Archive for the ‘sin taxes’ Category

Lucio Tan

It could be said that the merger of Lucio Tan’s Fortune Tobacco and the Philip Morris Philippine subsidiary (the Philip Morris Fortune Tobacco Corp., Inc) in 2010  is the equal of a marriage between Jollibee and McDonalds.  The result is control of the market. The Fortune-Philip Morris merger reportedly controls over 90% of the market.

While Fortune and Philip Morris consumated their marriage, a union between Jolibee and McDo was not, to my knowledge, even thought of by both parties.

The Senate is discussing several versions of the sin tax bill after the House of Representatives passed its version.

It is clear that the bill is not only about taxes; it is also about fair market competition.

British American Tobacco (BAT), the outsider protesting the Lucio Tan monopoly in the cigarette inIn other markets outside the Philippines, is supporting the sin tax bill for obvious reasons.  And that is, to find a place in a market dominated by another firm because of, among others, tax advantages.   In a sense, BAT is batting (pun intended) for a more competitive market in the Philippines.

However, BAT is not necessary a consistent champion for fair market competition.  In some markets outside the Philippines, BAT is dominant.  In Papua New Guinea, BAT is the only cigarette maker and distributor.  This drives home the truth that all firms with substantial investments will want to monopolize markets to ensure better profitability and lesser risks.  This insight is not the original contribution of a neoclassical economist.  The much-maligned Karl Marx made it first; more precisely, he observed that competition among capitalists and the workings of the modern financial system lead to market concentration and centralization.

This topic will be the subject of my next blog posts together with the items below:

Newly named Supreme Court Chief Justice Maria Lourdes Sereno beams before her oath-taking rites August 25, 2012

1. Ante the Supreme Court, Prof. Meilu Sereno, my UP Hardin ng Rosas neighbor and Christmas potlatch dinners

2. A logical analysis, based on open sources, of the political struggle over Secretary Jesse Robredo’s confirmation

3. Continuation of posts (about 4 more) on the property rights of the poor in the Philippines

4. Good politics, bad politics: Can we unite for the national interest while respecting our differences?

Dear reader, you are free to suggest topics that I should write on. Thanks and best wishes.


Ilocano farmer drying tobacco leaf while smoking a cigarette

A story written by Cathy Yamsuan and Kristine Alave published in today’s Philippine Daily Inquirer reports that the Senate intends to pass the bill raising taxes on cigarettes and alcoholic drinks before Christmas.  The measure was approved earlier by the House of Representatives.  The same report noted that legislators were worried that the proposed law will impact negatively on the incomes of tobacco farmers in their home provinces or districts in Northern Luzon.

Senators Juan Ponce Enrile and Bong Bong Marcos

Senate President Juan Ponce Enrile of Cagayan province and Senator Ferdinand Marcos Jr. of Ilocos Norte said  their principal concern is whether Malacañang’s plan to dramatically increase taxes on tobacco and liquor would discourage consumers from buying tobacco products sourced from Northern Luzon (see .

Senators Ponce Enrile and Bong Bong Marcos: HELLO!?

Tobacco farmers again sin tax increase (from GMA TV)

The very purpose of a sin tax is to discourage the consumption of certain products such as alcohol and cigarettes considered dangerous to one’s health.  If you and others in the Northern Luzon Alliance (on the Alliance, please read and are balking at the 700% increase in taxes, you have yourselves to blame.  In the past, you (especially Enrile when he was a member of the House of Representatives) vigorously opposed efforts to amend the law and index the sin tax rate to inflation.  Since the rates remained stagnant since the mid-1990s, any meaningful proposal to raise taxes now will seem excessive.

Northern Luzon where most of the tobacco is grown

This poster came out after the death of Jo Ramos, daughter of former President Fidel Ramos, due to lung cancer

It just won’t do to endlessly pit the economic interests of Ilocano tobacco farmers and the health of cigarette smokers.  The way to go is to raise sin tax rates and provide alternative livelihood for tobacco farmers.  Towards this end, it is necessary to amend Republic Act 7171, which was originally intended to promote the development and cultivation of Virginia tobacco in several tobacco growing areas.  RA 7171 (Sec. 2.b) provides for  “L]ivelihood projects particularly the development of alternative farming system to enhance farmers’ income.”

The July 26 issue of Business World reported that the National Tobacco Administration (NTA) is preparing a P165-million agribusiness project to provide alternative livelihood for some 7,700 tobacco farmers in Northern Luzon (

The numbers may seem paltry but we have to start somewhere.  Otherwise, we will have to keep up with the repeated whining  about the adverse impact of sin tax increases on the income of Ilocano tobacco farmers.

Wait a minute!  Last time I checked Senators Enrile and Marcos are senators of the Republic (smokers included) and not only of Northern Luzon.

Enrile and Marcos: you are senators of the Republic, not of Northern Luzon!

Department of Finance (DOF) logo

From government’s point of view, the ideal excise tax on sin products is an ad valorem or a percentage tax of the manufacturing price of a pack of cigarettes or a bottle of beer or whiskey.  Failing that, it can accept a specific tax on these products indexed to the inflation rate.  Of course, it goes without saying that government will prefer the highest tax rate, be it specific or ad valorem.

Through  these specifications, government can collect the maximum possible sin tax revenues.

Additionally, the national government believes that high sin tax rates will dampen consumption and consequently have positive effects not only on people’s health.  It could also improve peace and order and reduce crime rates.

Department of Health (DOH) seal

What about the tax preferences of the manufacturers of sin products?  Of course,  they will prefer low rates; specific rather than ad valorem; and unindexed (to inflation) tax rates.  Low tax rates will ultimately lead to lower prices of sin products which will ultimately mean greater demand for the same.  Nonetheless, the demand for sin products is generally inelastic–meaning demand for the same is not very sensitive to changes in product prices except in the long run.  Some tax experts report that beer is the most inelastic among alcoholic beverages while others opine that the nicotine content of cigarettes make demand for tobacco products also inelastic.

Local sin product manufacturers have predictably opposed the government-proposed 1000% increase in specific taxes on beer and alcoholic beverages and tobacco products.  The huge increase is proposed given the relative freezing of specific tax rates since 1996.  The tax law approved at the time did not approve indexation to inflation of the tax rates and provided only for minimal tax increases.


San Miguel beer

How will consumers of sin tax react to government’s tax proposals?

Filipino beer drinkers

It does not take one to be a rocket scientist to figure out that consumers will oppose government’s plans.  In his column at the Philippine Daily Inquirer yesterday, Prof. Cielito Habito pointed out that the poor consume sin products in a greater proportion compared to middle income and rich people.  Thus, they will oppose increases in tax rates that translate into higher retail prices.  

Colt 45, one of the beer brands of Asia Brewery Inc.

And higher retail prices for these ‘indispensable’ products means lower real incomes for the poor.

This might not register well with a public already reeling with high prices of oil products and an increase in transport fares.  

What we have here is a case where the interests of sin tax manufacturers and consumers largely coming from the ranks of the poor are aligned and ranged against that of government.

Obama and Noynoy smoking

It is incumbent upon government to gather political support for its tax plans within and without Congress.


Will it be a good idea to appeal for support from the wives and children of smokers and drinkers who may be concerned about the health of their relatives?  To those who are worried that  the money  spent for sin products is money that should spent for the dining table and other household necessities?  Or will that be seen as an invasion of privacy and curtailment of individual freedoms? Or will it encourage strife within households?

Will examples from role models help?

It’s the season to consider taxes on so-called sin products such as cigarettes and alcoholic drinks.

There is no better evidence for this than the full-page advertisements that came out during the past weeks in the major dailies paid by concerned manufacturers.

British American Tobacco logo

The first blast was fired by a company (obviously British American Tobacco Philippines through its public relations company) seeking entry into the cigarette industry with the proviso that the tax regime should not be discriminatory.  Under the current regime, cigarettes were classified  and taxed using a four-tiered schemeHowever, cigarette brands introduced after 1997 were taxed at a higher rate relative to older brands. BAT Philippines, which manufactures Lucky Strike among others,  wants the discrimination against new brands to be done away with.  It adds that it will bring in $200 million in fresh investments if a level playing field will ensue after the tax reform.

Philip Morris Fortune Tobacco Corp. logo

The Philip Morris Fortune Tobacco Corp. (PMFTC) opposed the abolition of four-tiered scheme as well the higher tax rates on newer brands.  This is understandable since PMFTC benefits from the existing tax regime and is willing only for minimal tax increases over five years.

Rep. Joseph Abaya

Authored by Rep. Joseph Abaya, House Bill No. 5727 incorporates features, such as a unitary tax regime, that are to BAT Philippines’ liking and is opposed by PMFTC. 

However, HB 5727 contains a feature that finds favor with both corporations.  The excise tax on cigarettes (of packs of 10s and packs of 20s) are specific rather than ad valorem or percentage taxes.

An ad valorem tax is a percentage levy imposed on the monetary value (i.e., the manufacturers’ price) of a product.  For example, if the tax rate is 10% and the manufacturers’ price of a 20-stick pack of ciga­rettes is P30.00, then the excise would amount to 3 pesos (or P3.00).  If all cigarettes regardless of retail price were slapped with a uniform tax rate, more expensive cigarette brands would pay a higher amount on a per unit basis compared to cheaper brands.    On the other hand, a spe­cific tax is a monetary levy on the quantity (or specified unit) of the product in question.  To illustrate, if the tax base is the cigarette pack (of 20 cigarette sticks), then a specific tax of P3.00 can be collected on each pack produced.

