A Technical Study and Market Report

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1 tax stamp cover V4 13mm spine_05/01409 Authen Directory Cover 09/05/ :15 Page 1 TAX STAMPS A Technical Study and Market Report TAX STAMPS: A Technical Study and Market Report The definitive source of data and analysis on tax stamps - including technologies and systems that increase government revenues and reduce or prevent contraband and counterfeits - for tobacco and alcohol. SPONSORED BY: Second Edition Second Edition

90 Case Study 1: Belarus Case Study 1 - Belarus Technology Key Across Broad Spectrum of Consumer Goods As was the case with most of its neighbours, the formation of Belarus as an independent state

2 90 Case Study 1: Belarus Case Study 1 - Belarus Technology Key Across Broad Spectrum of Consumer Goods As was the case with most of its neighbours, the formation of Belarus as an independent state following the break-up of the Soviet Union was followed by the rapid development of an underground (or shadow) market. This was fueled by counterfeiting, illegal trade and product abuse to such an extent that, in the early 1990s, the government estimated that it comprised 70% of GDP a situation that damaged not only consumers, legitimate manufacturers and state revenues, but also the reputation of the country as a whole as a place to do business. Matters have changed out of all recognition since then, however, and Belarus can now boast of having one of the lowest rates in the region for counterfeit goods and illicit trade, and one of the highest for tax collection both on excisable and non-excisable products. The solution has been the combination of a sophisticated yet simple set of first line security features on the country s tax stamps and control marks in the form of the Unigram, together with an automated electronic document management system a combination which is used not only for alcohol and tobacco, but a wide range of consumer products too. FACT FILE Population: 4.7 million GDP capita: US$5,770 Annual cigarette consumption: 23.8 billion Annual spirits consumption: 133 million Stamps introduced: 1996 (cigarettes), 1999 (alcohol) Supplier: Minsk Printing Factory of Goznak Revenue agency: Ministry for Taxes and Revenues The first tax stamps were introduced for imported tobacco and alcohol shortly after the formation of Belarus and were originally produced in Poland, before the Minsk Printing Factory of Goznak took over production in The stamps comprised a water mark, fibres, microtext, guilloche elements, an anticopy feature and UV luminescent ink. In 1999, excise stamps were introduced for domestic alcohol, including vodka, cognac and brandy, imported wine and domestic cigarettes. The features remained the same. Two years later, excise stamps were introduced for domestic wine, with additional (printed) security features. There were problems, however, with these stamps namely, they were not making a serious impact on counterfeit and illegallytraded products. A new tack was taken, therefore, comprising not only the introduction of a new technology in the form of the Unigram in 2003, but the development of a tracking platform that has been subsequently expanded to cover a wide range of goods excisable as well as commodity products. Two-Phase Approach The implementation of the country s national automated electronic document management system took place in Developed by Goznak and managed by the Payment Centre of the National Bank of Belarus, the management system was the first of its kind to be introduced and successfully implemented in the region. The system keeps track of various types of documents subject to fraud, including tax stamps and product labels (referred to as control marks) throughout their lifecycle, providing electronic support and verification at the state level. Once produced, each document is entered onto the database and tracked when distributed, used, discarded or invalidated for any reason by recording the data from the end user and the product it was allocated to. Each document carries its own identification number, which serves as the evidence of its legitimacy. Companies with direct access to the database can verify any given document or its product in real time, while consumers and retailers can do so by accessing the system s website or sending the relevant data to the National Bank s system management centre for verification. At the consumer level, however, online verification for tax stamps is yet to be implemented. The second phase of the evolution of Belarus excise stamps was the development and introduction, a year later, of the Unigram, which combines two existing features and their properties into one label. The visual effects of the Unigram enable simple consumer verification in two ways tilting it will display the optically variable effects, much like any hologram or OVD, whilst the latent image provides an added level of both consumer and retailer verification with the use of a simple, low cost polariser (priced at around 20 US cents and distributed free of charge to government officials). On tax stamps for vodka, for example, the polariser will reveal АКЦЫЗ (EXCISE DUTY) on the Unigram. The Unigrams are produced by the Minsk Printing Factory of Goznak under a licensing agreement with five other Belarusian collaborators who also own this technology Light Magic Ltd, JSC Holography Industry, BI Stepanov Institute of Physics of the National Academy of Science, ATB-LIT and RUE Cryptotech of Goznak. The agreement, as well as the original patent, thus includes all Belarusian companies working in the field of secure document production, making any alternative mass production or simulation of the feature in the country virtually impossible. To date there has been no evidence of forgery of the Unigrams. The Technology Unigrams are not, in themselves, unique since latent polarized images have been developed in other parts of the world too, notably in Russia, Japan and Australia. However, a particular feature of the Belarusian technology, as opposed to the

TAX STAMPS A Technical Study and Market Report - 2nd Edition 91 An example of a 2005 alcohol stamp (above) and viewed under the polarizing filter (left) The new Unigram with barcode (above) and

conditions. It retains high thermal stability and remains resistant to UV radiation.

