Q and A on the Proposed Sin Tax Reform Measure TABLE OF CONTENTS

Background (pages 2-4) Revenue Performance of the Current Structure (pages 6-10) Weaknesses of the Current Multi-tiered System (pages 12-15) Bills Filed, Status, and DOF position (pages 17-22) Features of the DOF Proposal (pages 24-37) Country Comparisons (pages 39-47) Challenges and Issues (pages 49-67) Universal Health Care (69-70)

Q and A on the Proposed Sin Tax Reform Measure

What are the Rationale for Excises? To apply higher rates than on other consumption. For revenue purposes: Political feasibility. Administrative ease. To improve economic efficiency. To achieve non-revenue goals: Discourage consumption. Progressivity. How are Excises as Source of Revenue? Excises can be very productive. In ASEAN countries on average over 15% of taxes and 2% of GDP almost as much as general consumption taxes. countries much higher). When countries encounter fiscal problems, often the quickest and easiest way to close the gap by increasing excise rates. Curbing Negative Externality The most important excises for revenue are usually those on petroleum products, alcoholic beverages, tobacco products, and motor vehicles. (In OECD

 These are also the products for which, because social costs exceed private costs, there is a strong case for levying excises. Well-designed excises should not only produce revenue but also improve resource allocation and economic welfare.

What is the current structure of excise tax on alcohol and tobacco products: Specific form and is a multi-tiered system. The tax tiers are according to net retail price (NRP), i.e. manufacturers or importers price less the amount of excise and VAT.
Tobacco Tobaccotwistedbyhandorreduced intoaconditiontobeconsumedin anymannerotherthanthe ordinarymodeofdryingandcuring Tobaccopreparedorpartially preparedwithorwithoutthe useofanymachineor instrumentsorwithout beingpressedorsweetened Finecutshortsandrefuse,scraps, clippings,cuttings,stems andsweepingoftobacco Tobaccospeciallyprepared forchewing Cigars(percigar) NRPpercigarisP500orless NRPismorethanP500.00 2011rates 1.19/kg 0.94/kg Alcohol Products Distilled Spirits A. If made from sap of nipa, coconut, cassava, camote, buri palm or from juice or syrup or sugar of the cane B. If made from other raw materials: NRP per 750 ml btl Less than P250 P250 up to P675 More than P550 Sparkling, regardless of proof , NRP / btl: P250 or less More than P500 2011 Rate (P/Liter) P14.68

158.72 317.45 634.89 183.41 550.24 22.01 44.01

Wines A.

Cigarettes CigarettesPackedby Hand(in30s) CigarettesPackedby Machine(in20s) NRPoverP10.00 OverP6.50toP10.00 P5.00uptoP6.50 LessthanP5.00

10%ofNRP P50.00+15% ofNRPinexcess P500.00 2.72/pack

Still wines, regardless of proof Contains 14% of alcohol by volume or less More than 14% up to 25% of alcohol by volume Fermented Liquor NRP per L of Vol. Capacity: Less than P14.50 14.50 22.00 More than 22.00 Brewed and sold at microbreweries or micro brew pubs

B.

10.42 15.49 20.57 20.57

28.30/pack 12.00 7.56 2.72

Distinguishes old brands of alcohol and tobacco from the new ones, i.e. old brands are those taxed on the basis of their tax classification determined according to their October 1, 1996 net retail prices.

Revenue Performance of the Current Structure

How much revenue does the government collect from the excise tax on tobacco and alcohol products? Revenues from locally manufactured tobacco products:

Year 2005 2006 2007 2008 2009 2010

Tobacco Products (PB) 23.7 26.8 23.2 27.6 24.2 31.7

Growth Rate 13% -38% 10% -12% 2%

% to Total Excise Revenues 31% 39% 34% 36% 31% 36%

% to Total Tax Revenues 3.4% 3.1% 2.5% 2.6% 2.2% 2.6%

Revenues from locally manufactured alcohol products:

Year 2005 2006 2007 2008 2009 2010

Alcohol Products (PB) 17.0 16.1 18.8 19.8 20.6 21.8

Growth Rate -5% 14% 10% 5% 7%

% to Total Excise Revenues 24% 25% 29% 28% 29% 28%

% to Total Tax Revenues 3% 2% 2% 2% 2% 2%

Revenues from imported tobacco products:

Year 2005 2006 2007 2008 2009 2010

Tobacco Products (PB) 0.31 0.27 0.17 0.19 0.16 0.17

Growth Rate -13% -38% 10% -12% 31%

% to Total Excise Revenues 0.41% 0.39% 0.25% 0.24% 0.21% 0.19%

% to Total Tax Revenues 0.04% 0.03% 0.02% 0.02% 0.01% 0.01%

Revenues from imported alcohol products:

Year 2005 2006 2007 2008 2009 2010

Alcohol Products (PB) 1.31 1.24 0.95 1.93 2.27 2.81

Growth Rate -5% -23% 103% 17% 24%

% to Total Excise Revenues 2% 2% 1% 3% 3% 3%

% to Total Tax Revenues 0.19% 0.14% 0.10% 0.18% 0.20% 0.23%

Revenue Performance from locally manufactured tobacco and alcohol products, by tax bracket. Cigarettes
I-VOLUME OF REMOVALS (In Billion Packs)
LOW PRICED 2004 2.13 2005 1.75 2006 2.21 2007 2.16 2008 2.42 2009 2.27 2010 2.82 Ave.0510 2.27 Year MEDIU M 1.03 0.81 0.75 0.69 0.68 0.51 0.64 0.68 HIGH TOTAL PRICED 1.62 4.78 1.46 4.01 1.62 4.58 1.24 4.10 1.57 4.68 1.27 4.05 1.74 5.21 1.48 4.44 LP GROWTHRATE MP HP TOTAL MARKETSHARE(%) LP MP HP TOTAL 44.49% 21.56% 33.94% 100.00% 43.53% 20.12% 36.35% 100.00% 48.16% 16.45% 35.39% 100.00% 52.82% 16.88% 30.30% 100.00% 51.79% 14.60% 33.61% 100.00% 56.13% 12.64% 31.23% 100.00% 54.16% 12.34% 33.50% 100.00% 51.10% 15.51% 33.40% 100.00% MARKETSHARE(%) LP MP HP TOTAL 11.33% 25.62% 63.04% 100.00% 15.24% 21.49% 63.27% 100.00% 17.46% 18.31% 64.22% 100.00% 21.39% 20.17% 58.44% 100.00% 20.27% 16.90% 62.83% 100.00% 23.82% 15.38% 60.81% 100.00% 22.27% 14.52% 63.20% 100.00% 20.07% 17.80% 62.13% 100.00%

