Finance department backtracks on Pall Mall

The Finance Department has officially reversed itself on cigarette brand Pall Mall’s excise tax, deferring to a Bureau of Internal Revenue (BIR) ruling stating that the brand is subject to the highest tax rate of P26.06 per pack. A February 11 decision by the department ended a disagreement with the BIR and stated that its earlier position - that Pall Mall be taxed only P6.74 per pack - violated the law which prohibits a brand’s "downward classification." Pall Mall is an imported brand owned by British American Tobacco (BAT) but is manufactured locally by La Suerte Cigar and Cigarette Factory. The dispute arose when tax authorities discovered that imported Pall Mall sold at duty-free shops had a much higher price, which meant that the brand was in the "premium" tax category. Finance Secretary Margarito B. Teves, who has been criticized for favoring BAT, said the decision was final. The cigarette firm, however, can take its case to the Court of Tax Appeals. BAT, which has threatened to pull out of the country, said going to court was an option. For BAT General Manager Jeremy Flint, the Finance department decision was "disappointing." "BAT, in consultation with its business partner La Suerte and its advisers, is considering its options and will not be making any further comments at this time," Mr. Flint said in a statement. In his decision, Finance Undersecretary Gaudencio Mendoza, who handles or legal matters in the department, said: "The highest tax classification of the imported brand is now a legal reality that is expressly secured by law against downward reclassification." In a separate interview, Mr. Mendoza said it was "difficult to disagree with the BIR" after the agency’s meticulous review of tax laws. He said the reversal had no connection with attacks by Senator Juan Ponce-Enrile that the Finance department was eroding the tax base by charging Pall Mall a lower excise tax. "It is natural for people to link it to the Senate but there is absolutely no pressure from [lawmakers]," Mr. Mendoza told BusinessWorld. Pall Mall products entered the country in March 2004 when La Suerte acquired a five-year license to manufacture the brand from British American Tobacco (Phils.) Ltd. The cigarette was sold at a suggested retail price of P12 per pack, and was initially classified as a mid-priced cigarette. In November 2004, Duty Free Philippines began to import Pall Mall to be sold exclusively in their shops at P85 per pack. The BIR decided that the products sold in duty-free stores should carry the highest excise tax rate, then at P25 per pack. Although a price survey conducted by the BIR in December 2006 showed that the applicable tax rate for Pall Mall was P6.35 per pack, the agency said the rate may no longer be reduced based on the tax code. "Excise tax classification is strictly a matter of law ... The results of the price survey cannot diminish, much less negate, the application of these statutory rules," Mr. Mendoza said. - Anna Barbara L. Lorenzo/BusinessWorld