British American Tobacco v Camacho

GR No. 163585 ‫ ׀‬August 20, 2008 & April 15, 2009 | Ynares-Santiago, J.

Petitioner: BRITISH AMERICAN TOBACCO

Respondents: JOSE ISIDRO N. CAMACHO, in his capacity as Secretary of the Department of Finance and GUILLERMO
L. PARAYNO, JR., in his capacity as Commissioner of the Bureau of Internal Revenue

Respondents-in-intervention: PHILIP MORRIS PHILIPPINES MANUFACTURING, INC., FORTUNE TOBACCO, CORP.,

MIGHTY CORPORATION, and JT INTERNATIONAL, S.A.

Topic: Equal Protection Clause

Summary: British American Tobacco challenged the validity of Sec. 145 of the NIRC as amended by R.A. 8420,
arguing that the provision violated the equal protection clause and the rule on the uniformity of taxation. The
provision created a four-tiered tax rate based on the net retail price of cigarette brands. BAT introduced a “new
brand”, Lucky Strike, which was taxed under the “current retail price” it was introduced. Old brands would be
taxed based on the retail price before 1996. BAT argued that the tax was unfair since older brands would benefit
from a “freeze” on the tax rates while newer brands would be taxed based on current retail prices even if older
brands now had the same current retail price. The Court ruled against BAT, holding that the tax did not violate the
equal protection clause as it passed the rational basis test, and was in fact uniform in its application.

FACTS
 This petition for review assails the validity of:
o (1) Section 145 of the National Internal Revenue Code (NIRC), as recodified by Republic Act (RA)
8424 (Tax Reform Act);
o (2) RA 9334, which further amended Section 145 of the NIRC on January 1, 2005;
o (3) Revenue Regulations (RR) Nos. 1-97, 9-2003, and 22- 2003; and
o (4) Revenue Memorandum Order (RMO) No. 6-2003.
 Petitioner argues that the said provisions are violative of the equal protection and uniformity clauses of the
Constitution.

 Paragraph (c)1 of Sec 145 of NIRC provides for 4 tiers of tax rates (low-priced, medium-priced, high-priced &
premium-priced) based on net retail price per pack of cigarettes.
o A survey on net retail prices per pack was conducted to determine applicable tax rates of existing
cigarette brands
 As such, new brands of cigarettes shall be taxed according to their current net retail price while existing or
“old” brands shall be taxed based on their net retail price as of October 1, 1996.

1 SEC. 145. Cigars and cigarettes.—
 xxxx
 (c) Cigarettes packed by machine.—There shall be levied,
assessed and collected on cigarettes packed by machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per pack, the tax shall be Thirteen pesos and forty-four
centavos (P13.44) per pack;
(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten pesos (10.00)
per pack, the tax shall be Eight pesos and ninety-six centavos (P8.96) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50) per
pack, the tax shall be Five pesos and sixty centavos (P5.60) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00) per pack, the tax shall be One peso and twelve centavos
(P1.12) per pack.
Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of this Act shall be taxed under the highest
classification of any variant of that brand.
New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the cigarette is sold on retail in 20 major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax and the value-added tax. For brands which are marketed only
outside Metro Manila, the net retail price shall mean the price at which the cigarette is sold in five major supermarkets in the region excluding the amount
intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set forth in Annex “D” of this Act, shall remain in
force until revised by Congress.”
  To implement RA 8240, the Bureau of Internal Revenue (BIR) issued RR 1-97, which classified the existing
brands of cigarettes as those duly registered or active brands prior to January 1, 1997.
o New brands, or those registered after January 1, 1997, shall be initially assessed at their suggested
retail price until such time that the appropriate survey to determine their current net retail price is
conducted.

 June 2001: Petitioner British American Tobacco introduced into the market Lucky Strike Filter, Lucky Strike
Lights and Lucky Strike Menthol Lights cigarettes, with a suggested retail price of P9.90 per pack.
o Pursuant to Sec. 145 (c) quoted above, the Lucky Strike brands were initially assessed the excise tax
at P8.96 per pack.

 Pursuant to new RRs and Regulation Memorandum Order2, survey on current net retail prices revealed that
the Lucky Strike brands were sold at P 22.54, P 22.61 and P 21.23 per pack (premium-priced)
o Respondent BIR Commissioner recommended the applicable tax rate of P 13.44 per pack, since the
average net retail price is above P 10 per pack.

 Petitioner sought to enjoin the implementation of Sec 145 and the RRs & RMO, on the ground that they
discriminate against new brands of cigarettes, in violation of the equal protection and uniformity
provisions of the Constitution.
o RTC dismissed

 While petitioner's appeal was pending, RA 93343 (An Act Increasing The Excise Tax Rates Imposed on Alcohol
And Tobacco Products, Amending For The Purpose Sections 131, 141, 143, 144, 145 and 288 of the NIRC of
1997, As Amended) took effect on January 1, 2005 which increased petitioners excise tax to P25 per pack

 Petitioner filed a Motion to Admit attached supplement and a supplement to the petition for review
assailing the constitutionality of RA 9334 and praying a downward classification of Lucky Strike products at
the bracket taxable at P 8.96 per pack since existing brands are still taxed based on their price as of
October 1996 even though they are equal or higher than petitioner's product price.

