Reforms to dismantle cigarette monopoly
As I mentioned in my column of Feb. 24, 2012, the battle lines have been drawn in the Ways and Means Committee of the House of Representatives between those who are proposing the reform of the excise tax structure for cigarettes and the group that wants to extend the protection being enjoyed by Lucio Tan’s Fortune Tobacco-philip Morris merged company (PMFTC), which enabled the company to be a monopoly of the cigarette market for the past 15 years.
Presented below is a comparison of the main features of the administration bill (House Bill 5727 authored by Rep. Joseph Abaya and supported by the Dept. of Finance) and the draft bill recommended by the sub-committee of the Ways and Means headed by Rep. Eric Singson of Ilocos.
Level playing field
When P-noy included the reform of the excise tax law among the priority bills of the administration, his message was to create a level playing field in the cigarette industry. This objective was echoed by Finance Secretary Cesar Purisima in various fora and interviews where he decried the existence of a company (PMFTC) that controls over 90 percent of the market and pays taxes based on 1996 retail prices.
The sub- committee draft bill recommended by Rep. Singson will allow the PMFTC monopoly to continue by maintaining the tax classification of existing brands and perpetuate the preferential treatment accorded to the Phillip Morris and Fortune Tobacco brands that began in 1996.
With this preferential treatment, the existing PMFTC brands are subject to much lower taxes compared to brands introduced after 1996, thus effectively blocking the entry of new investments.
Cong. Abaya’s bill, on the other hand, will create a level playing field as it removes the discrimination against post 1996 brands and provides for fair taxes to all brands based on current retail prices. According to supporters of this bill, the removal of the discriminatory provision protecting the existing PMFTC brands will avoid a repeat of the Philippines’ adverse WTO ruling similar to that of the alcohol industry. The lifting of this discriminatory barrier will also open the industry to new investments and entrants.
Impact on revenue
The Singson-supported bill seeks a status quo on the classification of existing brands, majority of which belongs to PMFTC, despite the increases in retail prices of said protected brands since 1996. By maintaining their classification, the PMFTC brands will continue to benefit from lower tax rates.
Furthermore, as provided in the Singson bill, the rate increases for the next five years is pre-determined and is not indexed to inflation. As a result, the bill will only provide the government with incremental revenues of about P2 billion per year.
The Abaya bill will provide for the reclassification of existing brands based on their current retail prices. The protection given to PMFTC brands that enables these to be in the lower classification will be removed, and therefore will be assessed the correct rate based on their current retail prices.
Future adjustments in the tax rate are to be indexed to inflation resulting in additional revenue to the government estimated at P30 billion per year, according to DOF estimates.
The Singson bill will generate billions of tax savings mostly for PMFTC since it has 90 percent of the market, while the Abaya bill will provide the government with additional revenues to fund a universal health program, build roads, school rooms and other much needed projects.
The agenda of each side is quite clear.
Tax administration
For its drive against corrupt practices, the government is in search of a simplification of process in assessing and collecting taxes. The simpler the procedure, the less likely it is for manipulation and subjective judgments.
Apart from maintaining the protected classification of existing brands, the Singson bill also provides for the maintenance of the current complex four-tier system. The opportunity and temptation for misclassification is not removed.
To simplify tax administration, the Abaya bill establishes a two-tier system on year one and two and a single tier and rate for year three onwards. The opportunity for manipulation is reduced if not completely eliminated with this simple structure.
Impact on health
Health advocates are expressing their support for the Abaya bill since the higher taxes will lessen the accessibility of cigarettes to the youth who are currently the segment with the highest rate of conversion to smokers, an alarming 40 percent in a span of four years.
The Action for Economic Reforms ( AER) criticized yesterday Philip Morris Philippines Manufacturing Inc. for flip-flopping on its position regarding sin taxes.
The non-government group, which supports moves to raise excise taxes on alcohol and cigarettes, said that Philip Morris previously lobbied for a single-tier tax system back in 2003.
AER senior economist Jo-ann Latuja cited a 2003 letter, which Philip Morris sent to then President Gloria Macapagal-arroyo. AER said in the letter that Philip Morris expressed its support to having a single-tier tax system for tobacco.
“This letter confirms our doubts that Philip Morris, which was once an advocate of excise tax reform, is protecting no one but its own personal causes for opposing the similar reform it had fought for in the past,” Latuja said.
Philip Morris is now part of Philip Morris Fortune Tobacco Corp. (PMFTC), which is an entity that merged with Fortune Tobacco in 2010.
PMFTC now corners 94 percent of the Philippine tobacco market.
The cigarette giant is now opposing House Bill 5727, a measure filed by Cavite Rep. Joseph Abaya, which seeks to restructure the current excise tax system on cigarettes and alcohol. The DOF- backed measure, is currently pending in Congress. It calls for the adoption of a unitary excise tax system from the current four-tier classification.
In its three- page letter dated Feb. 5, 2003, Philip Morris said a single-tier system “should result in an increase excise tax collection” and “promote a level playing field for all manufacturers.”
“In brief, our proposal is that the current four tier specific system should be changed to a single tier specific system over a period of three years,” the letter, signed by former general manager George Farah, said.
The battle over higher sin taxes is again ongoing in Congress. PMFTC on one side is opposing the shift to a unitary tax system on tobacco while the government and new player British American Tobacco are on the other side, pushing for a more level playing field in the industry.
The Aquino administration is pushing for the passage of the Abaya measure, saying that it would yield additional revenues of roughly P60 billion a year from tobacco and alcohol products.