PMFTC Rings in the Changes – PART 1

Source from:  Tobacco Asia  10/15/2013

Chris Nelson has spearheaded Philip Morris' development in the Philippines since 2003, He retired on May 1 after 32 years working in the tobacco industry and 10 years service in the country during which the company saw its investment in the Philippines flourish. Tobacco Asia was granted an exclusive interview with Nelson, recently in which he discussed a wide range of topics including the formation of PMFTC Inc. in 2010 and the recent tax increases in the Philippines and how these will affect the domestic industry going forward.

Working with legislators

The political scene in the Philippines has always been an area in which Philip Morris Philippines Manufacturing Inc (PMPMI) and latterly PMFTC have taken an active role in presenting their inputs. The company has faced many challenges during Nelson's tenure.

"A major issue is regulation on cigarette smoking. Philip Morris International (PMI) supports comprehensive regulation of tobacco products based on the principle of harm reduction," Nelson said. "PMPMI worked closely with the Philippine government in the enactment of the Tobacco Regulation Act of 2003 -- Republic Act 9211. This law regulates the packaging, use, sale, promotion, distribution, and advertisements of tobacco products in the Philippines. We believed that for a tobacco regulatory policy to be effective, this must be evidence-based, apply to all tobacco products, and should take into account the views of all legitimate stakeholders including public health authorities, government finance authorities, tobacco manufacturers, and other members of the tobacco supply chain."

Smoking bans is another area in which the company has taken an active role in working with relevant parties.

"With RA 9211, we faced subsequent challenges as certain local government units (LGUs) enacted their respective local ordinances on cigarette smoking regulations though they need not have to enact one to implement RA 9211. In the process, they went beyond the scope of the law, and this called for active engagement of the company's Corporate Affairs team with local executives to present our position on the real intent of the law."

PMPMI actively participated in the legislative proceedings and engaged the Executive Branch when Congress tackled a new excise tax measure in 2003, which was Republic Act 9334, also known as The Excise Tax Law on Alcohol and Tobacco Products of 2004.

"I can say that this tax law was a product of the industry's participation in the legislative process," Nelson told us. "I consider this a successful endeavor because this tax law took into account the interest of all stakeholders as well as assured the government stable and predictable revenues under a multi-tier excise tax system.
 
Trade issues

Another significant feat was the trade dispute involving Philippine-made cigarettes exported to Thailand before the World Trade Organization (WTO). In June 2011, the WTO in favor of the Philippines stating, "…that Thailand acted inconsistently with WTO rules in valuing Philippine cigarette exports for customs purposes and in failing to treat imported cigarettes the same way as locally-manufactured cigarettes."

"This ruling stemmed from PMPMI's protest against Thailand's action imposing higher customs values on Philippine cigarettes and raising maximum retail prices on imported cigarettes since 2006," Nelson recalled. "The Philippine Government tried to settle the issue at the bilateral level through the association of Southeast Asian Nations (ASEAN) dispute settlement system, with PMPI submitting a complaint against Thailand through the ASEAN Consultation to Solve Trade and Investment Issues (ACT) website on the 21st of September, 2007.

"This victory is a first in the history of the WTO, a landmark case that looked in detail on customs valuation method and procedures," Nelson added. ".It will be a case that established precedents (not only for cigarettes but all other products) that will be an important part of WTO law and which must be followed, not only by Thailand, but by all 153 countries who are members of the WTO. Basically, this case gives support to the reasonableness and appropriateness of the pricing methodology the company adopts in valuing its products exported to other Philip Morris affiliates."

PMFTC Inc.

Perhaps the most significant event during Nelson's tenure in the Philippines has been the formation of PMFTC Inc. The combination of the two largest tobacco manufacturers in the Philippines (PMPMI and Fortune Tobacco) gave the new company over 90% of the overall market share and inherited a band portfolio covering every segment. Nelson took on the role of president of the new company and recognizes that its formation is beneficial for both PM and Fortune Tobacco.

"Suffice to say that the decision of PMPMI and Fortune Tobacco Corporation (FTC) to combine their business operations by forming PMFTC Inc. (PMFTC) on February 25, 2010 was a great business decision on both parties," Nelson told us. "The business combination ensures PMI's long term success in the Philippines, which is the world's 12th largest market. With the partnership, PMFTC is the market leader in the local cigarette industry with around 90% share of the adult cigarette market. Adult consumers, at the same time, are assured of the quality of their cigarettes being manufactured with the highest quality standard of PMI. Local farmers, on the other hand, are continuously supported by PMFTC through our many initiatives."
 
A difficult pill to swallow

Most recently, Republic Act No. 10351 was signed into law. PMFTC presented vigorously during the public hearings their position to moderate the lawmaker's desire to raise taxes too high or too fast. The final outcome was a difficult pill for the majority of the domestic tobacco industry players to swallow and its effects may not be fully understood for some time, But there are deep concerns that its passing will create a difficult set of circumstances for the industry.

"At the start of the year, consumers faced steep increases in the prices of cigarettes as a result of the excise tax law passed by Congress last December 11, 2012. Republic Act 10351 (Excise Tax Law of 2013) significantly raised tax rates by as much as 341% to 820% during the first year (2013) of implementation alone," according to Nelson. "Consumers will continually bear an increasing level of burden because the tax law prescribes for yearly increases. By the fifth year (2017), the rate of increase will go up to 1003% if you compare it against the tax rate in 2012.
"Consumers and retailers are now experiencing the impact of high excise taxes – high prices, out of stock, and lower sales revenues. We will see how the market progresses with the new tax law. It is a wait-and-see but as industry stakeholders had warned we now see increasing presence of non-tax paid cigarettes. What we need to see is how the law would improve tax administration in order for the government to achieve its target revenues."

There are fears in some quarters that smuggled and counterfeit products might soon start appearing in the market place, concerns that are shared by PMFTC.

"On the part of PMFTC, the law has been passed and the company will work in improving and developing its business under this condition," Nelson said. "During the legislative proceedings, the industry presented the experiences of other countries like Malaysia, Singapore, and Brunei where steep taxes resulted to an increase in smuggling of non-tax paid stocks and counterfeits. I cite the case of Singapore when its government increased the tobacco excise tax by 135% between 2000 and 2005. The volume of illegal cigarettes seized by Singapore Customs increased from eight million cigarettes in 2000 to 106 million in 2006. This volume declined by 45% in 2009 only after government froze excise tax levels in 2005 through 2009. In 2006, Singapore Finance Minister Lee Hsien Loong admitted he had seriously considered raising tobacco duties, "but have reluctantly decided against it because we are already seeing revenues declining, not because people are smoking less but because smuggling has gone up." Another big question is how RA 10351 might affect tobacco production in the country. As yet, there is no clear indication of any impact, but the possible consequences are worrying.

"It is still early to talk about the direct effect of the excise tax law in terms of tobacco volume production," Nelson told us. "We are now in the harvest season for tobacco planted last year before the new law took effect. But we have constantly reminded the government and lawmakers of the likely displacement of farmers, whose produce are mostly used by local manufacturers in the production of the low-priced brands. These cheaper cigarettes comprised more than 60% of the market, and is the most hit by RA 10351, bearing the highest tax increases reaching 1003% increase from 2012 levels by 2017. Historical experiences show that consumers shift to the cheaper non-tax paid cigarettes and counterfeits, thus adversely affecting the local legal industry which have become expensive for the ordinary consumer." Enditem