17.89% 21.70% 10.14% 16.08% 26.40% 6.59% 11.25% 14.26% 1.99% 8.26% 23.48% 10.63% 12.04% 1.21% 26.76% 14.26% 6.17% 25.02% 19.57% 13.43% 24.02% 25.47% 37.86% 28.53% 6.07% 6.22% 3.78% 2.82% GROWTHRATE MP HP

IIEXCISETAXCOLLECTIONS(InBillionPesos) LOW MEDIU HIGH Year TOTAL PRICED M PRICED 2004 2..61 5..91 14..54 23..06 2005 3..63 5..12 15..09 23..84 2006 4..56 4..79 16..79 26..14 2007 4..94 4..66 13..50 23..10 2008 5..52 4..60 17..11 27..24 2009 5..66 3..66 14..46 23..78 2010 7..03 4..58 19..94 31..54 Ave.0510 5..22 4..57 16..15 25..94

LP

TOTAL

39.08% 13.27% 3.80% 3.42% 25.63% 6.59% 11.25% 9.61% 8.26% 2.63% 19.56% 11.60% 11.72% 1.21% 26.76% 17.90% 2.60% 20.58% 15.50% 12.69% 24.04% 25.28% 37.86% 32.63% 18.55% 3.17% 7.43% 6.54%

Market Share per Cigarette Manufacturer

Based on 2010 Volume of Removals/Excise Collections

Volume of Removals
Market Share (%)

Excise Tax Collections

Market Share (%)

Manufacturer Philip Morris Fortune Tobacco (PMFTC) La Suerte Mighty Anglo Sterling Others* Total

Manufacturer Philip Morris Fortune Tobacco (PMFTC) La Suerte Mighty Anglo Sterling Others* Total

97.15% 0.59% 0.95% 0.10% 0.45% 0.76% 100.00%

98.26% 0.60% 0.38% 0.04% 0.18% 0.54% 100.00%

*/ Other manufacturers include Japan Tobacco International (Camel F King), Vietnam Tobacco Import Export Company (Rambo M 100s), Forsythe Tobacco (Bonus M 100s), Lorillard (Maverick FK), etc.

Fermented Liquors
IVOLUMEOFREMOVALS(InBillionLiters)
LOW MEDIUM HIGH YEAR PRICED PRICED PRICED TOTAL 2004 0.922 0.514 0.122 1.558 2005 0.894 0.403 0.138 1.434 2006 0.866 0.318 0.145 1.329 2007 0.954 0.300 0.157 1.410 2008 1.000 0.286 0.164 1.450 2009 1.048 0.260 0.167 1.475 2010 1.160 0.260 0.161 1.581 Ave.2005to 2010 0.978 0.334 0.151 1.463 LP 3.09% 3.09% 10.14% 15.51% 9.86% 15.96% GROWTHRATE MP HP TOTAL LP 59.19% 62.31% 65.16% 67.63% 68.97% 71.05% 73.35% 68.08% MARKETSHARE(%) MP HP TOTAL 32.97% 7.84% 100.00% 28.10% 9.59% 100.00% 23.96% 10.88% 100.00% 21.26% 11.11% 100.00% 19.73% 11.31% 100.00% 17.60% 11.35% 100.00% 16.44% 10.21% 100.00% 21.18% 10.74% 100.00%

21.57% 12.61% 7.95% 20.97% 5.13% 7.33% 5.87% 8.39% 6.11% 10.15% 13.44% 9.13% 13.41% 6.78% 4.57% 9.14% 1.57% 9.03% 7.46% 2.26%

7.55% 13.52%

IIEXCISETAXCOLLECTIONS(InBillionPesos)
YEAR 2004 2005 2006 2007 2008 2009 2010 Ave.2005to 2010 LOW PRICED 6.456 7.391 7.162 8.518 8.933 10.102 11.182 MEDIUM PRICED 5.266 4.956 3.917 3.981 3.800 3.722 3.728 HIGH PRICED 1.662 2.245 2.361 2.764 2.893 3.187 3.075 TOTAL 13.384 14.593 13.440 15.263 15.626 17.011 17.986 LP GROWTHRATE MP HP TOTAL LP 48.24% 50.65% 53.29% 55.81% 57.17% 59.38% 62.17% 56.41% %SHARE MP HP 39.35% 12.42% 33.96% 15.39% 29.15% 17.56% 26.08% 18.11% 24.32% 18.51% 21.88% 18.74% 20.73% 17.10% 26.02% TOTAL 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

14.48% 5.88% 35.11% 9.03% 3.09% 20.97% 5.13% 7.90% 18.93% 1.62% 17.09% 13.56% 24.72% 3.00% 22.54% 16.26% 18.59% 6.50% 15.31% 11.45% 25.18% 1.88% 6.29% 15.10% 16.47% 6.10% 16.91% 9.59%

8.88 4.02 2.75 15.65

17.57% 100.00%

Market Share per Beer Manufacturer

Based on 2011 Volume of Removals

Volume of Removals
Market Share (%) 90.00% 10.00% 100.00%

Manufacturer San Miguel Corp. Asia Brewery Inc. Total

Source: BIR

Distilled Spirits

YEAR
2004 2005 2006 2007 2008 2009 2010 Ave.2005to2010

REMOVALS EXCISETAX Growth Growth (InMillion COLLECTIONS Rate Rate (InBPesos) ProofLiters)
295.93 231.37 227.93 293.85 324.34 266.70 259.78 267.33 21.82% 1.48% 28.92% 10.38% 17.77% 2.60% 2,651.54 2,695.43 2,655.44 3,696.61 4,080.15 3,624.48 3,530.39 1.66% 1.48% 39.21% 10.38% 11.17% 2.60% 6.00%

0.73% 3,380.42

Market Share per Distilled Spirit Manufacturer

Based on 2011 Volume of Removals/Collections

Volume of Removals
Market Share (%) 55.14% 32.93% 11.93% 100.00%

Manufacturer Ginebra San Miguel Tanduay Distillers Emperador Distillers, Inc. Total
Source: BIR

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Weaknesses of the Current Multi-tiered System

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Why is there a need to reform the current structure? The following weaknesses plague the current multi-tiered system: Classifying of new brand creates discretion for the taxing authority, Prone to downshifting/misreporting of consumption from high-priced and high-taxed brands to low-priced and lowtaxed brands resulting in lower revenues Eroded by inflation due to lack of automatic tax rate adjustment Congressional Protection or classification freeze of some brands that renders the system non-buoyant Inequity between old and new brands and even among old brands The effective tax burden relative to retail price becomes less and less and the tax becomes more ineffective as a tool to curb consumption.

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Reform Period with Tax Rate Increase R.A. 6956 R.A. 6956 R.A. 8240 R.A. 8240 R.A. 9334 1990 1991 1992 1993 1996 1997 1999 2000 2004 2005

Consumption (in PM) 15.94 16.07 16.16 16.12 16.89 17.13 17.59 17.90 19.16 19.13

Growth Rate

0.9% -0.3% 1.4% 1.8% -0.2%

Source: Philippine Statistical Yearbook

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How is Tax Burden Computed? Tax Burden of Current Excise Tax on Tobacco at Average Retail Price

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What are the disadvantages of the Multi-tier structure? Tiers depend on price, type (filter vs. non-filter), size. Difficult to define tiers.

Similar to ad valorem rates in terms of progressivity. May result in switching to lower brands when taxes are increased. Tax increases to next higher specific rate when price increases. So, producers tend to set price near the top tier. EU requires all members to adopt mixed regime. A combination of specific and ad valorem rates raises revenues efficiently by minimizing the distortions to quality and diversity of products. But, in the Philippines, the experience shows abusive transfer pricing practices is likely under the Ad Valorem regime

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Bills Filed, Status, and DOF position

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What are the bills currently filed in the 15th Congress seeking to amend the current structure? Rep. Aumentado files two separately bills, one each for alcohol and tobacco products. Both bills retain the existing structure but propose to increase the tax rates on alcohol by 10% and the rates for cigar and cigarettes by P 3.00. HB No. 2687 by Reps. Limkaichong, Arnaiz and Teves proposes to move from the current multi-tiered to a single rate for each type of alcohol and tobacco products under a phase-in period for a maximum of three years; provides for indexation of tax rates HB No. 3059 by Rep. Mandanas seeks to remove the classification freeze, and for BIR to conduct price surveys every two year to get updated tax classification. HB 4787, also filed by Rep. Mandanas intends to eliminate the use of raw materials as basis to differentiate taxation of distilled spirits. HB 4787 proposes to impose a graduated specific tax based on net retail price per 750 ml bottle. HB No. 3183 by Rep. Suarez seeks to shift the taxation of alcohol products from the present specific structure to ad valorem at the rate of 30% based on current net retail price.
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It seeks to reduce the tax tiers applicable for cigarettes from 4 tiers to two tiers. HB 3332 by Rep. Eric Singson proposes to retain the existing tax structure but provides increases in every two year from 2013 to 2017. HB 3489 by Rep. Tupas, Jr. proposes a gradual shift to a unitary tax rate which will be adjusted annually for all types of cigarettes using the consumer price index. HB 3666 by Rep. Javier proposes to increase the 2011 the rates

cigarette tax rates by 4% and add an absolute amount of Php0.17 per pack across all tax tiers. The proposed increase will take effect on January 1, 2012 with subsequent increases in 2014 and 2016. HB 3465 by Rep. Abad seeks to provide a unitary excise tax system for each category of tobacco products, indexation of the tobacco excise tax and removal of the classification freeze.

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What is the status of the above bills? Pending at the House Committee on Ways and Means. A Sub-Committee on Internal Revenues was created to discuss in further details all the proposals and to come up with a consolidated version. The consolidated version (Substitute Bill authored by Cong. Eric Singson) is already filed in Congress. It retains the

multi-tiered tax structure for alcohol and tobacco products. The current tax rates for distilled spirits remain the same. For fermented liquor and wines, the rates shall be increased by 8% every two years starting January 1, 2013 to January 1, 2017, while for tobacco products, the tax rates shall be increased by 6% every two years starting January 1, 2013 to January 1, 2017. Tax brackets shall be based on net wholesale price, determined through a price survey to be conducted by the Bureau of Internal Revenue (BIR) or by the National Statistics Office when deputized for the purpose by the Bureau of Internal Revenue. Net wholesale price shall mean the price at which it is purchased on wholesale by at least 10 major supermarkets in Metro Manila (5 major supermarkets, in case of regions).
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What is the position of the DOF on these bills? The DOF submitted its comments to the House Ways and Means Committee on HBs 2484, 2485, 2687, 3059, 3183, 3332 (the other bills were filed and referred to DOF on a much later date) citing the following observations: 9 The desire for more revenues can be achieved in a more efficient and reasonable manner than simply raising the rates under the present structure as sought by HBs 2484, 2485 and 3332. 9 The shift to ad valorem will only pose administrative challenges to BIR and will result in lower equivalent specific rates, for some cigarettes brands, than those already in place for 2011. 9 Removing the congressional protection, reducing the tax tiers towards a unitary system and indexation of the rates are deemed the desirable amendments to the existing structure as espoused by HB 2687. 9 The rates under HB 3183 can be integrated with HB 2687 to maximize government revenues.

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The Table below shows the DOFs estimates of the first year revenue impact of the various proposals:
Author Mandanas Suarez Aumentado Limkaichong,etal Abad Javier Tupaz Singson
1/

Cigarettes(PB) 16.75 11.12 9.26 15.41 22.29 0.28 22.29 (1.62)1/

Alcohol(PB) 13.20 8.91 2.62 20.74 0.27

Total(PB) 29.95 20.03 11.88 36.15 22.29 0.28 22.29 0.27

Proposed to commence in 2013 Note: The estimates of incremental revenues for BIR only. BIR collections constitute more than 90% of total excise tax collection from sin products.

DOF does not give categorical support to any of the proposals but continue to aim towards having a simple, effective and fair structure. HB 2687 presents features much more superior than the other bills. To further enhance its revenue potential, the rates under HB 3183 can be integrated with HB 2687.

