Business Circuit

The best thing that ever happened in the excise tax controversy is the threat of Jeremy Flint, announced in a press conference, that his British American Tobacco will sue the BIR if it does not get the tax classification it has been fighting for.

In fact, Flint thought his company won the case. BAT announced in Pakistan that it had obtained in its favor a lower tax classification for Pall Mall brands produced here by La Suerte.

A suit will get the case out of the hands of the BIR and the Department of Finance. But it was most arrogant of Flint to tell the revenue agency that if it does not get what it wants it will go to court.

Where I sit, there was no need for such a threat. File the suit and name the BIR as respondent.

I do not think the BIR will be threatened that easy. On the other hand, I expect BIR commissioner Lilia Hefti, to fight British American Tobacco tooth and nail.

I understand that the latest law amending the Internal Revenue Code as far as tobacco and liquor is concerned states that new brands entering the Philippine market should be imposed the same tax as those produced in the Philippines under a licensing agreement.

Flint says the BIR has a wrong interpretation of the law. If that is so, then lobby in Congress to amend the law. We must not forget the legal maxim "dura lex, sed lex." The law is hard but it is the law.

The only remedy is to amend the law. Or go to court as Flint threatens to do if his company's products are not given a lower excise tax qualification.

The main issue in this case is the prohibition by the law against a downward classification.

In three occasions, Duty Free Philippines imported the Pall Mall brands and declared the price at P31 per pack. Under a BIR schedule of excise tax, the imported brand is to be slapped a tax of P25 per pack.

The argument of BAT that Duty Free Philippines has delisted Pall Mall from its list of imported cigarettes does not justify a downward classification of the locally made Pall Mall.

The Department of Finance has the major obligation of balancing the budget by doing its best in improving tax collections.

The BIR knows that, too. That is why after a market survey, then BIR Commissioner Jose Mario Bunag recommended a higher tax of P25 per pack for local and imported Pall Mall brands, and all other new brands.

Why the DoF should reverse the recommendation of the BIR, made after a serious study, boggles the mind.

We have here a bird in hand. Why should we allow it to fly away while the BIR is suing perceived tax evaders precisely to give government more money while complying with the law?

The decision of the BIR to place both local and imported Pall Mall brands under a higher tax category complies with the law. BAT and the Department of Finance say the classification violates the law.

Which side is the DoF on? Need you guess? The DoF is clearly on the side of British American Tobacco, ignoring that supporting the foreign cigarette manufacturer means a huge loss in excise tax from cigarettes.

BAT argues that it enjoys legislative protection. The BIR says it does not, although the Department of Finance concurs with BAT that it does.

It will be recalled that the BIR Legal Service affirmed the findings of the Large Taxpayers Service of the bureau stating that Pall Mall cigarettes - imported or locally produced - should pay an excise tax of P25 per pack.

BAT may find it useful to read the annexes which list the brands presumably entitled to legislative protection.

It is unfortunate for BAT and La Suerte that legislative protection is given to brands introduced in the market between Jan. 1, 1997 to the end of that year.

On the other hand, the Pall Mall brands were introduced in the market as early as 2004. Being so, the brands may be subject to reclassification although the BIR earlier established that the imported kind is slapped a tax of P25 per pack.

The purpose of reclassification is precisely to remove the anomaly of having two rates on the same brands. If the tax of P25 per pack is classified downwards, there will be a violation of the law prohibiting downward classification.

BAT may not be allowed to violate that law. That is why it is threatening the BIR with legal action.

Bunag sticks to his guns

The legality of not allowing a downward classification did not end with the opinion of the Legal Service of the BIR. Then commissioner Mario Bunag confirmed the excise tax on locally produced Pall Mall should be similar or the same as the tax imposed on the imported type.

The decision of Bunag follows the tax principle that whichever is higher is what the taxpayer should pay even when one is imported and the other is locally-produced. The whole point is there has been a classification that put the imported Pall Mall in the higher category of P25 per pack.

Cutting that down to P6.25 is effectively downward classification. There should be no ifs buts about that. But there are, according to BAT. Disappointed over what it might have thought as a bird in hand, it is now threatening the BIR with a suit.

Private representations or orders have been made to Bunag to change his recommendations. The same was done to Commissioner Hefti. Neither of them would budge an inch.

Who do we uphold now pending decision of the Court? Two BIR commissioners or the DoF which is obviously accommodating BAT with a lower tax rate on its Pall Mall brands?

There is more to this than meets the eye.