Tax agency maintains Pall Mall’s premium brand classification

BY JUDY T. GULANE, BusinessWorld Senior reporter THE BUREAU of Internal Revenue will stick to its classification of Pall Mall as a premium brand, putting itself in direct collision with the Finance department that classified the cigarette as a mid-priced brand subject to a lower tax rate. Commissioner Lilian B. Hefti, at the conclusion of a hearing on the Pall Mall issue at the House of Representatives on Tuesday, told BusinessWorld there is "no reason" for the tax bureau to "downgrade" Pall Mall’s tax classification when the bureau is under intense pressure to improve collections. She also said she finds it reasonable that her predecessor, Jose Mario C. Buñag, sacked in June for a dismal first-half performance, classified the Pall Mall locally manufactured by La Suerte Cigar and Cigarette Factory through a licensing agreement with British American Tobacco Philippines Ltd. (BAT Philippines) as a premium brand or the same as the Pall Mall imported by Duty Free Philippines. The tax bureau’s regulations dictate that local production of a cigarette brand be taxed the same as its imported variant, as long the importations were made first. In the case of Pall Mall, local production came ahead of Duty Free’s importations. But Ms. Hefti said the local production should be taxed higher after imports entered the market. "The classification should be upgraded," she said, adding that in excise taxation, it is the brand that matters and not whether it is locally produced or imported. She pointed out that the law prohibits the downward reclassification of brands but not reclassification to a higher tax bracket. The Finance department had reversed Mr. Buñag’s ruling after an appeal by BAT Philippines and La Suerte. But it is reviewing its own ruling after several cigarette firms complained it effectively downgraded Pall Mall from a premium to a mid-priced brand. It has asked the tax bureau, as well as BAT Philippines, to comment on these cigarette firms’ arguments. Gaudencio A. Mendoza, Jr., Finance undersecretary for legal and revenue operations, reiterated to reporters at the hearing’s conclusion that the Finance department did not make a downward reclassification of Pall Mall to subject it to a lower tax rate. The ruling was based on the tax bureau’s own price survey that indicated Pall Mall has a net retail price of P6.15 per pack that puts it in the mid-priced category. But his office is still awaiting the tax bureau’s and BAT Philippines’ comments before it issues another ruling. Ms. Hefti reiterated that Pall Mall’s classification "has already been decided by the tax bureau" and any change in the classification should be made by "another body." Should the Finance department uphold its classification of Pall Mall as a mid-priced brand subject to a P6.74 excise tax, BAT Philippines and La Suerte’s competitors could elevate the matter to the Court of Tax Appeals. In case the Finance department changes Pall Mall’s classification to a premium-priced brand subject to a P26.06 excise tax per pack, BAT Philippines and La Suerte could also seek reconsideration at the tax court. The House ways and means committee, meanwhile, said it wants to come up with legislation to plug loopholes in the law that gave rise to a situation like Pall Mall’s. Congressmen, however, were already set in thinking that the Finance department made an error in classifying Pall Mall as a mid-priced brand, with Camarines Sur Rep. Arnulfo P. Fuentebella and Baguio Rep. Mauricio G. Domogan asserting that the department’s ruling had "no leg to stand on." Mr. Fuentebella also said the tax bureau’s classification was already final and the Finance department could not reverse it. BAT Philippines and La Suerte should have gone straight to the tax court, he added. Mr. Mendoza and Carlos G. Baniqued, BAT Philippines counsel, said the proper procedure was to appeal the tax bureau decisions with the Finance department. For his part, BAT Philippines General Manager Jeremy Flint, said the decision of the Finance department to set Pall Mall’s classification in the mid-price bracket would allow the company to compete fairly in the market. "While Pall Mall is one of the British American Tobacco’s leading international brands, it is not a premium brand in the ranks of Lucky Strike, Dunhill, Mild 7, or Marlboro," said Mr. Flint in his opening statement in the congressional inquiry. He added that Pall Mall is sold internationally as a mid-price value for money brand. He also said that Pall Mall never had a final classification until the Department of Finance’s decision to put it in the mid-price bracket. This, according to him, means that the company has always been paying the applicable mid-price excise tax rate which is set at P6.74. Mr. Flint also said it would be unfair for the government to put Pall Mall in the premium brand category because this would artificially and unfairly push up the tobacco brand’s price. "[Taxing Pall Mall at P26.06] will eventually force Pall Mall out of the market leading to a real and concrete loss of tax revenue to the government, not to mention the foregone investment opportunities," explained Mr. Flint. — with Ava Kashima K. Austria/BusinessWorld