The ad valorem tax is regarded as superior to the specific tax since it is inflation-proof.  When manufacturers’ costs go up and retail prices would consequently increase, the revenue to be collected would increase in a like manner without any change in the ad valorem tax rate.  Sup­pose the manufacturers’ price of the cigarette pack increased from P30.00 to P35.00, the cor­responding excise would now be 3 pesos and 50 centavos (or P3.50).  To remedy its inferiority, tax technicians advise indexation of the specific tax rate; that is, the specific tax should automatically increase as an agreed-upon indicator, say the consumer price index, increases.

The supposed advantage of the specific tax over the ad valorem lies in its simplicity.  As wags would put it, tax bureaucrats must understand a company’s financial statements in or­der to impose an ad valorem tax.   With a specific tax, the tax bureaucrat needed only to know how to count how many of the product in question was produced during a taxable period.  With the ad valorem, the tax official must not only know how to count but also how to ac­count, that is, to understand complicated accounting and financial statements.   A further disadvantage of the ad valorem system is that it invites transfer pricing and other schemes at tax evasion.  The tax must necessarily be levied on the manufacturer; if it were imposed on the retailers, the administration of the tax would be more complicated.  There are obviously many more re­tailers than manufacturers and there would a great number of retail prices to reflect differing market conditions.  If the ad valorem was levied on the retail price of a product, then there would as many effective tax rates as the number of retail prices for a given product.  Of course, the situation is complicated by the existence of many brands of a given generic sin product since cigarettes of Brand A would sell at a retail price different from cigarettes of Brand B or Brand C.  In addition, Brand A cigarettes would sell at different retail prices in different parts of the country.

Sin product manufacturers would thus face the incentive of under-declaring their manufacturers’ price so that their ad valorem tax bites would be lower.  They would then sell their output to affiliated marketing arms that would sell the products at retail price levels that were many degrees removed from the declared tax base.  In this manner, they deprive the public treasury of revenues the amount of which is determined by the difference between the retail and the manufacturers’ price.   Tax evaders would face this incentive if there was a great differen­tial between the ad valorem and the VAT rates (where the ad valorem is greater than the VAT rate).  Furthermore, if the tax base for the VAT is the manufacturer’s net price plus the ad valorem excise tax, then the incentive to under-declare costs at the manufacturer’s level be­come more robust.  The under-declaration would have a cascading effect; under-declaring manufacturing costs would lower the VAT base, which it would lower the income tax base.  If the tax code provides different ad valorem rates for differently priced generic products, then the manufacturer also faces the incentive to mis-classify his product in order to be taxed at a lower rate.  The corporate group can cheat the public treasury many times over.  For this to happen, the marketing arms must also cheat on their value-added tax (VAT).  They can avoid paying the VAT altogether.  If they were scrupulous in paying this tax, what the manufacturer avoided paying by under-declaring his price would be captured by the internal revenue service from the marketing firms.  Then all of these companies (manufacturer and marketing arm) would doctor their profit-and-loss statements to be assessed lower income taxes.

Last week, I wrote about a possible chink in the armor of the Northern Luzon Alliance NLA), a group of congressmen from the tobacco-growing parts of Northern Luzon, including the Ilocos.  This was when Ilocos Sur Governor Luis ‘Chavit’  Singson joined a press conference sponsored by the Department of Health regarding the hazards of smoking.

Governor Chavit Singson

Apart from being a poster boy for healthy living, Singson surprisingly expressed support for an administration- sponsored tax bill after decades of dodging tax hikes on tobacco products.  Displaying economic acumen, Singson explained that the merger of Philip Morris and the Lucio Tan-owned Fortune Tobacco Corp. created a monopoly big enough to depress tobacco farmers’ selling prices.  In effect, he said, only the manufacturers were benefiting from the transactions.

Fortune cigarettes

During that same press conference, Singson said he will talk to his NLA colleagues to get them to his point of view.

However, it seems that it was Singson who was convinced to come back to the fold.

A report of Tempo last 19 March 2012 read:

La Union Rep. Victor Ortega, president of the Northern Luzon Alliance (NLA), said he expects members of the organization, dubbed the “Solid North,” to maintain this stance after learning of Ilocos Sur Gov. Luis “Chavit” C. Singson’s clarification of media reports claiming that he has thrown his support to House Bill (HB) No. 5727 that contains the DoF version of the sin tax measure.

In a meeting with Ortega last week, Singson, an influential political leader in the Ilocos region, has made clear that he would support the bill that will protect the interests his constituents, the tobacco farmers, and other stakeholders in the affected industries.

“Definitely, it will not be the unitary tax system, we will vote against it,” Ortega said a day after he and several Northern Luzon lawmakers held a dialogue with Singson last week. He added, “Buo ang Northern alliance, we intend to vote as one bloc if that is what it takes to protect our industries.”

