From the Beginning to the End: Tax Stamps as Part of a System Rather Than Just a Product

The following is a panel report from the 2017 Berlin Tax Stamp Forum, which Bergmann, managing partner of Venture Global Consulting, attended and participated in.

See SlideShare slideshow here.

I had the pleasure of co-hosting the panel discussion “From the Beginning to the End: Tax Stamps as Part of a System Rather Than Just a Product” during the recent Tax Stamp Forum in Berlin. The distinguished panel represented the range of key stakeholders including Kaxton Xudi Mndeo (Kenya Revenue Authority), Hayward Beverley (U.S. Department of Homeland Security, Immigration and Customs Enforcement), Francis Gussens (Thomas Greg Security Printers) and Jean-Pierre Rique (Advanced Track and Trace). The panel had a spirited and wide-ranging 90-minute discussion minute, which spanned across three general topics: (1) Core features of tax stamp programmes, (2) Potential feature extensions of successful tax stamp programmes and (3) Considerations of tax stamps as an authentication feature.

Core Features of tax stamp programmes

The participants discussed that at the core of most tax stamp programs lies the desire to provide an effective tool that can help combat illicit products. In particular, tax stamp programs are driven by a dual objective to help protect tax revenue and protect consumer safety.

Tax stamps play a unique role for these dual objectives. First, they provide validation that the stamp is genuine and the accurate tax was paid. More importantly, on illicit product they can help add investigative data to establish the 5 W’s: Who, What, When, Where and Why, which can be used by field and investigative team.

While tax stamps and their embedded technologies are not an end in themselves, they are means to achieve those objectives. Tax stamps help with the provision and collection of data, production control and provide a mechanism for enforcement. The panel discussed in depth the increasing relationship between security features and data. Various panelist mentioned the importance for tax stamps to carry relevant security features and support data collection simultaneously. As a result, tax stamp providers have continued to modernize tax stamps and created ‘smart stamps’. These ‘smart stamps’ can carry a significant larger amount of information, which can be authenticated in a secure manner. As part of this modernization of tax stamps, panelists discussed the movement of tax stamps from mere payment receipts, to fiduciary products, which can integrate various security features and can provide production and distribution data. The panel explored what link should exist between material security verification in terms of the physical stamp and the data linked to the stamp. Some believed that the two are indivisible to ensure the security of the system. Authentication features ensure that the data read is accurate and genuine. As an alternative, the panel discussed, if the security features could be within the packaging itself and the data would be added during the production process.

The panel also discussed the physical, logistical and monetary limitations of adding a plethora of security features onto a stamp. While a multitude of security features provides additional security, the layering of security features creates obvious issues with embedding multiple security features on a tax stamp because of their small size. This can make it more difficult for enforcement officers to authenticate stamps, where the differences between fake and genuine stamps are much harder to spot due to the size and crowding of the security elements. To overcome these challenges, participants spoke of the next tax stamp evolution with the development of technologies that are both intelligent and that link to handheld devices for instant authentication.

Potential feature extensions of successful tax stamp programmes: These new technologies are part of the next generation of tax stamps. The goal of these stamps, according to the panelists, is to build on the foundation of tax stamp programs for better detection and enforcement. In particular, the panel discussed the extension of tax stamp programs into Track and Trace programs to link stamps directly to a central database allowing relevant and ‘real time’ data retrieval for enforcement officers. The goal of new track and trace systems is to enable tax authorities both to identify illicit products and take immediate enforcement action.

