BAT dukes it out with Philip Morris

MANILA, Philippines – Fair haired, barrel chested, 200-pound American James Lafferty is out for a fight.

At a briefing with reporters on February 27, 2012, Lafferty, the General Manager for British American Tobacco Philippines (BAT) said, “Get us into the ring and allow us to fight.” 

Lafferty wants a reform to the in-country tax on alcohol and tobacco that he believes would allow his company to go head to head with giant Philip Morris Fortune Tobacco Company (PMFTC). 

Lafferty’s BAT is the world’s 2nd largest quoted tobacco group by global market share. The company competes in many markets with Philip Morris, the world’s largest public tobacco corporation. A high school and college boxer Lafferty, doesn’t look like the kind of man one would want to trade fists with. He wears 2 wedding rings. The 2nd is a reminder not to balloon back up to 275 pounds.  

But in the Philippine market, BAT is not the heavyweight. PMFTC is the big contender, with over 90% of the market. 

After nearly half a decade hiatus, BAT came back to the Philippines last week. BAT pulled out of the market following the Bureau of Internal Revenue and the Finance department’s controversial 2004 ruling that its Pall Mall brand would be classed as super-premium in a country where less than 1% of the market is in that price bracket.

BAT had originally thought Pall Mall would fall in the mid-price range. 

Now BAT is back in the Philippine market and fighting in a different round of debates on sin taxes. 

In BAT’s corner

With over 200 brands around the world, BAT choose Lucky Strike as the first brand it would bring back to Philippine consumers. Lucky Strike is popularly known as a major client in the TV show Mad Men. Lafferty disclosed that distribution would start in Luzon and spread across the Philippines within the year. 

He said the company is ready to invest significantly in the Philippines if the government is able to level the playing field through better tax treatment. Lafferty’s main complaint is that as the four tier tax system stands now, it is unfair to newer entrants. 

The current tax scheme based on retail price per pack allowed brands introduced to the market before 1997 to be taxed based on their old retail price while brands that came in later were re-classified with their later and generally higher price. Thus the complex tax code favored older companies, like Fortune Tobacco which created a joint company with Philip Morris in 2010.

The former boxer thinks the current tax rules are skewed. On February 22, 2012, When the Ways and Means Committee met to discuss proposed reforms, he told them a story about a boxer who weighed in at 147 pounds in 1996 and was allowed to fight in that weight class even in 2012 after he had bulked up to a muscular 220 pounds.

The heavyweight boxer would fight younger boxers who weighed in at 147 pounds, mere welterweights, while other fellow 220 pounders, new contenders, couldn’t face the old heavyweight in the ring. 

“You have a company defending this who then says we love the Philippines when the Philippines has lost 140 billion in lost excise revenue because of this artificial underpricing,” added Lafferty.

In PMFTC’s corner

Philips Morris International Inc. (PMI) sells 7 of the top 15 international brand, including the iconic Marlboro. PMI’S 2010 annual report identifies the Philippines as the 5th largest cigarette market in the world and one of the main drivers of its profitable growth.

In 2010, the foreign PMI joined forces with the local Fortune Tobacco to form a joint venture which allowed it to corner almost all of the local market save roughly 6% by the estimates of BIR commissioner Kim Henares.

PMFTC supports the current 4-tier tax system. At the Ways and Means Committee meeting on February 22, 2012, Philip Morris lawyer Raul Academia testified that while the company once supported a single specific tax rate in 2001, it realized the realities of the market and revised its proposal in 2002 to 2004 to ask for a 4 tier system that applied a uniform increase across all brackets.

Lafferty said the company was now protecting a tax system it had campaigned against before it was a monopoly. But in an e-mail to Rappler, Academia pointed out that PMPMI supported the system long before its combination with FTC. 

Academia added that in 2001, “PMPMI welcomed their (BAT’s) entry as a competitor.”

He added, “Please understand that it is the government that tax-classifies cigarette brands.” 

He wrote that “Under the present law (RA 9334), however, any brand can enjoy the same protection as that enjoyed by the brands in Annex D–ie, a price classification freeze–if they can maintain the initial price classification of that brand for 18 months. Truly, the playing field is level. If only people will study their law instead of shooting from the hip!”

Sin and taxes

The old competitors have not been reclassified as the years have passed. According to a presentation given to the Ways and Means Committee by the Department of Finance, since the excise tax is not pegged to inflation, the system has resulted in tax inequality.

BIR showed data that without change, the excise tax would continue to decrease as a percentage of GDP, meaning a smaller relative contribution to the country’s coffers. 

In advocating to reform the sin tax, British American Tobacco finds itself in a rare position, on the side of the Bureau of Internal Revenue and the Department of Health. 

Still, the prize the 2 tobacco titans will slug it out for are Filipino smokers, their pocket change and their lungs. – Rappler.com