Tax Consequences of "New Brand" and "Variant of an Existing Brand" for Excise Tax Purposes

April 16, 2002 BIR RULING NO. 015-02 000-00 Baniqued & Baniqued Suite 803, 8/F Jollibee Centre, San Miguel Ave., Ortigas Center, Pasig City Attention: Attys. Carlos G. Baniqued & Terence Conrad H. Bello Gentlemen : This refers to your letter dated August 2, 2000, in behalf of British American Tobacco ("BAT") that: (a) "Lucky Strike Soft Pack", a new brand of cigarette that BAT intends to introduce and sell in the domestic market shall be considered as a "New Brand", not as a "Variant of an Existing Brand", for excise tax purposes; and (b) "Lucky Strike Soft Pack", which BAT proposes to sell at a net retail price of P9.90 per pack of twenties, shall be subject to specific tax at the rate of P8.96 per pack. It is represented that BAT is a resident foreign corporation organized and existing under the laws of the United Kingdom. It maintains a branch office in the Philippines located at 25c Citibank Tower, 8741 Paseo de Roxas, Makati City. It is engaged in the business of importing and selling cigars and cigarettes and other goods related thereto. BAT intends to import into the Philippines or manufacture locally "Lucky Strike" brand of cigarettes in soft pack ("Lucky Strike Soft Pack") and proposes to sell the same at a net retail price (exclusive of VAT and the applicable excise tax) of P9.90 per pack of twenties. It currently imports and sells in the domestic market "Lucky Strike" cigarette brand in hard pack ("Lucky Strike Hard Pack") at net retail price of P22.92 BAT, which introduced Lucky Strike Hard Pack in the domestic market in January 1998, pays an excise tax of P13.44 per pack of Lucky Strike Hard Pack prior to the removal thereof from customs custody. Based on the foregoing facts, you now request for confirmation of your opinion that: (a) Lucky Strike Soft Pack shall be considered a "New Brand", not a "Variant of an Existing Brand", for excise tax purposes; and (b) Lucky Strike Soft Pack, which BAT proposes to sell at a retail price of P9.90 per pack of twenties, shall be subject to a specific tax at the rate of P8.95 per pack. In reply, please be informed that for excise tax purposes, cigarette brands are grouped into three (3) categories, existing brands, new brands and variants of existing brands. "Duly registered or existing brands of cigarettes" include duly registered, existing, or active brands of cigarette prior to January 1, 1997. [ Section 2(3), Revenue Regulations ("Rev. Regs.") No. 1-97, January 1, 1997 ] The classification of existing brands of cigarettes, as well as their specific tax per pack, is already fixed by law. It is based on their average net retail price as of October 1, 1996. This classification shall remain in force until revised by Congress. [ See Section 145 and Annex "D" of the National Internal Revenue Code of 1997 ("1997 NIRC"), and Annex "D", Republic Act No. 8240 ]. "New brands" of cigarettes refer to brands duly registered after January 1, 1997, which include duly registered but inactive brands of cigarettes not sold in commercial quantity prior to January 1, 1997. [ Section 2(6), Rev. Regs. No. 1-97 .] New brands are classified according to their current net retail price. In the meantime that the current net retail price has not yet been established, the suggested net retail price shall be used to determine the specific tax classification. Thereafter, a survey shall be conducted in 20 major supermarkets or retail outlets in Metro Manila (for brands marketed nationally) or in 5 major supermarkets or retail outlets in the region (for brands marketed only outside of Metro Manila), 3 months after the initial removal of the new brand to determine the actual net retail price excluding the excise tax and the value-added tax which shall then be the basis in determining the specific tax classification. [ Section 4(B), Rev. Regs. No. 1-97 .] "Variant of a brand" refers to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand and/or a different brand which carries the same logo or design of the existing brand. Variants of existing brands of cigarettes which are introduced in the domestic market after January 1, 1997 shall be taxed under the highest classification of any variant of the brand. [ Section 145, 1997 NIRC; see also Section 2(8), Rev. Regs. No. 1-97. ] Section 145 of the 1997 NIRC, which prescribes the specific tax applicable to each class, provides that "Sec. 145. Cigars and cigarettes. xxx xxx xxx "(C) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below: "(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve pesos (P12.00) per pack; "(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be Eight pesos (P8.00) per pack; "(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack; "(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack; Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of Republic Act No. 8240 shall be taxed under the highest classification of any variant of that brand . "xxx xxx xxx "The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4) hereof shall be increased by twelve percent (12%) on January 1, 2000. " New brands shall be classified according to their current net retail price . "For the above purpose, 'net retail price' shall mean the price at which the cigarette is sold on retail in twenty (20) major supermarkets in Metro Manila (for brand of cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax and the value-added tax. For brands that are marketed only outside Metro Manila, the 'net retail price' shall mean the price at which the cigarette is sold in five (5) major supermarkets in the region excluding the amount intended to cover the applicable excise tax and the value-added tax. "The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set forth in Annex 'D', shall remain in force until revised by Congress." As can be gleaned from the aforequoted provision, the tax classification relating to variants (i.e. taxed under the highest classification of any variant of the brand) applies only to variants of existing brands . In other words, such tax classification has no application to variants of new brands. Instead, if the cigarette brand concerned is a variant of a new brand, it should be classified as a "new brand" for excise tax purposes in which case it shall be classified according to its current net retail price, and not taxed as a "variant of a brand". While the law defines the term "variant of a brand", this term should be understood in the context of the earlier paragraph in Section 145 of the 1997 NIRC, which makes reference to "(V)ariants of existing brands of cigarettes that are introduced in the domestic market after the effectivity of the Act (which) shall be taxed under the highest classification of any variant of that brand". Besides, the term "variant of a brand" is defined as "a Brand on which a modifier is prefixed and or suffixed to the root name of the brand and/or a different brand which carries the same logo or design of the existing brand". In fact, Section 2(8) of RR 1-97 confirms this view when it cites the following examples: "a. Modifier is prefixed Example. A registered existing "ABC" brand manufactured as "Kings ABC", "Large ABC" b. Modifier is suffixed Example. A registered existing "ABC" brand manufactured as "ABC Kings", ABC Large", ABC Lights", "ABC Menthol", "ABC Filter, etc. c. A different brand which carries the same logo or design of the existing brand Example. A registered existing "ABC" brand carrying the logo, badge, emblem or mark in the shape of a horseshoe is manufactured as a new "DEF" brand carrying the same horseshoe logo, badge, emblem or mark; or a registered existing "ABC" brand carrying two (2) horizontal stripes with red and white colors is manufactured as a new "DEF" brand carrying the same stripes and colors." (Emphasis supplied.) Then again, Section 4.A of RR 1-97 explicitly enumerates the brands that are considered "existing brands" under R.A. 8240, which enumeration does not include Lucky Strike, logically so, since such brand does not exist prior to January 1, 1997. While BAT currently sells Lucky Strike Hard Pack in the domestic market, the excise tax classification applicable to it should not be made to apply to Lucky Strike Soft Pack. Lucky Strike Hard Pack is a new brand of cigarette having been introduced by BAT in the domestic market only after the effectivity of R.A. 8240, i.e., after January 1, 1997. Not being an existing brand as the term is understood within the context of R.A. 8240, the specific tax applicable to Lucky Strike Hard Pack at the rate of P13.44 should not be applied to Lucky Strike Soft Pack, which should be classified instead according to its current net retail price. On the other hand, Lucky Strike Soft Pack, which BAT proposes to sell at a net retail price of P9.90 per pack of twenties, shall be subject to specific tax at the rate of P8.96 per pack . Since BAT's suggested net retail price for Lucky Strike Soft Pack is P9.90, the specific tax applicable is P8.96. Accordingly, we confirm your opinion that (a) Lucky Strike Soft Pack shall be considered a "New Brand", not a "Variant of a Brand", for excise tax purposes; and (b) Lucky Strike Soft Pack, which BAT proposes to sell at a net retail price of P9.90 per pack of twenties, shall be subject to specific tax rate of P8.96 per pack. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue