but corroborates the need to protect its implementation. The Minister of Finance should not give its arm to twist in the implementation of the tax, and the DIAN (customs department of Colombia) has the task of maintaining independence in the production of illicit trade figures such as tracking and tracing systems.