High court upholds higher taxes on ‘new’ cigarette brands
INQUIRER.net
First Posted 03:40:00 08/21/2008
Filed Under: State Budget & Taxes, Tobacco, Judiciary (system of justice), Litigation & Regulations
MANILA, Philippines — The Supreme Court has declared as constitutional a section of the tax code that levies higher taxes on cigarette brands that entered the market after 1996.
The Court declared as invalid certain sections of issuances of the Bureau of Internal Revenue (BIR) in that these gave the bureau the power to reclassify or update the classification of new cigarette brands every two years or earlier.
"As modified, this Court declares that: (1) Section 145 of the NIRC [National Internal Revenue Code], as amended by Republic Act 9334, is constitutional; and that (2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by machine, are invalid insofar as they grant the [BIR] the power to reclassify or update the classification of new brands every two years or earlier," said a Court decision authored by Associate Justice Consuelo Ynares-Santiago.
The case began at the Makati City Regional Trial Court Branch 61, which upheld the validity of the questioned section of the tax code and the BIR issuances. The petitioner, British American Tobacco (BAT), brought the case to the Supreme Court.
BAT is the manufacturer of Lucky Strike Filter, Lucky Strike Lights and Lucky Strike Menthol Lights.
The case involves Republic Act 8240, which amended some sections of the tax code effective Jan. 1, 1997. Section 145 of the code provides for four tiers of tax rates based on the net retail price per pack of cigarettes. It also provides that new brands of cigarettes be taxed at their current net retail price and old brands at their net retail price as of Oct. 1, 1996.
To implement RA 8240, the BIR issued Revenue Regulations (RR) No- 1-97 classifying old brands of cigarettes as those existing before Jan. 1, 1997 and new brands as those registered after Jan. 1, 1997. It later amended this issuance through Revenue Regulations No. 9-2003, providing for a periodic review every two years or earlier of the current net retail price of new brands and variants for establishing or updating their tax classification.
The BIR issued Revenue Memorandum Order No. 6-2003 to provide guidelines in establishing the net current retail prices of new brands and alcohol products, and RR No. 22-2003 to implement the revised tax classification of certain new brands introduced in the market after Jan. 1, 1997, based on a survey of their current net retail prices.
BAT said its rights to equal protection were violated when the BIR included Lucky Strike among the brands subject to higher tax rates.
It said the tobacco excise law was discriminatory because it provided that brands that entered the market after 1996 subject to taxes based on their current retail prices while older brands were subject to taxes based on their 1996 retail prices.
An intervenor in the case, Fortune Tobacco Corp. argued that the law was not discriminatory and that BAT had only itself to blame for paying higher taxes for Lucky Strike, because the provisions being questioned were already in place when it entered the market in 2001. The law took effect in 1997.
The Supreme Court, in its ruling said that the "classification freeze provision" did not violate the equal protection clause for several reasons. It said these included:
(1) that it was a result of Congress' earnest efforts to improve the efficiency and effectiveness of the tax administration over sin products while trying to balance the same with other state interests;
(2) the assailed provision addressed Congress' administrative concerns regarding delegating too much authority to the Department of Finance and the BIR, which may possibly open the tax system to potential areas for abuse and corruption; and
(3) allowing the periodic reclassification of brands might tempt cigarette manufacturers to manipulate their price levels or bribe the tax implementers to allow their brands to be classified as a lower tax bracket.
The Court, in invalidating the provisions of BIR issuances that empowered the BIR to reclassify or update the classification of new brands of cigarettes every two years, noted that the power to reclassify cigarette brands remained with Congress.
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