Rep. Victor Ortega

Ortega said HB 5727 is considered by many congressmen as “prejudicial to the interest of our constituents and the tobacco industry.”

What we have here is somebody, Ortega, claiming that Chavit will ‘vote’ against HB 5727.  Technically, Chavit cannot vote against the bill since he is not a member of the House of Representatives. 

However, if he indeed changed his mind and will cast his lot against the bill’s opponents, Chavit’s opinion will carry a lot of weight.

The term ‘Solid North’ first came up during the quest of one Ferdinand Edralin Marcos for the highest political post of the land–the Presidency.  It was understood to mean that Ilocanos and Ilocano-speaking persons in Northern Luzon will vote as a bloc for Marcos.  Marcos’ election to the Senate and his election and re-election as president in 1965 and 1969, respectively, were cited as proof of the region’s solidity. He lifted martial law in 1981 and new presidential elections were held which he won handily.  Another score for the Solid North.

Map of Northern Luzon

After the ouster and demise of Marcos, talk about ethnic-based voting blocs diminished and the political strength of religious groups was increasingly recognized.  To this date, vote-seeking politicians try to insinuate themselves into the assemblies of these groups.

Eventually, the Solid North got reincarnated as a potent legislative bloc composed mostly of representatives of tobacco-growing districts in Northern Luzon.  This bloc was named the Northern Luzon Alliance (NLA).

Lucio Tan

The Northern Luzon Alliance is specially active every time government tries to reform taxes on sin products like cigarettes and cigars.  Lucio Tan’s cigarette-manufacturing companies are heavy buyers of raw tobacco from the NLA districts.  Tan’s competitors do not manufacture low- and middle-quality cigarettes and do not use local leaf tobacco.  It is thus not surprising that NLA representatives supported Tan’s tax preferences.  President Ramos tried reforming sin taxes twice–in 1993 and in 1996.  In both instances, strong opposition from the Northern Luzon Alliance adulterated the reform effort.  In 1996, Ramos cajoled his fellow Ilocano congressmen, scolding them at times for parochialism, to stop stonewalling against the sin tax reform measure so he could present it as a trophy to the APEC summit in Subic Bay, Zambales.  To get their support, he sponsored a measure providing for an annual P400 million tobacco fund for tobacco-growing provinces to be distributed in accordance to production volumes.  Needless to say, both measures got passed but Ramos did not get the sin tax measure he really wanted.

Since last year, the legislative mill is processing yet another version of a sin tax measure.  However, the context has changed.  Tan’s cigarette company has merged with its competitor forming the Philip Morris Fortune Tobacco Corporation (PMFTC) in 2010 to capture about 90% of the market.  A newer entrant, British American Tobacco (BAT) which produces such brands as Lucky Strike, Kent and Dunhill, will have to work hard to make a dent on the market.  For this reason, it is interested in the unitary tax on cigarettes as currently proposed by administration legislators.  Of course, Tan wants to preserve a multi-tiered tax structure that makes his brands more competitive.  Under the existing law, cigarette brands introduced after 1996 have to pay a higher excise tax.  Tan’s products were introduced before 1996.

Philip Morris cigarettes

Also, there seems to be cracks within the Northern Luzon Alliance.  In a press conference sponsored by the Department of Health, Ilocos Sur Governor Luis “Chavit” Singson said he was supporting government’s plan to increase cigarette taxes after decades of blocking higher taxes.  Chavit explained that the monopoly formed by the merger of Fortune Tobacco and Philip Morris depressed prices of tobacco leaf to the detriment of Ilocano tobacco farmers.  And he predicted prices will continue going down since there was only one buyer.  To the extent that this was true, Singson argued that only cigarette manufacturers prospered at the expense of tobacco farmers.

Gov. Luis "Chavit" Singson

Singson’s stand is supported by the League of Provinces of the Philippines (LPP) president Oriental Mindoro Governor Alfonso Umali.  La Union (also part of Northern Luzon) Governor Manuel Ortega claimed Umali did not consult LPP members in making his statement in support of Singson.

Rep. Eric Singson

Also, there is division in the House Singson.  After Singson pere’s press conference, his son Ryan, a member of the House of Representatives, refuted his father and claimed that Ilocos Sur became a first class province primarily due to the additional income earned by farmers from the tobacco sold to cigarette manufacturers.  Another relation, Rep. Eric Singson Jr., also contradicted Chavit’s contentions.

Rep. Ryan Singson

Will Chavit’s arguments affect the ultimate fate of the current sin tax measure?  He reportedly  intends to meet with NLA colleagues about the dangers of allowing PMFTC to continue its monopoly and dictate the prices of raw tobacco.  Perhaps, he can score if he gets firm commitments from BAT that it will also buy locally-grown tobacco.

In addition, he needs to convince his relatives.