Bloomberg News

Tan’s Philippine Cigarette Venture Calls for Gradual Sin Taxes

October 30, 2012

Philippine billionaire Lucio Tan’s venture with Philip Morris International Inc. (PM:US) said taxes on cigarettes should be gradually increased (PM:US) to avoid hurting the nation’s $2.1 billion tobacco industry.

A drastic increase in the so-called sin taxes will force an ``abrupt” price rise and this will lead to smuggling, a drop in demand and job losses, Michael Tan, the tycoon’s son, said in an Oct. 25 interview in Manila.

“We would like a moderate, predictable increase that will give realistic revenues” for the government, said Tan, director of the PMFTC Inc. venture, the nation’s largest cigarette maker with a 90 percent market share. “The tobacco industry should be treated in a more fair fashion, with a more equitable sharing of the tax burden.”

President Benigno Aquino wants Congress to pass a bill to boost annual collections by at least 60.6 billion pesos ($1.47 billion) by increasing the levy on tobacco and liquor. The additional revenue will help fund health-related expenses, while Aquino increases spending on infrastructure to boost economic growth. Tax Commissioner Kim Henares said Oct. 24 the bill will help the $225 billion economy achieve investment-grade rating status.

The government collected about 26 billion pesos in excise taxes from tobacco last year. It wants to boost revenue from smokers by 30 billion pesos in the first year, intending to collect the rest from alcohol drinkers.

‘Impossible Mission’

To hit the revenue target, the cigarette industry must generate 75 billion pesos in additional sales which will be an “impossible mission,” said Raul Academia, trade and regulatory affairs director at PMFTC, formed by Philip Morris Philippines Manufacturing Inc. and Lucio Tan-controlled Fortune Tobacco Corp. The industry had 87 billion pesos in sales in 2011, he said.

Industry growth averaged only 1.97 percent from 1997 to 2011, Academia said. Industry sales volume may drop 51 percent to 49.1 billion sticks next year from an estimated 100.5 billion this year, according to data from the Philippine Tobacco Institute.

“It has been shown that we can raise 30 billion pesos based on our proposal because the drop in consumption is not large enough,” Bureau of Internal Revenue Commissioner Henares said. “If the target is unreasonable and unrealistic, we would be the first to say so.”

The government plan will effectively raise the levy for low-priced brands by between 350 percent and 700 percent, and increase the tax for higher-priced brands by 150 percent to 300 percent in the first two years of implementation. In the third year, a single tax rate will be applied for both low- and high- priced brands.

Illicit Trade

An “abrupt” price increase may encourage smuggling which will replace about half the volume decline in legal tobacco sales in the country, Academia said. Illicit trade now accounts for about 80.4 percent of the market in Brunei, which imposed a 360 percent tax increase in November 2010, he said.

“When you have an abrupt and a significant tax increase, people merely shift to other products, which could either be contraband or smuggled,” Academia said.

Tobacco leaf production in 2013 will decrease 51 percent from this year to 17,700 metric tons because of the higher tax, which will translate to a loss of 1.2 billion pesos in income for farmers, Tan said. About 2.9 million Filipinos are dependent on the tobacco industry for income, he said.

Low Prices

The Philippines has the fourth-lowest price per pack of cigarettes worldwide, according to the World Health Organization, and has one of the lowest excise tax rates, Henares said. A Marlboro pack of 20 cigarettes sells for 40 pesos, about a 10th of its cost in Singapore.

The low price has encouraged usage, placing the nation at the top in the region for per-capita consumption, based on government data.

Even with the increase in prices of cigarettes, the Philippines will still have the lowest prices relative to its neighbors, said Filomeno Sta. Ana, coordinator of Action for Economic Reforms, a research and advocacy group based in Manila.

“There will be drop in demand but that will not kill the industry,” he said.

Henares said the government focuses on tobacco because of the worse health risk linked to smoking than drinking in a country where seven of the 10 leading causes of death are diseases related to tobacco consumption, according to data from the Department of Health.

Health Spending

Smoking costs the economy about 188 billion pesos, including expenses related to health care, productivity losses and premature death, government estimates show.

The Senate’s deliberation over a version of the bill that cuts the revenue goal to between 15 billion pesos and 20 billion pesos, with tobacco contributing 9.79 billion pesos to 15 billion pesos of the target, got stalled after Senator Ralph Recto quit on Oct. 15 as head of the chamber’s ways and means committee and withdrew the measure on allegations he caved in to tobacco companies.

The Senate will resume discussions on the bill in early November and the country has enough time to pass the law by December, Henares said Oct. 24.

To contact the reporters on this story: Ian Sayson in Manila at isayson@bloomberg.net; Cecilia Yap in Manila at cyap19@bloomberg.net

To contact the editors responsible for this story: Lars Klemming at lklemming@bloomberg.net; Stephanie Wong at swong139@bloomberg.net; Darren Boey at dboey@bloomberg.net; Colin Keatinge at ckeatinge@bloomberg.net


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Companies Mentioned

  • PM
    (Philip Morris International Inc)
    • $83.05 USD
    • -0.97
    • -1.17%
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