New Cigarette Brands Subject to Specific Tax

May 10, 2001 BIR RULING NO. 018-01 Baniqued & Baniqued Attorneys-at-Law Suite 803, 8/F Jollibee Center San Miguel Avenue, Pasig City Attention: Attys . Carlos G . Baniqued and Terence Conrad H . Bello Gentlemen : This refers to your letter dated July 11, 2000 requesting on behalf of your client, British American Tobacco (BAT) , for confirmation of your opinion that two new brands of cigarettes that BAT intends to introduce and sell in the domestic market at gross retail price of P16.75 and P22.50 per pack of twenties shall be subject to specific tax at the rate of P5.60 and P8.96 per pack, respectively. It is presented that BAT is a resident foreign corporation organized and existing under the laws of the United Kingdom; that it maintains a branch office in the Philippines and is engaged in the business of importing and selling cigars and cigarettes and other goods related thereto; that BAT intends to import into the Philippines or manufacture locally two new brands of cigarettes which it proposes to sell at a retail price (inclusive of VAT and the applicable excise tax) of P16.75 and P22.50 per pack of twenties, respectively; that, pursuant to Section 145 of the Tax Code of 1997 and Revenue Regulations No. 1-97, the classification of existing brands of cigarettes, as well as the specific tax per pack, is already fixed by law based on the average net retail price as of October 1, 1996 while new brands are classified and taxed according to their net retail price ; that net retail price is defined by Section 145 of the 1997 NIRC and Rev. Regs. No. 1-97 as the price at which the cigarette is sold on retail, excluding the amount intended to cover the applicable excise tax and the value-added tax; that for new brands proposed to be sold at a certain retail price, inclusively already of the applicable excise tax and VAT, the net retail price can be determined only by deducting therefrom the VAT portion and the applicable excise taxes; that for new brands whose gross retail price falls within a certain price range ("the pricing gap"), the applicable specific tax rate cannot be determined with certainty; that since the retail prices of the new brands to be introduced by BAT (i.e., P16.75 and P22.50) fall within the pricing gap, the specific tax classification applicable to such new brands cannot be determined; and that the deficiency created by the so-called "pricing gap" may be supplied by reference to the specific tax classification applicable to existing brands whose retail prices fall within the "pricing gap". In reply, please be informed that for excise tax purposes, cigarette brands are grouped into the following categories: 1. Duly registered or existing brands Existing brands include duly registered, existing, or active brands of cigarettes prior to January 1, 1997 (Section 2(3), Rev. Regs. No. 1-97, January 1, 1997). The classification of existing brands of cigarettes, as well as the specific tax per pack, is already fixed by law. It is based on the average net retail price as of October 1, 1996. This classification shall remain in force until revised by Congress (Section 145, 1997 NIRC). 2. New brands New brands refer to the 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 on retail outlets in the region (for brands marketed only outside 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 be then the basis in determining the specific tax classification (Section 4(B), Rev. Regs. No. 1-97). 3. Variants of existing brands Variants of existing brands refer 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 that brand (Section 145, 1997 NIRC; Section 2(8), Rev. Regs. No. 1-97). aICcHA For new brands intended to be sold at a certain gross retail price or gross selling price (inclusive already of the applicable excise tax and VAT), the net retail price can be computed by deducting therefrom the VAT and applicable excise tax. Once the net retail is ascertained, the specific tax applicable thereon may be determined. However, a careful reading of Section 145 of the 1997 NIRC as well as of Rev. Regs. No. 1-97 reveals that for new brands whose retail price falls within a certain retail price range, the applicable specific tax rate cannot be determined with certainty (the "pricing gap"). Since BAT intends to introduce two new brands of cigarettes and intends to sell the same at a retail price of P16.75 and P22.50 per pack of twenties (which retail prices fall within the pricing gap), respectively, their specific tax classification cannot be determined with reasonable certainty. In this regard, the deficiency created by the pricing gap may be supplied by reference to the specific tax classification applicable to existing brands whose retail price falls within the pricing gap. The following are some of the brands currently selling at P16.75 and P22.50, or thereabouts, as well as the applicable excise taxes imposed thereon: Manufacturer Brand Current Tax Current Retail Classification Price La Suerte Marlboro Lts. KS 8.96 22.50 La Suerte Marlboro Lts. MKS 8.96 22.50 La Suerte Marlboro Red KS 8.96 22.50 La Suerte Philip Morris M 100's 8.96 24.00 Fortune Hope Lux. M 100's 8.96 23.00 Tobacco Fortune Hope Lux. M KS 5.60 17.00 Tobacco Fortune Mark M 100's 5.60 16.00 Tobacco Fortune More Premium M 5.60 16.50 Tobacco 100's Considering that the foregoing existing brands currently sell at, or within the proximity of, P16.75 and P22.50 and are subject to excise tax at the rate of P5.60 or P8.96, respectively, this Office is of the opinion and so holds that the same excise tax rates should be applied in BAT's case, which is admittedly similarly situated as the manufacturers of the foregoing existing brands. BAT and cigarette manufacturers of existing brands, being similarly situated, should be treated alike or put on equal footing both in privileges conferred and liabilities imposed. ( Juan Luna Subdivision v. Sarmiento, 9 Phil . 371; BIR Ruling No. 151-94 dated September 7, 1994; and BIR Ruling No. 235-92 dated August 27, 1992 .) This is without prejudice, however, to the subsequent conduct of a survey in 20 major supermarkets or retail outlets in Metro Manila (If the new brands to be introduced by BAT shall be marketed nationally) or in 5 major supermarkets or retail outlets in the region (if such new brands shall be marketed only outside Metro Manila), in order to determine if the actual gross retail price thereof is consistent with BAT's suggested gross retail price . In view of the foregoing, this Office confirms your opinion that the two new brands selling of cigarettes that BAT intends to introduce and sell in the domestic market at a gross selling price of P16.75 and P22.50 per pack of twenties shall be subject to specific tax at rate of P5.60 and P8.96, respectively, subject however to the condition above stated . This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue