Malaysia: Imported Cgarettes Made Cheaper by New Sin Tax Law
Source from: Malaya Business Insight 02/20/2013
The retail price of duty-free cigarettes sold in many unauthorized outlets is at an average of P120 per pack. They come cheap because they come in without paying a tariff.
Cigarettes imported by British American Tobacco (BAT) are even cheaper. In fact, the retail price of Lucky Strike sold mostly in 7-Eleven outlets is only P27 to the pack. They do not pay a tariff either because under the ASEAN Free Trade Area agreement, manufactured products of members are tariff exempt.
The new sin tax law raised the price of low-end brands by around 700 per cent. Consequently, Philip Morris Fortune Tobacco was forced to raise the retail price of its Marlboro Reds from P40 to P60 per pack.
That retail price is at least 100 per cent more expensive than the Lucky Strike imported by the comebacking player in the cigarette industry, BAT.
The Winston Lights made by Fortune Tobacco in Parang, Marikina, was being retailed at P25 to the pack under the old excise tax law. In the new law, the retail price as determined in a memorandum circular issued by the BIR in early January has climbed to P43 to the pack, or an increase of nearly 100 per cent.
James Lafferty, general manager of BAT in the Philippines, earlier said his company is capable of selling in one month what it failed to sell in one year in 2012. How this can happen may be a result of cheaper imports of at least one brand from an affiliate in Malaysia.
Lafferty pointed out his company's failure to meet its target of 150 million sticks was mainly a result of its preoccupation in the House of the Representatives and in the Senate with the passage of the sin tax bill.
He said that BAT will sell more starting this year because the new tax rate levels the playing field.
The memorandum circular of the BIR lists the net retail prices of all cigarette brands and their corresponding excise tax rates.
For still unknown reasons, the BIR did not include the net retail price of cigarettes – specifically Lucky Strike, imported by British American Tobacco. Therefore its excise tax obligation is not as defined as the brands listed in the memorandum circular.
In the mind of Lafferty, the new sin tax law leveled the playing field. A smaller cigarette manufacturer, not even half the size of Philip Morris Fortune Tobacco, hinted to Malaya Business Insight that the level playing field Lafferty talks about is against the interest of Philippine cigarette makers.
This, he said, is best proven by the fact that for the first time in the history of cigarettes in the Philippines, the price of the brand imported by BAT is lower than local. In fact, it is lower than duty-free smokes supposed to be sold only in duty free shops but are found in many places like the Harrison Plaza Shopping Center.
The non-inclusion of the BAT brands in the memorandum circular may be the excuse or reason BAT can retail its imported cigarettes at prices lower than those made in the Philippines.
The owner of the small cigarette maker added that nobody really knows how much in excise tax the imported brands of BAT will pay. Under the schedule drawn up by the BIR, there are two categories. One category pays a tax starting at P25 for the "high" category in 2013. The rate goes up to P27 in 2014; P28 in 2015 and unitary at P30 per pack by the last year of the law.
It is presumed that the brands of BAT are under this "high" category.
The premium category in the old law was deleted.
The low category pays an excise tax of P12 starting this year; P17 in 2014; P21 by 2015; and P26 per back in 2016.
All brands pay a unitary rate of P30 per pack in the last year of the present excise tax law.
The four small competitors of PMFTC wonder aloud how British American Tobacco can make money if it continues retailing Lucky Strike at P27 while paying a rate of P30 per pack, applicable to all brands by the last year of the law.
They pointed out that the BIR would soon draw up a net retail price (NRP) of brands of BAT. The problem, they said, is what year of survey will be used as a basis.
That last NRP survey that included the brands of BAT was made in 2003. If that survey is used, the brands can go for a much lower retail price. However, the small cigarette makers pointed out that BIR Commissioner Kim Jacinto Henares will be fair to the local cigarette makers by conducting a new survey for the BAT brands.
Pending that survey, the foreign cigarette importer is taking advantage of not having a BIR-determined net retail price. That, they said, is the only reason BAT is able to retail Lucky Strike at P27 to the pack.
They explained that the gross to BAT is lower than P27 per pack because the outlets such as 7-Eleven have to make a spread or profit.
The sources who did not want to be named because of fears they might offend the sensibilities of Henares, pointed out that nobody except the BIR knows when the NRP of BAT brands will be declared.
The longer it takes, the more the brands will dominate the local cigarette market. Carried for an unexpected long period, Lucky Strike alone may drive Philippine cigarettes out of the market.
It is in this sense, they explained, that the BIR should find out the exact production cost of Lucky Strike in Malaysia. If the said cost is higher than the retail price of the brand in the Philippines, a case of anti-dumping may well reach court.
But they all said they depend completely on the sense of fairness of the BIR commissioner. Enditem