One unexpected in-depth discussion of the panel was, which role consumers and the public should take in the authentication of tax stamps and to help ensure products are legitimate. Some panelists stated that the consumer plays a potentially very powerful role, possibly as a co-auditor, because of the shared interest in authenticating. Some disagreed and believed that consumers have no interest in knowing about the authenticity of their products. Some even suggested that consumers purchase illicit product full knowing and would not be interested in or deterred by additional security or authentication features. As the discussion evolved, it became clear that reality is most likely in-between and tax stamp technology, as well as authentication technology, needs to reflect the consumer needs in the respective product categories. Panelists and the audience provided quite interesting examples of innovative new approaches to authentication and consumer involvement. For example, one audience participant shared the challenge of household garbage, which enters the grey and black markets. If authentication features are part of genuine packaging, this undermines the integrity of the system. Many panelists and audience agreed that the modern enforcement arrangement requires broadening. Responsibility for enforcement should not lie solely on the government but on all stakeholders in the supply chain, as well as the consumer.

For example, Kenyan Revenue Authority shared that in developing their system they deliberately involved the distribution chain in product verification and provided them with authentication tools. The Kenyan Revenue Authority believes that such a shared system provides a self-reinforcing mechanism, where all parties have an incentive to detect and deter illegal and counterfeit products.

Overall, the panel and the audience agreed that public outreach to increase awareness, education and engagement is critical and needs to be part of any comprehensive tax stamp programme. This was especially vividly highlighted by a comment from Howard Pugh from Europol who shared how public sentiment shifted against illicit tobacco and alcohol North-West England, once the public understood how many other criminal activity was involved with and financed by illicit tobacco and alcohol. Another example from Brazil highlighted a very innovative approach to incentivize consumers through tax reimbursements for legitimate purchases. According to audience members the system was simple and was yielding exceptional results.

However some remained skeptical that consumer would start to authenticate products with their smartphones, partially because every product carrying a code might require a different application to read and decipher that code. This sparked a discussion on the need and importance for collaboration, open platform systems and common shared data platforms. In addition, the public might not have any interest in authentication product, since they are mainly interested and vested in buying the cheapest product.

Considerations of tax stamps as an authentication feature The panel discussed, if and how tax stamps could be used as authentication against counterfeit products.

The panel was truly split on this subject. Some were doubtful, if tax stamps would be enough to fulfill all the additional requirements that a brand owner may have, especially, since brand protection for some companies includes also the issue of grey market products, which undermine overall margins. However, grey market products are not counterfeit, but genuine diverted products and therefore tax stamps and codes might not provide the right tool.

However, some panelist spoke of the opportunity to reverse the question and ask how can a brand protection program serve the tax stamp program? The example was given of a traceability program with an association of producers, where the data from the brand protection track and trace program was being fed into the overall tax compliance system to augment existing data. The panel concluded that such collaboration and private-public partnerships can and have been impactful and significant. Involving the industry, manufacturers and distribution chain participants, creates involvement, accountability and additional enforcement. Private industry participants help provide intelligence to the government for enforcement of illicit products in the marketplace. In addition, a robust tax stamp program allows manufacturers to use the government program to enforce brand protection. Such collaboration is key, but appears to be lacking in the tobacco sector.

Finally, the panel discussed, if tax stamps are truly the right tool for product authentication. According to some on the panel, brand owners instead of relying on external overt authentication features, such as stamps or labels, they have continued to move to covert features included in the product itself. These covert features are included as part of the manufacturing process, provide the needed brand integrity and can be used for consumer authentication if needed. However, the panel discussed that the effectiveness of such an inclusion of covert features depends on various factors including the industry, illicit trade landscape and reusability / recycling of packaging materials, which would defeat embedded security features. The panel concluded that such features need to be customized to the category and illicit trade environment.

In Conclusion The panel highlighted that tax stamp programs need to be part of a larger comprehensive enforcement program. The discussion highlighted that each feature alone cannot be effective, but that rather the combination of stamp security, product security and data provides the most significant impact. In addition, the panel discussion showed that much innovation for security features, processes, programs and data integration lies still ahead and should be encouraged. While there will continue to be an ongoing debate on how to best apply, implement and execute the various features, the panels consensus appeared to be a comprehensive coordinated approach with collaboration amongst all stakeholders will continue to yield the greatest results.