3 TAX STAMPS A Technical Study and Market Report - 2nd Edition 91 An example of a 2005 alcohol stamp (above) and viewed under the polarizing filter (left) The new Unigram with barcode (above) and viewed under the polarizing filter (left) alternative methods of production, is that the image has high contrast when viewed through the polariser and no contours or traces when viewed in normal conditions. It retains high thermal stability and remains resistant to UV radiation. It also offers a unique method of integration with the hologram, comprising four layers of which the hologram serves as a reflective layer, with the polymer layer containing the latent image, an adhesive layer and the base PET layer. The nationwide scale of implementation of this technology on alcohol stamps, product labels and other valuable documents is simply unprecedented says Goznak Belarus, making the country a text book example of its success and usability. Issuing and Marking Procedure The issuing and marking system for both excisable and nonexcisable products is underpinned by a regulatory framework, devised by the Ministry for Taxes and Revenues in collaboration with Goznak Belarus and designed to ensure government and consumer control over the sale of marked products. The procedure consists of a number of steps providing transparency from the point tax stamps and control marks are manufactured to the point the products reach their intended consumer. Manufacturers and importers file their applications for tax stamps or control marks to their appropriate territorial inspectorate under the Ministry for Taxes and Revenues. Inspectors from the Ministry consider each individual application and give permission to issue tax stamps or labels, recording their own steps and associated data in the electronic database. Once processed, Goznak Belarus receives the orders for production of stamps and labels, produces these and then distributes them as appropriate (ensuring that the quantities do not exceed manufacturing quotas). Each action is again recorded in the database. Under the relevant legislation, one manufacturer or importer cannot transfer tax stamps or control marks to another. When the tax stamps or control marks have been received, the manufacturer or importer applies them onto the products. The marking system enables the authorities to exercise control over every stage of the process with the minimum effort. The price of the tax stamps and control marks is fixed by the government. At present, it amounts to 70 Belarusian Rubles (around 1 US cent) for control marks and tobacco tax stamps and 170 Belarusian Rubles (just over 2 US cents) for alcohol stamps, making them among the cheapest in the region. This is paid for either by the manufacturer or importer, and may be added to the retail price of the goods. Non-Excisable Products The introduction of the technology for products other than tobacco, spirits and wine started in Known as control marks rather than excise stamps, these were initially applied to two products only malt beer and engine oils based on the large volume of sales in the grey market for both. The result was that the overall volume of legally-imported beer increased almost threefold, while beer imported from Russia, Belarus's largest supplier for many products, increased over four times. Following the introduction of the system in 2005, imports of Russian beer represented 90% of the market, compared with just 50% in the previous year. A twofold increase in domestic beer production was also witnessed, with tax revenues increasing by 220%. Similarly encouraging results were obtained from the marking of engine oil, and in 2006 it was decided to extend the scheme to vegetable oil, canned fish and caviar, water, mild alcoholic beverages and synthetic detergents. The following year, the control marks were added to tea and coffee, food supplements, footwear, audiovisual storage media and mobile phones. Production of marked goods and tax revenues kept increasing, and in 2008 control marks were introduced for watches, antifreeze, vinegar and TV sets. Over 20 products lines are now marked. Five years after its introduction, government revenues from taxes paid by manufacturers and importers of marked goods increased by more than $1 billion. The number of legitimate manufacturers increased from 210 to 250, and the number of importers from 6,600 to 9,800 for the product lines concerned. The programme initially met with opposition from the manufacturers and importers. But the results from the first goods to be marked soon overcame this, and it was the manufacturers themselves that suggested subsequent categories of consumer goods to be marked, as a means of protecting their status as legitimate suppliers and protecting them from unfair competition from the grey market. Examples of the 2005 version of alcohol stamps

92 Case Study 1: Belarus The growth of excise duties on alcohol and cigarettes in Belarus 2000-2010 Results for Tax Stamps Similar successes have been recorded for excise stamps on tobacco and

