Fortune opposes new cigarette taxes

Fortune Tobacco Corp., owned by taipan Lucio Tan, has aired its opposition to a plan by the Department of Finance to increase the excise tax rates on cigarettes.

The tobacco firm, in a 23-page position paper submitted to the Senate ways and means committee chaired by Sen. Ralph Recto, said it endorsed instead a return to the ad valorem tax system, which uses the actual retail price of cigarettes as a tax base.

This system "will prevent the use of so-called marketing arms to underdeclare the tax base... It will eliminate the need to exclude excise taxes, which distort the calculation of the net retail price and the average retail price is also reflective of the true market situation as it represents the amount that consumers are willing to pay for a certain product," Fortune said.

The firm noted that since more than two-thirds of cigarette raw materials are dollar-dependent, any proposal to increase the tax brackets should consider the 114-percent devaluation of the peso against the dollar from 1996 to 2003, as well as apply cumulative inflation on local market and manufacturing overhead.

"If the proposed measures to reclassify and slap additional levies on top of the current excise tax rates are implemented, quite a number of Fortune’s popular selling brands will be phased out of the market," Fortune Tobacco said.

It added that while the government can argue that other brands could always fill the void resulting from the phaseout, these may not be local substitutes but are smuggled or counterfeit cigarettes.

"If this happens, the government will find itself in a ‘lose-lose’ situation. It will lose tax revenues from phased-out brands. It will collect nothing from contraband and fake cigarettes. Corruption will thrive because smuggling is such a lucrative racket for both smugglers and regulators," the tobacco firm said.

Fortune said it has consistently preferred the ad valorem tax system because it has a built-in mechanism for government to capture more revenue from inflation. The firm also considers the system "progressive because high-priced products pay higher taxes while low-priced brands pay their proportionately lower share."

It also said that the government should crack down on the smuggling and counterfeiting of cigarettes, a practice rampant in Mindanao, before raising taxes on cigarettes any further.

"In China and some parts of Mindanao, mobile cigarette-making machines that are loaded into container vans make these evasive counterfeiters difficult to apprehend," Fortune said.

The tobacco firm said the current specific tax system imposes a heavy tax burden on the poor, citing a computation made in 2000 by the National Tax Research Center (NTRC) on effective tax rates, categorizing excise tax by product.

The computation showed that the lowest income classes — those earning P60,000 and below a year, comprising 45 percent of families surveyed by the NTRC — carry the heaviest excise tax burden with an average of 1.64 percent compared to only 0.31 percent excise tax paid by most affluent families.

Fortune added that a 2003 study by the International Tax and Investment Center (ITIC) and the Oxford Economic Forecasting indicated that cigarette taxes in many developing countries are already significantly higher than in developed countries, when measured against purchasing power.

"Raising excise taxes in such circumstances would encourage increased smuggling and criminality, and undermine the government tax base," the tobacco firm quoted from the study.

The same study also said the experience of the United States, Canada and the United Kingdom demonstrates that high excise taxes can generate a serious problem with smuggling, even in countries with very effective law enforcement.

The UK government is losing $7 billion a year from smuggling and cross-border purchases of cigarettes, according to the study.

Canada encountered similar problems in the early 1990s, when contraband cigarettes made up over 60 percent of the market in Quebec province, and tobacco smuggling was reducing federal and provincial revenues by $1.5 billion.

"As a result, Canadian authorities reduced federal excise taxes by 30 percent in 1005... smuggling was virtually eliminated in the mid-1990s," the ITIC said in its study.

The ITIC noted that in the US, tax differences between states, not corruption nor poor law enforcement, is the primary incentive for smuggling. Citing a 1998 study, the ITIC said state excise and retail sales taxes on cigarettes can range from over $2 per pack in Massachusetts, New Jersey, New York and Washington to just 50 cents per pack in Kennedy, North Carolina and Virginia.

"The same study stressed that smuggling and cross-border sales of cigarettes is not the only concern. Rather, governments are worried that cigarette smuggling undermines law and order, encourages the development of organized criminal gangs and threatens legitimate business," the ITIC said.

The ITIC also quoted Canadian Prime Minister Jean Chretien, who said in 1994 that the "effects of tobacco smuggling include the growth of violent organized crime; the establishment of extensive smuggling networks that are also being used for liquor and, to some extent, weapons and drugs; the loss of $2 billion a year in public funds through federal and provincial tax losses; the loss of business for law-abiding merchants and a general lack of respect for the law. Smuggling also undermines government initiatives to reduce smoking, particularly among young people."

In the Philippines, Fortune said the ITIC study found that 20 percent of cigarettes sold in the local market are contraband.