Let’s have fair play

Back in 1996, the Ramos administration realized it was losing huge amounts of money through a very clever ploy. Cigarettes were taxed at a percentage of their value (ad valorem tax) as the cigarettes left the factory—a few factories—so it was easy to control. The trouble was, one company was selling its cigarettes way below what their cost would dictate, thus paying a relatively low amount of tax.

Why, you might wonder. Well, it was selling its production to a main distributor that was owned by the factory’s owners. The price, and profit, was added there—after the tax had been calculated, giving it a most unfair price advantage over its competitors, and robbing the government of huge amounts of revenue.

To resolve this, the government decided to apply an excise tax: Just count the sticks coming from a factory and tax on volume. Not a good way to tax, but it could have solved the problem.

But it didn’t. Some careful maneuvering resulted in a law where there were four tiers to the tax: low, medium, high and premium. Low-priced cigarettes were those with a net retail price (NRP) of P5 or less; medium-priced, P5 but not over P6.50; high-priced, P6.50 but not exceeding P10; and premium, P10 and up.

The tax rates when the law was enacted 16 years ago were: P1 per pack for low-priced; P5 for medium-priced; P8 for high-priced; and P12 for premium.

In 2004, Republic Act 9334 was passed, increasing “sin tax” rates every two years (2005, 2007, 2009, and 2011). Effective Jan. 1, 2011, low-priced brands were taxed P2.72 per pack; medium, P7.56; high-priced, P12; and premium, P28.30.

After the law was passed, this same manufacturer raised the price of his low-priced cigarettes to the medium bracket. But—and here’s the clincher—the manufacturer paid, not the higher tax, but the tax for low-priced cigarettes because the law determined prices based on the price AT THE TIME OF THE LAW. Sixteen years later, cigarettes on the market in 1996 are still taxed based on the price in 1996 (adjusted somewhat, but not fully, for inflation). Any cigarette entering the market after 1996 was taxed on the current day price—a price obviously higher than its comparable competitor who was taxed on pre-1996 prices. This is not the level playing field that the government espouses.

Revenue losses over the past 16 years have run into billions of pesos.

And that same company is playing the same games, manipulating the proposed new law to again make any new competition uncompetitive. It is doing so through four clever stratagems:

• Allowing for “no downward classification” of cigarettes.

Lucky Strike, which is relatively new in the market, is paying P28.30 per pack, while its comparable competitor, Marlboro, is paying only P12. If the Senate version of the law prevails, that differential will remain as Marlboro will pay only P20, while Lucky Strike will still pay P28.30—because the law will not allow a reduction (no downward classification) of the tax currently paid. By 2017 the tax will have risen to P26, but a differential of P2.30 will still remain. These prices will be inflation-adjusted in both cases, so parity will never be obtained.

• Determining the category of any new cigarettes based on RA 9334, the law passed in 2004.

With inflation, all new cigarettes will be in the premium classification even if their current competitor in the market is in the low tier. They can’t enter the low tier.

• Determining the NRP by the Bureau of Internal Revenue by checking prices in 20 supermarkets.

Fair enough, you get a good cross sampling. But the bill going into the bicam has a last-minute change that mandates the BIR to check only the top three selling supermarkets, any one of which may refuse to sell a brand if it chooses to. What happens then? What happens is the BIR can’t determine the price as the law mandates, so the cigarette can’t be sold.

• Determining the tier into which cigarettes will fall by their tax rates paid in 2012.

But if they weren’t in the  market in 2012, the price will automatically put them in the top tier. A new, low-priced cigarette can’t enter the market.

The House sin tax bill has none of these sneaky clauses. It will consider existing and new products on an equal basis—the level playing field that the government has declared as policy. House Bill 5727 has only two tiers—a compromise to the government’s wish of only one, and a compromise that has been accepted.

The Senate bill has three, or unofficially four, if you consider the P28.30 vs. P20 as a separate tier. As you would.

It’s almost certain that most of the members of the bicam are unaware of these facts, and the bulk of congressmen and senators almost certainly are because they seem like innocuous clauses until you examine them more closely.

The entity that distorted the market in 1996 is trying to do it again: set the law to give it unfair advantage.

Let’s hope the bicam recognizes the dirty tricks being played here, and throws those clauses out. Remove the “no downward classification” clause. Remove the reference to pricing based on RA 9334, and base it on today’s prices. Determine those prices through a survey of 20 or more supermarkets, not just three.

Let’s have fair play.