Ecuador 'risks undermining traceability system', says ITSA

The International Tax Stamp Association (ITSA) says Ecuador's decision to allow tobacco and alcoholic beverage producers to hire a traceability provider of their choice could hit tax revenues.

The industry body says the move "sets an alarming precedent" and could open "the flood gate" to the use of traceability systems that are in producers' self-interest.

ITSA is concerned about the decision last year by Ecuador's Internal Revenue Service's (SRI) to adopt resolutions 19 and 48, which allows taxpayers to use any provider for traceability systems and undermines the country's existing SIMAR traceability framework.

SIMAR has been in place since 2017 to regulate and gather excise on beer, other alcoholic beverages and tobacco products and according to has been instrumental in securing more than $100m in additional tax revenues.

It says the changes may introduce a conflict of interest between the provider and taxpayer "because authorities cannot independently verify production and import levels without controlling the track and trace provider."

ITSA said it has already flagged its concerns with the general director of the SRI, reiterating the position that marking and fiscal traceability solutions independent of controlling industry interests are far more effective in securing supply chains and excise.

"These technologies generate independent and precise information to facilitate more effective tax administration through better control of tax declarations and enforcement of taxpayer obligations," said the organisation.

The new plans also mean thar Ecuador is no longer meeting the requirements of the Word Health Organization's Framework Convention of Tobacco Control (FCTC) which the country has signed up to.

The FCTC aims to prevent any interference in independent compliance measures to control the production, distribution, import and sales of tobacco products.

That view ties into ITSA's long-running concerns with Codentify, a traceability system for tobacco products originally developed by tobacco giant Philip Morris International and now promoted as Inexto.

The Inexto system has been discarded in recent bidding processes for cigarette tax traceability systems in Chile and Pakistan because of a clear conflict of interest and the technology's lack of security, according to the ITSA.

The WHO has also rejected it for failing to comply with the requirements of its Framework and the Protocol to Eliminate Illicit Trade on Tobacco Products, which has also been ratified by Ecuador.

The new plan "reduces the security, quality and service level requirements of the control system compared to those currently applied in the execution of SIMAR [and] any new system could be highly fragmented and difficult to police."

Instead of dismantling the SIMAR system, ITSA considers that it should be strengthened through a new bidding process where companies with a proven track record in implementing such systems – and which can guarantee transparency and independence – could compete.

Furthermore, in order to reduce the burden on the state budget, the SRI could implement a mechanism to make controlled companies pay for the system, as established by the WHO Protocol.