$300M cigarette plant for 3M kg of tobacco?
- Details
- Published on Thursday, 12 July 2012 00:00
- Written by AMADO P. MACASAET
By A Web design Company
‘Is this leveling the playing field? Yes, if you ask BAT. No, if you ask all of us.’
BRITISH American Tobacco is either capable of performing magic or miracles or, and this is more likely, it has something up its sleeve.
In a full page advertisement in the Philippine Daily Star on June 28, supposedly taken out and paid by “Concerned Entrepreneurs Against Monopoly/DB law”:, there was a claim that as a result of the level playing field from Sin Tax Reform, a new entrant (obviously BAT) will buy three million kilos (of tobacco) more next year.
The suggestion is the foreign company has been buying local leaf. The truth is it left the Philippines in 1979 unable to compete with local manufacturers.
BAT never bought a single leaf of tobacco. It left the country after it lost its case questioning the reclassification of cigarette brands. It sold an estimated 50 million sticks of Lucky Strike which is equivalent to 2.5 million 20-stick packs.
BAT tried to come back seeking what it calls a level playing field, a field that raises the excise tax on cigarettes by around 700 percent while the Lucky Strike it had intended to import has yet to establish a tax base.
According to Teresa Habitan, assistant secretary of finance, the cigarettes that BAT intends to import will be taxed at the same rate as the local low-end brands that are estimated to account for 65 percent of cigarette demand.
If BAT, as announced, constructs a $300 million cigarette factory plant that will use only about 3 million kilos of local leaf, or about 2.5 percent of total tobacco production of 80 million kilos in 2011, it’s asking to lose its shirt.
Cristino Panlilio, undersecretary of trade and industry, went out of his way to say that BAT will not be given tax breaks or incentives. But here’s the rub. Panlilio said that if BAT sets up its operations in a less developed area (LDA) it will be granted some perks, presumably tax breaks that will cut its production costs and give it an edge over its competitors.
The wonder of wonders in the BAT plan is that it accuses Philip Morris and Fortune Tobacco of perpetuating a monopoly accounting for higher than 95 percent of total cigarette demand although there are four players in the business.
The plan to set up a $300-M cigarette manufacturing plant is clearly intended to break up the alleged monopoly by Philip Morris and Fortune Tobacco. Which means that it will fight in the market by all means – fair or foul.
But how does a company like BAT break up a monopoly by using only three million kilos of local leaf? Not possible by any stretch of the imagination.
The possibility is BAT will import cigarettes as it had earlier planned, import tobacco or increase the consumption of local leaf beyond three million kilos.
What are the other possibilities? There are many. One is BAT will not set up the $300 million plant. It is a carrot dangled before the government. If it does, it will have to increase leaf consumption far beyond the three million kilos the ad claims the new entrant will buy, presumably from local leaf growers.
BAT, as the proposed excise tax demands, will pay the same tax as local low end brand of cigarettes. It will have to produce cigarettes of the same category. But how far can it go using only three million kilos of tobacco when its closest competitor clearly consumes the bulk of the 80-million kilo leaf production?
The other possibility is BAT will import the bulk of the 150 million sticks it says it will produce. Yes, imported cigarettes will pay the same tax as those locally produced. But it will have the advantage of having remarkably lower costs because all it needs is a string of warehouses, large fleet of delivery trucks and a big sales force.
Third possibility is the unknown perks BAT will get if it locates its factory in a less developed area but presumably closer to the tobacco growing region like many provinces in Northern Luzon. Who will define “less developed area”? That is a big question because some towns in say Tarlac, Pangasinan or even Pampanga may be arbitrarily classified as less developed areas.
There is no set definition of what LDA is or the elements that make it so. Panlilio did not hint at the perks that BAT will get if it sets up its factory in an LDA. That is another question the answer to which can only benefit the new comer.
This must be BAT’s idea of a level playing field. Some field.
Here it is important to recall what former Supreme Court Justice Consuelo Y. Santiago declared in her ponencia in the case of BAT, petitioner, vs Jose Isidro Camacho, secretary of finance, and Guillermo Parayno, commissioner of the BIR.
Justice Santiago ruled “(second), we cannot lend credence to petitioner’s claim that it cannot produce cigarettes that can compete with Marlboro and Philip Morris in the high-priced tax bracket. Except for its self-serving testimonial evidence, no sufficient documentary evidence was presented to substantiate this claim.
“The current net retail price, which is the basis for determining the tax bracket of a cigarette brand, more or less consists of the costs of raw materials, labor, advertising (now banned) and profit margin.
“To a large extent, these factors are controllable by the manufacturer; as such, the decision to enter which tax bracket will depend on the pricing strategy adopted by the individual manufacturer.
“The same holds true for its claims that other new brands like Astro, Memphis, Capri, L&M, Bowling Green .. were ‘killed’ due to the effects of the operation of the classification provision over time. The evidence that petitioner presented before the trial court failed to substantiate the basis for these claims.”
It might have been this decision that forced BAT to pack up and go home. Now it is coming back claiming that the playing field must be leveled with an excessive tax on low-end cigarettes that, as mentioned above, account for an estimated 65 percent of total demand. Lucky Strike is not low end but the price of cheap cigarettes may come close to that of the BAT brand. If the prices are the same or if Lucky Strike is only slightly higher, it will dominate the market and deny smokers the chance to buy local brands.
The objective of trying to reduce smoking by raising the price of cigarettes will never be accomplished because the smokers will switch to illicit cigarettes or to the equally expensive brands of BAT.
Is this leveling the playing field? Yes, if you ask BAT. No, if you ask all of us.
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