BusinessWorld: WTO asked to settle RP-Thai cigarettes row

The Philippines, failing to resolve a trade row over cigarettes through diplomatic channels, has filed a case versus Thailand at the World Trade Organization (WTO), accusing Bangkok of discriminating against Manila’s cigarette exports to protect a state-owned tobacco monopoly. Manila last week submitted a "request for consultations" to Bangkok and the head of the WTO’s dispute settlement body in Geneva, formally starting a process than can take up to 20 months. In the February 7 "communication", the Philippines’ delegation to the global trade body said Thailand violated WTO rules by setting higher customs values for Philippine cigarettes, which are the basis for calculating customs duties, and by raising maximum retail selling prices on imported cigarettes, the basis for assessing value-added taxes (VAT). The dispute arose in August 2006 when Thai authorities, suspecting that exports from multinational tobacco firm Philip Morris’ plant in Tanauan, Batangas were undervalued, disregarded declared transaction amounts and charged higher duties. Thailand suspected that since the cigarette exporter, Philip Morris Philippines Manufacturing, Inc., and the importer, Philip Morris Thailand, are related parties, the declared prices may have been artificially low to reduce tax payments. Manila’s complaint, however, claims that Bangkok’s "fiscal measures" were designed to protect the Thai Tobacco Monopoly, which by law has the sole right to manufacture cigarettes in Thailand. The Thai Tobacco Monopoly is a business unit under the Thai Ministry of Finance, the country’s tax authority. The ministry sends directors to the monopoly’s board, which has included ministry officials as well as the head of the excise tax and customs offices, both in-charge of taxing imported cigarettes. "These pervasive institutional and personal links between the [tobacco monopoly] and the Thai government leads to conflicts of interest and partial and unreasonable administration of Thai fiscal and customs measures," Manila’s complaint states. The Thai Tobacco Monopoly controls 80% of the Thai cigarette market. Philip Morris’ Batangas plant employs 1,000 workers and exports 30% of output, or eight billion sticks, to Thailand annually. Philip Morris’ Marlboro and L&M compete in the premium and mid-price segments, respectively, while the state monopoly’s brands sell to consumers at lower prices. The multinational tobacco firm has been paying duties under protest, and fears that its market share would be eroded further with higher taxes. Manila’s complaint pointed out that Bangkok had yet to issue an official explanation on how it determines customs values and maximum retail selling prices, in violation of WTO rules. The customs value is also the basis for a host of other taxes such as excise, health, and television taxes. The maximum retail selling prices which are the basis for computing VAT, meanwhile, have been set at "significantly higher levels" for imported brands. The values have also been adjusted more frequently for imported products, favoring cheaper domestically produced cigarettes. The Thai embassy in Manila had no comment, saying the matter is being handled by the Thai Ministry of Commerce. Chris J. Nelson, managing director of Philip Morris Philippines, said the Philippine government had been "extremely cooperative" in helping resolve the dispute. A trade official told BusinessWorld that attempts to settle the row through diplomatic means had failed. The Trade department had raised the issue at the senior official and ministerial levels since the Association of Southeast Asian Nations has no established dispute settlement mechanism, the official said. The matter was also raised four times in two WTO bodies. The Philippines is not asking for special treatment, only a level playing field, the official added. There are no other parties in the case but the United States, Japan, the European Union, Switzerland, and Canada have spoken in support of the Philippines, the official also said. Philip Morris’ parent firm based in Lausanne will help pay for legal costs. The case is significant since the Philippines rarely uses the WTO’s dispute settlement mechanism, having filed only five cases since the multilateral body’s formation in 1995. "Considering that thousands of tobacco farmers’ lives are on the line, the resolve of our government to have a favorable resolution of this dispute obviously plays a big part on the outcome," said Jeremy I. Gatdula, trade principal at KPMG Manabat Sanagustin. - BusinessWorld