SONA announcement challenges an industry lobby that’s entrenched in the legislature

While most observers of the State of the Nation Address (SONA) debated President Arroyo’s stated political plans and smirked at her “french fries” magenta gown, few may have noticed if some congressmen squirmed in their seats at a policy announcement.

The President wants new sin taxes.

She wants something that finance officials estimated would bring up to P20 billion into government coffers on the first year of implementation, but which many lawmakers had blocked due to strong lobbying from the affected industries.

“Taxes should come from alcohol and tobacco and not from books,” the President said, apparently referring to a recent boo-boo by the finance department to stubbornly impose heavy duties on imported books but to defer to congressmen’s refusal to impose new taxes on cigarettes and liquors.

“Tax hazards to lungs and livers, do not tax minds,” Arroyo said.

To congressmen who had favored tobacco players in the past, it could very well be a presidential directive for them to choose between the President and industry lobbyists who had help fund their campaigns and community projects.

Newsbreak interviewed nine sources, including lawmakers and tobacco industry players, to put together a picture of the tobacco lobby in the Philippines that has expanded in scope and grown more complicated in purposes since the campaign to block the printing of health warnings on cigarette packs nearly a decade ago.

Intra-Industry Battle

The choice that the President is asking lawmakers to make is not as simple as siding or not with the tobacco industry.

House Bill 3759, whose fate was left hanging until Congress went on recess last May, proposes to impose a uniform tax rate for all types of cigarettes, which the finance department favors. It has been opposed by congressmen who want to only increase rates but retain the current multi-tiered scheme.

A uniform tax will mean that eventually all types of cigarettes will be imposed a P14 tax per pack. Currently, low-priced brands carry a P2.47 tax per pack; medium-priced, P7.14; high-priced, P11.43; and premium, P27.16.

A uniform tax rate will increase the taxes on low-priced and locally manufactured brands 6 times, while it will reduce by a little more than half the taxes imposed on premium and international brands.

The removal of the four-tiered taxation scheme, our sources say, will also remove the edge of the 5 dominant tobacco companies, and will level the playing field for new players that want a share of the market.

The battle therefore is between different groups within the tobacco industry. And since the President didn’t specify in her SONA what taxing structure she preferred, the shaping of the final version of HB 3759 remains a free-for-all.

The Other Lobby

Tobacco lobby in the Philippines—described as the “strongest…in Asia” in a 2004 study by the University of Sydney’s School of Public Health—has always been believed to be limited to the industry collectively pushing for government policies that will favor it.

This was the case 6 years ago when the tobacco companies found ways to water down the bill that proposed to require that health warning be printed on cigarette packs. The original proposal was to: 1) indicate specific ill effects of smoking (such as “Smoking causes fatal lung disease, stroke, and heart diseases”); 2) place the warning on both sides of the cigarette package.

When Republic Act 9211 or the Tobacco Regulation Act was finally passed in 2003, it only required that a standard health warning (such as “Cigarette smoking is dangerous to your health”) be printed, and only on the front panel of the package.

This became possible after a compromise was reached in Congress to transfer the bill from the health committee to the committee on trade and industry, supposedly to guarantee the protection of the tobacco industry, former Senator Juan Flavier, a former health secretary who then chaired the Senate committee on health and demography, said in a 2006 interview with Newsbreak magazine.

The House panel during the deliberation inserted a phrase to ensure “that the interests of tobacco farmers, growers and stakeholders are not adversely compromised” with the implementation of the proposed law.

Health Undersecretary Alex Padilla, who attended hearings on the bill, had a suspicion that RA 9211 was drafted by the tobacco industry. He pointed out that the bill was drafted 2 years before the Philippines was to sign the Framework Convention on Tobacco Control (FCTC), an international treaty that would require signatory countries to print graphic, not just text, health warnings on cigarette packages.

An industry source, who spoke to Newsbreak on condition that he wouldn’t be named, confirmed Padilla’s suspicion. Lawyers of one of the major cigarette companies drafted the tobacco regulation law based on the compromises that they and lawmakers reached, the source said.

Before this, in the 10th and 11th Congresses, the House of Representatives had sat on tobacco control measures approved by the Senate.

Closing Ranks

When there are issues affecting the entire industry, says an industry source, cigarette companies “are together” in lobbying with Congress.

The companies have an association, the Philippine Tobacco Institute (PTI), that does the lobbying, he says. It represents local cigarette manufacturers Fortune Tobacco Corporation, Philip Morris Philippines Inc., La Suerte Cigar and Cigarette Factory, Mighty Corporation, and Associated Anglo-American Tobacco.

Members of the PTI, the industry source says, contribute money for their lobbying activities based on their market share. “If your market share is 5%, you pay 5%.”

The money is used primarily as “lobby money” and to cover expenses when the industry players meet with legislators. Expenses in these meetings are different from what may be required when there are committee hearings or consultations held in Congress when a bill is being discussed, the source says.

Based on the account of the industry source, lobby money ranges from P500, 000 to P1 million for every lawmaker when a vote favorable the industry is needed. The amount depends on who acts as broker between the parties.

Northern Alliance

The industry insider says lobby money is distributed either through Ilocos Sur Rep. Eric Singson, who heads the so-called Northern Alliance or group of lawmakers from the Ilocano provinces that produce virginia tobacco, or through the chair of the committee where the bill of interest is referred (in case of the sin tax bills, the chair of the ways and means committee).

“For tobacco, it’s Eric Singson. He’s the broker for everything that is related to tobacco cigarette,” the industry source said. “PTI passes to Eric Singson and he will be the one to distribute.”

A source in Congress who is privy to negotitions on the sin taxes since 2004 confirms that information.

Newsbreak had been contacting the office of Singson since April, but was always told that congressman either had prior appointments or was out of the country.

La Union Rep. Victor Ortega, a member of the Northern Alliance,  denies any personal knowledge of the alleged distribution of money from tobacco lobbyists. He explained that lawmakers from the Ilocos region and tobacco companies do not always share similar positions on tobacco measures.

He added that it is “natural for tobacco companies to protect their businesses,” while the Northern Alliance only protects the welfare of tobacco farmers in their provinces.

“Sometimes our positions differ. It depends. Like, for example, for the graphic health warning, they oppose it out rightly. But we might approve it if the rule will also apply to imported cigarettes, not just to the locally-manufactured,” Ortega said.

Newsbreak tried to get the side of other congressmen from the Northern Alliance, but they begged off.

Campaign Funds

Antique Rep. Exequiel Javier, who chairs the ways and means committee, defends the Northern Alliance. He says he doesn’t know either of any money changing hands between the tobacco industry and congressmen, and he thinks that Ilocano congressmen are only protecting the interests of tobacco farmers.

There are around 40,000 families whose livelihood depend on tobacco farming.

The lobby extends to non-Ilocano congressmen. A congressman from Luzon, who requested not to be identified, said that cigarette companies also pour money into their campaign kitties during elections and give financial support for their community projects.

“Those who are winners and those perceived to be winners, inaalagaan nila (they maintain them),” the lawmaker said.

The lawmaker agreed with the justification of the industry insider. Accepting lobby money from the tobacco industry is tempting for some politicians since most of them are burdened by requests for financial assistance from their constituents. Politicians consider accepting lobby money as a lesser evil than getting commissions or kickbacks from government-funded projects.

Different Opinions

The unity of the tobacco industry ends where proposals on sin taxes begin. While the PTI represents the member-companies on common concerns, like the advertising guidelines and graphic health warning, it’s divided when it comes to sin taxes. This is according to Roberto Eugenio, corporate and regulatory affairs manager of former PTI member British American Tobacco (BAT), and Greg Lim, general manager of Mighty Corp.

“When it comes to tax, we don’t discuss it. The local manufacturers basically have one stand; Philip Morris, and other multinationals like BAT, Japan Tobacco, have another stand. If we go into a meeting and discuss these matters nothing would have been agreed upon,” Lim said.

As a result, says the congressional source privy to negotiations on the six tax bills, cigarette companies do separate lobbying on the matter. Each lobby group, he says, has a point person who finds links to lawmakers.

“If they send feelers or initiate talks and you don't react, they leave. If you agree or show openness, they talk or make proposals,” the source said.

Shift in Focus

When it comes to sin taxes, the battle really is between the current players that dominate the market and the new players who want a share of it.

In another interview, an industry source told Newbsreak that the recent debate on sin tax may turn into a battle between the lobby groups of the two biggest players in the industry. “It’s going to be Fortune against Philip Morris,” he said.

The Philippine tobacco industry is dominated by five major players: Lucio Tan’s Fortune Tobacco, Philip Morris, Mighty Corp., La Suerte Cigar & Cigarette Factory, and Associated Anglo-American Tobacco Corp. The first two companies represent 90 percent of the local market.

New players like Japan Tobacco International and British American Tobacco, industry sources say, are having hard time penetrating the market, making the industry almost a “virtual monopoly.”

“All the existing players agree that, ‘You know we are competitors, but let’s keep the competition between ourselves,’” the industry source said.

Pawns

Under the National Internal Revenue Code of 1997, cigarettes are classified into four price categories. The Code also said that cigarette brands listed before 1997 should be taxed based on average net retail price as of October 1996, while prices of those listed after 1997 should be computed using current net retail prices.  It also said that brands introduced after the passage of Republic Act 8240 in 1996 or the Excise Tax on Beer and Cigarettes Law shall be taxed under the highest classification.

This tax scheme has allowed old brands to remain in the lowest tax bracket even if they increased their net selling prices, but forced the new players to sell their product at higher prices because they belong to the highest tax bracket

BAT’s Eugenio said that the tax scheme has made it harder for them to penetrate the local market. “If the four-tier scheme is removed, this will provide a level playing field in the industry.”

Talks in Congress had it that Javier was favoring a new player in the tobacco industry that was why he was opposing the finance department’s proposed uniform tax rate for all tobacco brands. Javier denied this. He told Newsbreak that he’s opposed to this tax structure because it would put the locally manufactured cigarettes at a disadvantage, and that would mean killing the local industry.

Two tobacco farmers group—Immayos Farmers Association and the Samara Farmers Associations—even issued a statement in February lauding Javier for his support to tobacco farmers.

The Antique lawmaker said his province also has some tobacco farmers, although the volume of tobacco that they produce is “not enough for commercial production of cigarettes.”

That’s why he understands where the much-maligned Northern Alliance is coming from, Javier said.

The congressional source agrees: “There’s no use in quarrelling with the Northern Alliance. In the end, you are all pawns in a game by big industry players.” (Newsbreak)

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