- BIR collects P91.6B sin tax; it’s not enough

In The News
19 June 2014

By Ducky Paredes |

malaya_business_insightWHEN the Congress approved the excise tax reform law 18 months ago, lawmakers made it clear that the proceeds from alcohol and tobacco taxes (the sin taxes) would be used to support the country’s universal health care program and help tobacco farmers.

After having passed the law, the Senate now wants to find out whether these goals are being fulfilled. Senate President Franklin Drilon says he wants to know he would find out how much of the excise taxes went to the health sector. Fellow senators Pia Cayetano and Bongbong Marcos also want to determine whether the billions collected in the past year from tobacco and alcohol excise taxes have reached their intended beneficiaries.

Apparently, the benefits outlined under the law for the local tobacco industry and the universal health care program appear good only on paper.

Under Republic Act 10351, the law prescribing excise tax increases on tobacco and alcohol products, 15% of the incremental revenues collected should go to programs promoting alternative means of livelihood for tobacco farmers and workers. The law also requires that 85% of the remaining incremental revenues goes to the health sector, particularly to help support the National Health Insurance Program (Philhealth) and improve state medical and health care facilities.

Internal Revenue Commissioner Kim Henares says collections already exceeded BIR’s revenue target for 2013 for tobacco and alcohol excise taxes.

A total of P91.6 billion was generated from tobacco and alcohol excise taxes for the first 11 months of 2013, exceeding the full year collection target of P85.86 billion, according to Henares.

Drilon notes that “all of this incremental tax collection as provided by law is supposed to go to the health program.” Does it -- really?

The last time Cayetano and Marcos asked during a hearing of the Congressional Oversight Committee on the Comprehensive Tax Reform Program a few months ago, Health Secretary Enrique Ona and officials of PhilHealth could not give them a definite answer.

Perhaps another question that lawmakers should be asking is whether the correct amount of excise tax payments from liquor and cigarette manufacturers are being collected.

The answer seems to be “No.”

According to a study done by the International Tax and Investment Center and its partner, Oxford Economics, the government has been remiss in its job of addressing the worsening incidence of the illicit tobacco trade in the country, which led to cigarette tax revenue losses of P15.6 billion in 2013 alone.

Using inputs from the public sector and industry stakeholders in the Philippines, the independent study done by the ITIC and Oxford Economics estimates that legal domestic sales of cigarettes in the Philippines dropped almost 16 percent in 2013 from the previous year.

The decline in legitimate sales was offset by the alarming increase in illicit consumption. “As a result, total consumption (legal and illicit) was only 3% down in 2013,” notes the study.

The consumption of illegally traded cigarettes, which means these are untaxed, rose from 5.9% of total consumption or 6.4 billion cigarettes in 2012 to an estimated 18.1% of total consumption or 19.1 billion cigarettes in 2013, says Oxford Economics..

The ITIC-Oxford Economics study estimated an 800% hike in the consumption of fake cigarettes in the Philippines last year, which accounted for 1.8% of the total consumption or 1.8 billion cigarettes in 2013, as compared to 0.2% in the previous year.

Thus, revenues lost from the illicit tobacco trade, both representing excise and VAT, was estimated at P15.6 billion in 2013, which ITIC says corresponds to an increase of 497% from P2.6 billion in 2012.

The loss is significant and is expected to worsen considering that the excise tax rate for low-end brands increases every year. From P2.72 per pack, excise tax rates for machine-packed low-end brands, or those costing P11.50 and below, rises to P12 in 2013 under the new tax law. The market share of low-end brands, it should be noted, increased 175% from 8% in 2012 to 22% last year.

For this year, the BIR will collect P17 per pack for low-end brands, and P21 per pack in 2015, P25 in 2016, and uniform tax rate of P30 per pack for all cigarettes, regardless of price in 2017.

Machine-packed cigarettes costing P11.50 were taxed P25 per pack in 2013. This year, excise tax rates increased to P27 per pack and will be P28 per pack in 2015 and P29 in 2016.

Naturally, these tax increases will mean price hikes for legitimately sold cigarettes in the country, which the proponents of the excise tax reform law expected would discourage potential smokers and prod current ones to quit.

But this is hardly the case in the Philippines, where the government seems helpless against the illicit tobacco trade as can be seen from the figures of the ITC-Oxford Economics Study.

The study utilized Empty Pack Surveys (where independent research agencies collect empty cigarette packs discarded in public places) and retail audits to estimate the consumption of domestic illicit cigarettes.

“We estimate the tax loss associated with illicit consumption for 2013 at PHP 12.7 billion in excise tax and PHP 2.9 billion in VAT, or a total of PHP 15.6 billion (US$368 million). This represents a PHP 13 billion or 497% increase versus the tax loss in 2012, which was estimated at PHP2.6 billion (US$ 62 million),” concludes the ITIC-Oxford Economics study.

Thus, for excise taxes alone, the government, according to ITC-Oxford Economics, lost 15.3% of the potential total excise tax revenues from the illicit tobacco trade in 2013, as the BIR collected only P70.4 billion in cigarette excise taxes based on figures of the Senate Tax Study and Research Office.

The BIR has dismissed this study as a mere “smear job” against the bureau.

Of course, the P15.6 billion considered by Oxford Economics as “revenue losses” is no small deal for the millions of marginalized Filipino families who could have benefited from the sin taxes in terms of quality health care, and for the thousands of tobacco growers.