More importantly, the proposal does not address the World Trade Organization (WTO) decision wherein the Philippines current excise tax regime was found-out to be inconsistent with its obligations under GATT 1994, in particular, Article

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III.2.

We have to make our fiscal regime, specifically on

distilled spirits, in conformity with WTO provisions. DOF extends technical assistance to the House Ways and Means Committee by evaluating each proposal in terms of revenue implications, equity and administrative challenges.

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Features of the DOF Proposal

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Does the DOF have its own version of the Reform? What are its objectives, features and estimated revenue impact? DOF has come up with its own version of the sin tax reform measure (HB 5727 sponsored by Cong. Joseph Emilio Abaya). In addition to the objectives of simplifying the structure, the other principal object of the sin tax reform measure is to fund the universal health care program of the government. Structurally, HB 5727 recommends to maintain the specific form of excise taxation; it is easier to administer; does not provide an incentive for manufacturers and importers to under invoice products; internalizes negative externalities from drinking and smoking

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What are the Salient Features of HB 5727

Product less than 45% alcohol by volume Distilled Spirits more than 45% alcohol by volume, Fermented Liquor Immediately unify at P25.00 per liter 25.75 26.52 27.32 28.14 317.45 per proof liter 233.73 Year 1 42.00 per proof liter Year 2 80.00 150.00 154.50 159.14 Year 3 Year 4 Year 5

NRP is over P10.00 per Cigarettes in 20s pack NRP is below P10.00 per pack

30.00

30.00 30.00 30.90 31.83

14.00

22.00

Three-year transition period before unifying the rates on cigarettes and distilled spirits. The tax structure for fermented liquor will be immediately unified on the first year of the reform. Automatic adjustment of the tax rates using relevant NSOestablished tobacco and alcohol indexes. The proposed structure under this bill is expected to yield additional revenues of P60 billion for the first year. Provides for the continued sharing by tobacco farmers from incremental revenues but for purposes different from the existing intentions. More importantly, however, the bill purposes to direct incremental revenues towards augmenting the funds for the universal health care program of the government.

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Percentage increase in the Excise Tax Rates of Alcohol and Tobacco Products due to DOF Reform Proposal (HB 5727)?

CigarettesPackedbymachine BelowP5.00 P5.00uptoP6.50 OverP6.50toP10.00

ExciseTaxRatesGrowthRates(%) Year1 Year2 Year3 Year4 Year5 414.7% 85.2% 150.0%

57.1% 0%

36.4% 0%

3.0%

3.0%

FermentedLiquor BelowP14.50 P14.50uptoP22.00 OverP22.00

ExciseTaxRatesGrowthRates(%) Year1 Year2 Year3 Year4 Year5 140.2% 61.4% 21.5% 3.0% 3.0% 3.0% 3.0%

DistilledSpirits Ifmadefromsapofnipa,coconut,etc. NRP/750mlbottleis<P250* NRP/750mlbottleisP250P675* NRP/750mlbottleis>P250* *ifmadefromotherrawmaterials

ExciseTaxRatesGrowthRates(%) Year1 Year2 Year3 Year4 Year5 186.1% 100% 0% 50% 26% 36% 90% 88% 3% 3%

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How much is the expected revenue impact of the proposed DOF structure?
Estimates of Incremental Revenues of HB 5727 (2012 to 2016, PB)

Year Year 1 Year 2 Year 3 Year 4 Year 5

Cigarettes 30.13 36.10 41.27 43.36 45.51

Distilled spirits1 11.19 26.51 52.99 58.35 64.24

Fermented Liquor 19.35 21.68 24.37 27.47 30.94

Total 60.66 84.28 118.63 129.19 140.68

Note: The estimates of incremental revenues for BIR only. BIR collections constitute more than 90% of total excise tax collection from sin products.

Estimates for distilled spirits for further refinements

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Breakdown of the incremental revenues quoted in HB 5727 for alcohol and tobacco products, per category/tax classification from Year 1 to Year 5?

Reform Years ( In PhB) DOF Reform Proposal Fermented Liquor Cigarettes Distilled Spirits Total
Notes:
For cigarettes, a two-tiered structure for years 2012 and 2013, and a unitary system for 2014 onwards. Same structure applies for the distilled spirits. For fermented liquors, a unitary excise tax system starting 2012.

Year 1 19.3 30.13 20.29 9.84 11.19 60.66

Year 2 21.7 36.10 21.31 14.79

Year 3 24.4 41.27

Year 4 27.5 43.36

Year 5 30.9 45.51

Unitary Tier 1 Tier 2 Unitary

41.27 26.51 84.28 52.99 118.63

43.36 58.35 129.19

45.51 64.24 140.68

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What are the assumptions and methodology used in estimating incremental revenues for tobacco products?

Elasticity of -0.584 for cigarettes was used Positive (16.65%) and Negative (-13.4%) Frontloading was assumed in the computation of the new volume as a result of the change in price due to the increase in tax Volume for brands where taxes were unchanged from year to year were increased by GDP real growth rate (normal growth assumption)

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What is the share of the proposed DOF sin tax reform on retail price

DOF Proposed Tax Structure as a ratio of Retail Price 2011

Fermented Liquor Cigarette Distilled Spirits 19.3% 31.0% 12.2%

Year 1
33.1% 56.6% 27.8%

Year 5
35.6% 63.3% 56.2%

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What is the impact of the proposed tax reform on the prices of the alcohol and tobacco products?
Prior to Reform (2011) Fermented Liquor Low-priced brands g.r, annual g.r Year 5 / 2011 = 34% Medium-priced brands g.r, annual g.r Year 5 / 2011 = 23% High-priced brands g.r, annual g.r Year 5 / 2011 = 11% Cigarette Low priced Brands g.r, annual g.r Year 5 / 2011 = 241% Medium-priced brands g.r, annual g.r Year 5 / 2011 = 111% High-priced brands g.r, annual g.r Year 5 / 2011 = 71% Distilled Spirits (in proof liter) g.r, annual g.r Year 5 / 2011 = 135% P 58.94 Reform Years Year 1 P 75.27 28% 72.84 17% Year 2 P 76.11 1% 73.68 1% Year 3 P 76.98 1% 74.54 1% Year 4 P 77.87 1% 75.44 1% Year 5 P 78.79 1% 76.35 1%

62.19

78.69 P13.47

83.65 6% P25.92 92%

84.49 1% P34.89 35%

85.35 1% P43.85 26%

86.24 1% P44.86 2%

87.16 1% P45.90 2%

24.01

38.35 60%

44.16 15%

48.60 10%

49.61 2%

50.65 2%

31.51 P 120.37

51.74 64% P 150.97 25%

51.74 0% P 194.21 29%

51.74 0% P 272.98 41%

52.74 2% P 278.03 2%

53.78 2% P 283.23 2%

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Prior to Reform (2011) (in PhP)

Fermented Liquor (in M L) Low-priced brands Medium-priced brands High-priced brands Cigarette (in million packs of 20s) Low-priced brands Medium-priced brands High-priced brands 58.94 62.19 78.69 13.47 24.01 31.51

Reform Years (in PhP) DOF Reform Proposal

Unitary

Year 1

Year 2

Year 3

Year 4

Year 5

75.73

76.57

77.40

78.33

79.25

Tier 1 Tier 2 Unitary

25.84 51.78

34.81 51.78 48.44 49.45 50.50

Distilled Spirits

120.37

150.97

194.21

272.98

278.03

283.23

Reform Years (Growth Rates) DOF Reform Proposal

Fermented Liquor (in M L) Low-priced brands Medium-priced brands High-priced brands Unitary Cigarette (in million packs of 20s) Low-priced brands Medium-priced brands High-priced brands Tier 1 Tier 2 Unitary 91.8% 7.6% 64.3% 34.7% 0% 39.2% -6.5% 2.1% 2.1%

Year 1
28.5% 21.8% -3.8%

Year 2

Year 3

Year 4

Year 5

1.1%

1.1%

1.2%

1.2%

Distilled Spirits

25.4%

28.6%

40.6%

1.8%

1.9%

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What is the impact of the proposed tax reform on the consumption of alcohol and tobacco products?
Prior to Reform (2011)
Fermented Liquor (in M L) Low-priced brands Medium-priced brands High-priced brands Cigarette (in million packs of 20s) Low-priced brands Medium-priced brands High-priced brands 1,186.14 268.49 167.13 2,705.14 693.56 1,723.77

Reform Years (in millions) DOF Reform Proposal

Unitary

Year 1

Year 2

Year 3

Year 4

Year 5

1,615.99 2820.11

1,708.54 2,596.8 1,376.3 1,220.5

1,814.82 2,513.21

1,936.68 2,507.72

2,066.62 2,501.98

Tier 1 Tier 2 Unitary

1,304.55 1,515.57

2,513.21

2,507.72

2,501.98

Distilled Spirits
Notes:

429.72

424.84

419.50

403.36

429.69

457.72

For cigarettes, a two-tiered structure for years 2012 and 2013, and a unitary system for 2014 onwards. Same structure applies for the distilled spirits. For fermented liquors, a unitary excise tax system starting 2012.

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What are the elasticities used in estimating the revenue impact of HB 5727? Product Fermented Liquor Cigarettes Distilled Spirits Elasticity -0.230 -0.584 -0.236

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What do you think would be the impact of HB 5727 on the alcohol and tobacco industry? The excise taxation of tobacco and alcohol products has a long history. It has shifted from specific, compound (mixed specific and ad valorem), to ad valorem, and then back to specific. Even with these different reforms, both industries have survived for decades. The addictive nature of these products has sustained the existence of the alcohol and tobacco industry.

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What is the plan for tobacco farmers under HB 5727? Tobacco farmers, who might be displaced by this reform and are forced to shift to planting other crops or other livelihood endeavors, will continue to share in the incremental revenues. The bill provides that a share of the revenues from the revised law will go towards farmer support programs.

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Country Comparisons

37

What is the percent share of total taxes, across income group, to the average price per pack of the most sold brand of tobacco? Tobacco retail prices and taxation across income groups

Source: World Bank Report, Philippines: A Tax System for High and Inclusive Growth, June 2011.

38

What is the percent share of the total tax burden to the retail sales price of most sold brand of tobacco in the Philippines and other selected countries? Total Tax Burden as a Share of Retail Sales Price for Most Sold Brand of Tobacco

Source: World Bank Report, Philippines: A Tax System for High and Inclusive Growth, June 2011.

39

What is the percentage share of tax on the average price per pack of cigarette in the Philippines, as compared to other countries? Cross Country Comparisons: Cigarette Price per Pack, and Tax as Percent of the Price

Source: World Bank Report, Philippines: A Tax System For High and Inclusive Growth, June 2011.

40

What is the total excise tax burden of selected brands of cigarette compared to other Asian countries? The Philippine tobacco excises are low compared to the international standard and across Asian region. The Philippines, in comparison of other 15 countries, is in the lower half when comparing taxes as share of retail prices.

Retail Sales Price, Excise Burden and Total Tax Burden in Selected Asian Countries
Country 09 Exchange -Rate (Local Currency/ US$) 69.02 1.97 6.82 5.56 49.12 10.520 13.34 80.67 47.22 2.94 31.57 34.94 1.48 7.86 17.780 Retail Sales Price (US$/20) Premium Brand (Marlboro) 1.34 2.16 2.20 1.53 1.83 1.01 2.10 0.79 0.65 3.38 1.33 2.15 3.50 1.02 0.96 Most Sold Brand 0.25 1.52 0.60 0.49 1.22 1.25 2.10 0.29 0.65 2.70 0.92 1.66 2.29 0.83 0.67 Cheapest Brand 0.21 1.02 0.30 0.49 0.51 0.64 1.27 0.24 0.16 2.11 0.14 1.20 2.04 0.37 0.20 Total Excise Tax Burden % of RSP) Premium Brand (Marlboro) 0.57 26.7 42.7 38.2 39.1 43.4 48.6 55.5 37.5 59.2 13.1 61.6 58.0 31.7 31.7 Most Sold Brand 32.0 25.5 29.7 55.6 27.3 42.7 48.6 41.6 37.5 66.3 16.3 58.4 58.0 35.1 29.5 (as Total Tax Burden (As % of RSP) Premium Brand (Marlboro) 72.0 62.7 62.2 39.4 61.8 51.8 61.7 69.3 48.2 77.3 28.4 73.2 73.3 48.3 40.0 Most Sold Brand 47.0 61.4 47.6 59.3 33.1 51.1 61.7 55.4 48.2 84.3 31.6 73.3 73.3 51.8 37.8 Cheapest Brand 47.0 74.2 49.8 26.3 71.0 30.6 61.7 62.9 43.6 94.1 56.6 79.3 79.3 58.0 38.7

Cheapest Brand 32.0 38.2 31.6 55.6 65.5 22.2 48.6 49.1 32.9 76.1 41.3 51.1 64.1 41.4 30.8

Bangladesh Brazil China Egypt India Indonesia Mexico Pakistan Philippines Poland Russia Thailand Turkey Ukraine Vietnam

Source: World Bank Report, Philippines: A Tax System for High and Inclusive Growth, June 2011.

41

What are the current alcohol excise tax rates in selected Asian countries? The Philippine alcohol excises (except for Cambodia) are still low compared to the international standard and across Asian region. Excise Tax Rates of Alcohol in Selected Asian Countries
Cambodia Lao Thailand 1/ Vietnam Ad valorem rates, in percent 30 50 55 50 10 60 60 25 10 60-70 25-50 25-50 Philippines Excise/RSP 26.1 5.5 35.8

Beer Wine Spirits

Source: World Bank Report, Philippines: A Tax System for High and Inclusive Growth, June 2011.

42

What are the excise tax systems in other countries? trend towards specific taxes?
Specific Australia Brunei Fiji Hong Kong India 1/ Korea Japan Laos Macau Maldives Mongolia Nepal New Zealand Papua New Guinea Philippines Singapore South Korea Sri Lanka Taiwan Ad Valorem Bangladesh Cambodia Indonesia 2/ Thailand Vietnam China Malaysia Pakistan Mixed

Is the

Over the period 1986-2006, there has been a trend toward specific excises on cigarettes. Part of the explanation for this trend is that countries have been opening up their tobacco markets for foreign investment and/or competition. Although the trend is toward specific excises, Malaysia in 2005 switched from a unit-based system to a mixed system. Source: IMF

43

Tobac cco - Retail R Sales Price, Exc cise Bur rden an nd Total Tax Burde en Selec cted Cou untries 2009 2

Source e: IMF

44

Comparison of Excise Revenues on Tobacco as share of GDP Tobacco Excise (%GDP) Philippines China Indonesia India Russia 0.40% 1.18% 1.04% 0.35% 0.13% Year (2010) (2005) (2007) (2007) (2005)

45

Comparison of Excise Tax Structures

Product Type of Excise Cigarettes Philippines Specific 2.72P 28.3P (cigarettes packed by machine) Cambodia Vietnam Lao P.R. Thailand Indonesia Specific 80-290 (2 Types, 2 Tiers, 3 Price Range) China Mixed 0.6 RMB/ Carton 30-45% India Specific 8191323R(Unfiltered) 819-2163R (Filtered)

Ad valorem Ad valorem Ad valorem Mixed (%) (%) (%) 10 65 55 75

Alcohol High Alcohol 14.68-634.89P 10 45/50 25 70 60 35-50or 340B 75,000 (D) 130,000(I) 25 or 100B 11,00030,000 (D) 11,00040,000(I)

Low Alcohol 44.01-550.24P 10

Beer

10.42-20.57P

30

45/50

50

55 or 100

Source: IMF

46

Challenges and Issues

47

Why does DOF prefer specific tax over Ad Valorem? The countrys experience under AVT had shown how poorly administered the AVT system was in the Philippines due to the marketing arm problem where a related company, acting as a marketing arm can be set up by the manufacturer of an excisable product so that the firms tax liabilityis reduced. Specific tax internalizes the cost of sin products consumption more effectively by targeting the quantity of consumption not the price. The AVT system promotes downgrading which results in

continuous erosion of the tax base. Downgrading, which is the tendency for the market to shift towards low-priced products, is a natural consequence of the AVT system. Downgrading has a more pernicious economic effect where it promotes resources to shift to the production of increasingly lower quality goods.

48

What are the Advantages and Disadvantages of Specific vs. Ad Valorem Rates? Advantages of Specific Rates Predictability of revenue Ease of administration Targeting to externalities Discourage consumption No disincentive to quality Disadvantages of Specific Rates Unresponsive to price changes Regressivity

49

Specific vs. Ad Valorem Rates If a primary purpose is to discourage negative behavior e.g. smoking and drinking, a strong case can be made for specific excisesthe same tax burden per cigarette or per unit of alcohol. Given oil price movements, specific excises may also be best for petroleum products. Motor vehicles may be levied a mixture of specific and ad valorem taxes.

50

What is the appropriate way of making a specific tax system responsive to price changes and make the revenues buoyant? Adequate and timely adjustment to inflation ofspecific rates should be done.

51

Is

the

regressivity argument against specific tax system

deemed appropriate if one talks about curbing consumption of sin products? No. The income and ability to pay of consumers should not figure in

the design of excise taxes for tobacco and alcohol products. Given the same level of toxicity and alcohol content, cheap and expensive tobacco and alcohol products do the same level of health damage. Otherwise, sin products that are more expensive and consumed by the rich are interpreted to be more dangerous to ones health by taxing them higher. A specific tax or tax per unit internalizes and targets better the cost of consuming unheathy products.

52

Does the proposed unitary structure help curb smuggling? Yes. We believe that with the DOFs proposed unitary tax structure, the chance to commit the mistake of misclassification in the nature of technical smuggling is nil, if not removed.

53

Will higher excise taxes increase smuggling? There are studies showcasing mixed results: Bureau of Alcohol, Tobacco and Firearms (ATF), Mackinac Center for Public Policys Study (Cigarette Taxes and Smuggling: A Statistical Analysis and Historical View, 2008): 9 An increase in tobacco taxes will escalate underground market, making it more lucrative for gangs, and other organized crime outfits to steal, smuggle and funnel black market cigarettes to consumers. 9 The higher the tax increase, the more lucrative are the illicit profits made by criminals and the less legal profits is made by retailers and wholesalers. 9 There is a direct link between cigarette excise taxes and the import smuggling rate (casual and organized) due to a states high tax rate relative to surrounding states, and other considerations like international borders and availability of counterfeit cigarettes. World Bank 9 Tobacco taxes are not the primary reason for cigarette smuggling and cigarette tax avoidance

54

9 Levels of smuggling tend to increase with the degree of corruption in a country.

9 Many countries have significantly increased tobacco taxes without productions 9 Experience shows that these illegal activities can be controlled by legal means: experiencing changes in smuggling/illicit

prominent tax stamps and serial numbers, special package markings, health warning labels in local languages by law enforcement, improving corporate auditing,

better tracking systems, and good governance

55

Should the threat of increased smuggling dampen the desire of government to raise taxes on sin products? No. rates, Smuggling is a serious problem, but a 1999 World Bank Report tax increases bring greater revenues and reduce

Curbing the Epidemic concludes that, even where it occurs at high consumption. Therefore, rather than foregoing tax increases, the appropriate response to smuggling is to crack down on criminal activity.

56

What are the effects of Increasing Tobacco Excise Tax on employment? Not obvious. Difficult to separate tax effects from the effects of changes in population. Spending away from tobacco products generates new employment in other sectors. Technological advancement in tobacco production has greater effects on employment reduction than an increase in excise tax and other tobacco control efforts. Government spending of the new tax revenues from a tax increase will create jobs on more labor - intensive sectors. Employment from crop diversification programs that support farmers and retraining programs for those involved in tobacco product manufacturing can be funded by a small portion of the new revenues from an increase in taxes on tobacco products Source: IMF

57

What is the impact of the WTO case on the DOF proposed reform? While we recognize that the WTO case is a battle of the country as a whole, we believe that the proposed sin tax reform should be taken as a stand alone measure. The government, the DOF in particular, has had a long standing desire to pursue a simplified excise tax structure for alcohol and tobacco products. This objective shall be pursued regardless of the decision of the WTO. Paramount is the attainment of a simple structure, leading to ease in administration and generation of revenues maximized. The WTO Appellate Body has ruled that the Philippines, as a signatory to the
WTO Law, should bring its fiscal regime on distilled spirits in conformity with GATT 1994, particularly, Article III.2. In general this means that the tax

system should cease to be based on raw materials used.

58

Phillip Morris supported the specific and unitary tax regime before? What is the present position now of Phillip Morris after its merger with Fortune Tobacco? Yes, Phillip Morris (PM) used to be an ally and a supporter of a unitary tax structure but has now changed position after the merger with Fortune tobacco. PM said tobacco manufacturers support the ongoing efforts to reform but the proposals to adopt a unitary approach instead of the current four-tier system would push the prices so high no one will benefit from it, the government included. For them, the better option is to preserve the status quo under Republic Act 9334 and simply improve the efficiency of collection a long standing position of Fortune Tobacco.

59

What happened in Thailand after tobacco tax adjustment? The May 2009 sin tax adjustment in Thailand increased the ad valorem rate on tobacco from 80% (2006) to 85%. Prior to the 2009 tax adjustment, the revenue from excise tax on tobacco products was only 42.18 Billion Baht in 2008. In 2009, the revenues increased to 43.94 Billion Baht, which is a 4% growth in collections.

60

How about exports? e ?

What t was th he move ement o of exports of

cco and alcohol precuts during the last reform? ? tobac Export ts of alc cohol fair rly increa ased while cigaret ttes cont tinued to o grow from 2006 to 2010 de espite the e increas se in exc cise tax r rates on 2005, a 2009 9 2007 and

Expor rt 2006 to 2010 0, FOB in n US$

Source e: NSO

61

How far is the DOFs estimate of price elasticity of demand for cigarettes (-0.584) from the elasticity estimates used by other studies? Studies, in general, have consistently demonstrated that demand for tobacco products is not as elastic as the demand for many other consumer products because of the addictive nature of tobacco products.

A World Bank review concludes that, all else being equal, a 10% increase in price would, on average, reduce tobacco consumption by 4% in high income countries and 8% in low to middle income countries. These results indicate that smokers in low to middle income countries are more responsive to price increases. (Frank
Chaloupka, et al., World Bank Publication, 2000)

Gallet and List suggest a mean price elasticity of -0.48 which means that, a 10% increase in price would, on average, result to a 4.8% decline in tobacco consumption. (Gallet C and List J. Cigarette demand: a metaanalysis of elasticities, 2001)

The study of Quimbo, et al. concludes that, the household demand for cigarettes in the Philippines, using the 2003 FIES (which covers about 42,000 households), is on the average, inelastic (i=-0.87). The price elasticity of demand is in the range of -0.5 to -1.1, with increasing price responsiveness at lower income levels. (Stella Quimbo, et
al., The Economics of Tobacco Taxation: The Philippine Case)

The 2006 Tobacco and Poverty Study (TPS) reports an estimated price elasticity of -0.2, using nationallevel data for the period 1970-2004. The study of Estrada, et al. finds that, the price elasticity of demand for cigarettes in the Philippines is in the range of -0.15 to -0.20. (Estrada, GB, et al., Analysis of Demand for Tobacco in the Philippines)

62

If we apply the above estimates of price elasticity of demand, what are the estimated incremental revenues from 2012 to 2016?

Revenue Impact of Different Estimates of Price Elasticity for Cigarettes

(In Billion Pesos)
Price Elasticity Estimates -.15 -0.2 -0.4 -0.8 -0.584

2012

2013

2014

2015

2016

61.5 57.7 42.4 18.1 30.1

73.5 69.1 51.2 20.8 36.1

85.9 80.7 59.5 22.8 41.3

90.4 84.8 62.5 24.1 43.4

95.0 89.1 65.6 25.5 45.5

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What are the shares of alcohol manufacturers/producers in the GDP?

and

tobacco

GROSS VALUE ADDED OF BEVERAGE AND TOBACCO MANUFACTURERS In Million Pesos At Current Prices Industry Group Beverage Industries Non-Alcohol Industries Alcohol Industries Tobacco Manufacturers PERCENT TO GDP, NOMINAL Industry Group 2009 2010 9,003,480 0.79% 0.26% 0.52% 0.08% 2009 63,857 21,467 42,390 13,483 2010 70,944 23,850 47,094 7,602 Average 67,401 22,658 44,742 10,543

GDP, Nominal (In Million Pesos) 8,026,143 Beverage Industries Non-Alcohol Industries Alcohol Industries Tobacco Manufacturers 0.80% 0.27% 0.53% 0.17%

Sources: National Income Accounts, 2010 Business World Top 1000 Corporations in the Philippines

64

What are the shares of excise tax collections on alcohol and tobacco products to, a) total Excise tax collections, b) BIR collections, c) GDP, d) Tax revenues and, e) NG revenues from 2003 to 2011?
BIR EXCISE TAX COLLECTIONS FROM ALCOHOL AND TOBACCO PRODUCTS (In Million Pesos)
SOURCE OF INCOME EXCISE TAX COLLECTIONS 1. Alcohol Products 2. Tobacco Products 2003 57,042 13,866 19,972 2004 59,530 15,974 23,062 2005 61,816 17,012 23,702 2006 58,254 16,081 26,808 2007 54,998 18,786 23,195 2008 61,415 19,839 27,555 2009 60,548 20,637 24,230 2010 67,203 21,781 31,720 Average 60,101 17,997 25,030

PERCENT TO EXCISE TAX COLLECTIONS SOURCE OF INCOME 1. Alcohol Products 2. Tobacco Products 2003 24.3% 35.0% 2004 26.8% 38.7% 2005 27.5% 38.3% 2006 27.6% 46.0% 2007 34.2% 42.2% 2008 32.3% 44.9% 2009 34.1% 40.0% 2010 32.4% 47.2% Average 29.9% 41.5%

B IR COLLECTIONS

427,350

470,329

542,697

652,734

71 3,605

778,571

750,287

822,623

PERCENT TO BIR COLLECTIONS SOURCE OF INCOME EXCISE TAX 1. Alcohol Products 2. Tobacco Products 2003 13.3% 3.2% 4.7% 2004 12.7% 3.4% 4.9% 2005 11.4% 3.1% 4.4% 2006 8.9% 2.5% 4.1% 2007 7.7% 2.6% 3.3% 2008 7.9% 2.5% 3.5% 2009 8.1% 2.8% 3.2% 2010 8.2% 2.6% 3.9% Average 9.8% 2.9% 4.0%

GDP , No minal

4,548,1 02

5,1 20,435

5,677,750

6,271 ,1 57

6,892,721

7,720,902

8,026,1 43

9,003,480

PERCENT TO GDP, NOMINAL SOURCE OF INCOME EXCISE TAX 1. Alcohol Products 2. Tobacco Products 2003 1.3% 0.3% 0.4% 2004 1.2% 0.3% 0.5% 2005 1.1% 0.3% 0.4% 2006 0.9% 0.3% 0.4% 2007 0.8% 0.3% 0.3% 2008 0.8% 0.3% 0.4% 2009 0.8% 0.3% 0.3% 2010 0.7% 0.2% 0.4% Average 0.9% 0.3% 0.4%

NG Tax Revenues

550,468

604,964

705,61 5

859,857

932,937

1 ,049,1 79

981 ,631

1 ,093,643

PERCENT TO NG TAX REVENUES SOURCE OF INCOME EXCISE TAX 1. Alcohol Products 2. Tobacco Products 2003 10.4% 2.5% 3.6% 2004 9.8% 2.6% 3.8% 2005 8.8% 2.4% 3.4% 2006 6.8% 1.9% 3.1% 2007 5.9% 2.0% 2.5% 2008 5.9% 1.9% 2.6% 2009 6.2% 2.1% 2.5% 2010 6.1% 2.0% 2.9% Average 7.5% 2.2% 3.0%

NG Revenues

639,737

706,71 8

81 6,1 59

979,638

1 ,1 36,560

1 ,202,905

1 ,1 23,21 1

1 ,207,926

PERCENT TO NG REVENUES SOURCE OF INCOME EXCISE TAX 1. Alcohol Products 2. Tobacco Products
Source: BIR, NSCB, BTr

2003 8.9% 2.2% 3.1%

2004 8.4% 2.3% 3.3%

2005 7.6% 2.1% 2.9%

2006 5.9% 1.6% 2.7%

2007 4.8% 1.7% 2.0%

2008 5.1% 1.6% 2.3%

2009 5.4% 1.8% 2.2%

2010 5.6% 1.8% 2.6%

Average 6.5% 1.9% 2.6%

65

Did DOF consult the Congressmen whose constituents will be affected by the restructuring of excise tax on alcohol and tobacco products, and other stakeholders?
The DOF submitted a similar bill during the 14th Congress, during which a number of public hearings were called by the Committee on Ways and Means. Aside from legislators, there were also representatives from sectors. DOF believes that its primary venue for consultations would be in committee hearings since congressmen are elected representatives of the people.

DOFs reaction to the November 17, 2010 DBM position paper on Excise Tax that as per an NTRC Study in its 37th Annual Report, trends show that collection from excise tax on sin products do not follow shifts or increases in the tax rates (i.e. higher rates do not necessarily follow higher collections.
The DBMs comment has already been considered in the DOF proposal. In essence, they are supportive of the Bill since it is now a LEDAC Certified Bill

66

UHC

67

What are the objectives of Universal Health Care (UHC)? UHC focuses on ensuring that all Filipinos, especially the poor, are given financial risk protection through enrolment to PhilHealth enjoying extensive benefits entitlements and reduced out-ofpocket expensesand access to affordable and quality health care and services. In line with these, the following are identified as its main thrusts: (i) Improve financial risk protection (ii) Enhance health facilities for improvement of capacity and quality of service (iii) (iv) Upgrading of selected local government unit, DOH, and Attain health-related Millennium Development Goals (MDGs) private facilities to attain critical capacities (v) Scale up of implementation of key public health programs (ie: TB, HIV/AIDS)

68

What will be the cost entailed in implementing UHC? For 2012, total estimated cost of UHC implementation is P93.3 billion. Of this amount, 47% is covered in DOHs budget of P44.1 billion, leaving a gap of P49.2 billion or 53% which shall be sourced from the incremental revenues of the proposed Sin Tax reform. For more detailed information, below is a table showing the implementation cost and possible funding sources:

Annual Financial Requirements 2012 2013 2014 2015 2016 P265.8 P93.3 116.8

Sourced from SIN Taxes P49.2 P61.9

GAA P44.1 P44.1 P44.1

Others

P10.8

P133.5

P44.1 P44.1

69