708% 'sin tax' hike stuns Big Tobacco

Posted at 06/08/12 11:16 PM

MANILA, Philippines – A 708% tax increase on low-priced cigarettes in the country, as set by the lower House-approved "sin tax" bill, has been described as "unprecedented" by the head of the country's largest tobacco company.

Philip Morris Fortune Tobacco Corp. (PMFTC) president Chris Nelson, in an interview with ANC Friday night, said no other country in Asia has come close to the tax rate hikes that House Bill 5727 wants to impose on tobacco products in the Philippines.

"If you look at what's being proposed, the rate increase is 708% on low-tier (cigarette brands) over 2 years, 150% on the high tier, and on the medium it goes up nearly 300%," Nelson said.

"Seven hundred percent on the low, that's unprecedented. I can't think of any country that has done that," he said.

He said the tax hike will have a detrimental effect on tobacco farmers, workers, and the entire industry.

"Let us not destroy this industry," he said.

Nelson said PMFTC does not oppose taxes, but any additional levy should be moderate.

He said the tobacco giant earlier advocated a P1 across-the-tier increase in 2004.

"The reason for that is we recognize the dynamic of the market," he said.

"We're not against the tax increase. In fact, Philip Morris is working with the government. What we're recommending is a tax increase sustainable for the industry and which gives future revenue streams for the government," he added.

"We are looking for moderate tax increases. We like increases that are planned out because we can plan our business," Nelson said.

He said that under House Bill 5727, the tax increase for beer is between 8% to 32%.

"That is what we call a moderate increase, as opposed to 700%," he said.


PTFMC said if the Senate approves a similar measure to HB 5727 and the proposal is signed into law by President Benigno Aquino, the cigarette manufacturer expects a 50% drop in demand for tobacco for domestic consumption.

This, in turn, will affect the livelihood of around 22,000 farmers nationwide, the company said.

It may also result in oversupply of domestic capacity and affect jobs.

Nelson said PMFTC will definitely reduce the number of its workers that currently number around 3,000.

He also believes that the sin tax bill, once enacted, will result in a rise in cigarette smuggling and counterfeit products.

"We already have smuggling in cigarettes in Mindanao. We already have brands coming in that sell for retail at P5. There's counterfeiting even on my own brands," he said.

"If you assume that taxes will go 100% and 700%, that (smuggling, counterfeiting) will increase significantly. The problem will grow massively," he warned.

Nelson said the battle over the “sin tax” measure will now move to the Senate.

"I think we made a lot of good representation (in the lower House). Unfortunately, the whole process was cut short and we proposed some amendments that were not accepted," he said. "But obviously, (we) hope that the debate will continue and obviously engage in the Senate."

Praise for 'sin tax' hikes

Action For Economic Reforms (AER), a non-government watchdog that pushed for reforms in sin taxes, earlier praised congressmen for approving House Bill 5727.

It said the bill, as amended, "corrects all the mistakes in the law."

"Representative Isidro Ungab, the chair of the ways and means committee, has done his homework. Not only did he brilliantly engineer the landslide vote for the Abaya bill at the committee level.  With his avuncular mien, he has been very persuasive in defending the bill and parrying the arguments of the vested interests," AER said.

The group said opponents of the measure cannot dispute the health argument, that the sharp increase in taxes will significantly lower consumption of tobacco and liquor, thus reducing problems associated with smoking and excessive drinking.

AER said the high tax rate for low-priced cigarette brands will deter young and poor smokers from either starting to smoke or force them to quit smoking.

According to AER's Jo-Ann Latuja, retail price for PTFMC products will increase by 76% in the first year if the "sin tax" bill becomes law.

"Studies have shown that a 10% increase in cigarette prices in the Philippines will decrease consumption by 5%. With a 76% price increase, consumption will decrease by 44%," Latuja said.

The group also does not believe that higher taxes on tobacco and liquor products will result in a sharp spike in smuggling and counterfeiting.

Quoting Customs Commissioner Ruffy Biazon, AER said the price of the country’s most popular tobacco brand -- Fortune International Filter Kings -- would rise to P35.26 per pack by 2014.

The price will still be lower than the 2009 prices of top-selling cigarettes in Cambodia (P52.36), Indonesia (P64.68), Thailand (P103.84), Malaysia (P146.08) and Singapore (P365.2), according to the group.

Again quoting Biazon, AER said cigarette smuggling will only flow out of -- rather than into -- the Philippines, if House Bill 5727 becomes law.

Tax revenues for health programs, tobacco farmers

Budget Secretary Florencio Abad also welcomed the bill's approval by the lower House.

"Through this groundbreaking move, we are much closer to reforming the current tax regime for tobacco and alcohol products, which has been in place for more than 15 years and has proven ineffective and outdated," he said in a press statement.

He said an updated "sin tax" system will boost tax efficiencies in the country, as well as increase government revenues by around P33 billion in the first year of its implementation.

He said most of the revenues to be collected from higher taxes on tobacco and liquor will go to health services.

"Once approved, 15 percent of sin tax revenues will also be used to support tobacco farmers, who may be adversely affected by the measure," Abad said.

"Tobacco- and non-tobacco growing provinces will likewise have a share in the revenues generated by an updated excise tax regime. In its original form, HB 5727 was expected to generate at least P60.7 billion, which will be channeled to 81 beneficiary provinces. This is a far cry from the 16 provinces now being supported by the present excise tax scheme," he added.

"More importantly, however, restructuring the sin tax system will go a long way toward improving the health and well-being of Filipinos. At present, tobacco and alcohol products enjoy very low retail prices in the country, and an updated sin tax scheme will help discourage Filipinos—particularly the youth—from engaging in harmful health practices," Abad said.