4 92 Case Study 1: Belarus The growth of excise duties on alcohol and cigarettes in Belarus Results for Tax Stamps Similar successes have been recorded for excise stamps on tobacco and alcohol. According to the Ministry for Taxes and Duties, in the 16 years since the introduction of the tax stamps and, later, the Unigram with the data management system, budgetary tax revenues have totaled $6 billion an impressive achievement given that Belarus is a small country with under 10 million people. In 2004 alone, tax revenues totaled almost $30 million, while sales of legal alcohol products were boosted by 70%. More recently, from , budgetary tax revenues from alcohol and tobacco totaled around US$120 million. In percentage terms, from the growth rate of excise taxes paid on alcohol products was 950% and on tobacco 4,400%. According to the latest government figures, the shadow market in the country is now represented by no more than 10-15% compared with 60-70% before, whilst the overall amount of counterfeit stamps uncovered in 2009 was only 50,000. Goznak Belarus annually produces and distributes over 2 billion tax stamps. Further Developments The success of Unigram in the country has paved the way for further developments. In 2010, in collaboration with JSC Holography Industry and the Belarusian State University, Goznak Belarus produced the first ready-forapplication samples of Unigram with diffractive barcode and Unigram with demetallisation. The former is of particular interest, adding another feature to the existing technology. The diffractive barcode is integrated in the hologram and contains an encoded 8-10 digit number read with a reader connected to a PC, providing in effect an additional authentication tool. This feature is now used in Belarus on commercial invoices (waybills) and has been proposed by the developers for use on tax stamps both in Belarus and abroad. The demetallised version of the hologram, meanwhile, has been in use on cigarette stamps since System Functionality Belarusian tax stamps and control marks do not incorporate variable data apart from identification and serialisation numbers. There are no sophisticated system-generated codes with track and trace capabilities. This, however, does not seem to have affected or limited system functionality. Over the years the system has performed efficiently, giving the government control over its alcohol, tobacco and consumer markets and helping it increase the cash flow from its tax revenues. With recent emphasis in the industry on digital technologies and real time traceability functions, Belarus is a good example of continuing success by combining digital and conventional features on tax stamps. Demetallised on cigarette tax stamps, c. 2010

5 Table of Contents Table of Contents CHAPTER 1: Introduction to the Tax Stamp Report Page 9 CHAPTER 2: Why Countries Use Tax Stamps Page 11 CHAPTER 3: How Tax Stamps Curb Illicit Trade Page 15 CHAPTER 4: How Tax Stamp Programmes Work Page 19 CHAPTER 5: Tax Stamp Production and Authentication Page 25 CHAPTER 6: Tax Stamp Formats and Application Page 41 CHAPTER 7: The Digital Revolution Page 45 CHAPTER 8: International Regulations Page 49 CHAPTER 9: Compliance and Enforcement Page 53 CHAPTER 10: Global and Regional Use of Tax Stamps Page 59 CHAPTER 11: Africa Page 65 CHAPTER 12: Asia and Far East Page 69 CHAPTER 13: Eastern Europe and CIS Page 73 CHAPTER 14: Western Europe Page 77 CHAPTER 15: Latin America and the Caribbean Page 81 CHAPTER 16: North America Page 83 CHAPTER 17: The Road Ahead for Tax Stamps Page 85 APPENDIX 1: Tax Stamps in Practice a Selection of Case Studies Page 89 APPENDIX 2: Worldwide Alcohol and Cigarette Consumption Page 127 APPENDIX 3: Definitions of Authentication Terms and Technologies Page 131 APPENDIX 4: Contributors and Acknowledgements Page 135

6 TAX STAMPS A Technical Study and Market Report - 2nd Edition 1 TAX STAMPS A Technical Study and Market Report Second Edition Published by Reconnaissance International Ltd 4 Windmill Business Village, Brooklands Close, Sunbury-on-Thames, TW16 7DY UK Tel: Fax: info@reconnaissance-intl.com Website: Reconnaissance International Ltd 2012 ISBN: Although all the information contained herein is obtained from sources believed to be reliable, we accept no legal liability of any kind for the publication s contents or for any omissions, errors and their consequences. No part of this publication may be reproduced, stored in a retrieval system or translated in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publishers. Reconnaissance International Ltd acknowledges products, services and company names referred to in this publication, some of which are trade names, service marks or registered trade marks.

Official Journal of the European Union

Official Journal of the European Union 16.4.2018 L 96/57 COMMISSION IMPLEMTING DECISION (EU) 2018/576 of 15 December 2017 on technical standards for security features applied to tobacco products (notified under document C(2017) 8435) (Text