[Digester’s short version: So basicallyyyyy the law here provides for a legislative freeze, wherein brands of cigarettes
introduced between January 2, 1997 to December 31, 2003, remain in the classification that the BIR has determined
them to belong to, as of December 31, 2003, until revised by Congress. Here, existing or "old" brands (brands included
in the “Annex D” tax base) were being taxed based on their net retail price as of October 1, 1996 (before the
effectivity of the law) and then new brands (introduced after Jan 1, 1997) get classified according to their current net
retail price.

Lucky Strike was introduced in 2001, so they were being taxed a lot based on their current net retail price at that
time. Lucky Strike claimed it was violative of equal protection that they were being considered premium-priced so
they were being taxed more, as opposed to others which were being taxed as high-priced.

See NOTES for more haha. Also did you know, isang pack ngayon ng sigarilyo P 108 na :’( sadlyf ok]

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RR 9-2003 amended RR 1-97: Provided for periodic review every 2 years or earlier of the current net retail price of new brands and variants thereof for the
purpose of the establishing and updating their tax classification
RMO 6-2003: Prescribed the guidelines and procedures in establishing current net retail prices of new brands of cigarettes and alcohol products
RR 22-2003 was issued: To implement the revised tax classification of certain new brands introduced in the market after January 1, 1997 based on the survey of
their current net retail prices.

3 The statute, among others,—

(1) increased the excise tax rates provided in paragraph (c) of Section 145;
(2) mandated that new brands of cigarettes shall initially be classified according to their suggested net retail price, until such time that their correct tax bracket is
finally determined under a specified period and, after which, their classification shall remain in force until revised by Congress;
(3) retained Annex “D” as tax base of those surveyed as of October 1, 1996 including the classification of brands for the same products which, although not set
forth in said Annex “D,” were registered on or before January 1, 1997 and were being commercially produced and marketed on or after October 1, 1996, and
which continue to be commercially produced and marketed after the effectivity of this Act. Said classification shall remain in force until revised by Congress; and
(4) provided a legislative freeze on brands of cigarettes introduced between the period January 2, 199717 to December 31, 2003, such that said cigarettes shall
remain in the classification under which the BIR has determined them to belong as of December 31, 2003, until revised by Congress.
ISSUE:
 Whether or not the classification freeze provision4 violates the equal protection and uniformity of taxation
clauses of the Constitution? NO.
o EQUAL PROTECTION: classification, if rational in character, is allowable.
 In Sison Jr. v. Ancheta, the court held that "It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in
the same manner, the conditions not being different, both in the privileges conferred and
the liabilities imposed. If the law be looked upon in terms of burden on charges, those that
fall within a class should be treated in the same fashion, whatever restrictions cast on some
in the group equally binding on the rest.
 "Equality and uniformity in taxation means that all taxable articles or kinds of property of
the same class shall be taxed at the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation"
o Standard for analysis for equal protection is RATIONAL BASIS TEST, coupled with a deferential
attitude to legislative classifications and a reluctance to invalidate a law unless there is a showing of
a clear and unequivocal breach of the Constitution.
o The classification is considered valid and reasonable provided that:
 (1) it rests on substantial distinctions;
 (2) it is germane to the purpose of the law;
 (3) it applies, all things being equal, to both present and future conditions; and
 (4) it applies equally to all those belonging to the same class.

 The first, third and fourth requisites are satisfied.

o The classification freeze provision was inserted in the law for reasons of practicality and expediency
 Since a new brand was not yet in existence at the time of the passage of RA 8240, then
Congress needed a uniform mechanism to fix the tax bracket of a new brand.
 The current net retail price, similar to what was used to classify the brands under Annex “D”
as of October 1, 1996, was thus the logical and practical choice
 With the amendments introduced by RA 9334, the freezing of the tax classifications now
expressly applies not just to Annex “D” brands but to newer brands introduced after the
effectivity of RA 8240 on January 1, 1997 and any new brand that will be introduced in the
future
o The classification freeze provision was in the main the result of Congress’s earnest efforts to improve
the efficiency and effectivity of the tax administration over sin products while trying to balance the
same with other State interests
 Congress sought to simplify the whole tax system for sin products to remove these potential
areas of abuse and corruption from both the side of the taxpayer and the government.
 The classification freeze provision is in line with one of the objectives of the assailed
law “to simplify the tax administration and compliance with the tax laws that are
about to unfold in order to minimize losses arising from inefficiencies and tax
avoidance scheme, if not outright tax evasion.”
 It also intended to generate stable revenue for the government.
 With the frozen tax classifications, the revenue inflow would remain stable and the
government would be able to predict with a greater degree of certainty the amount
of taxes that a cigarette manufacturer would pay given the trend in its sales volume
over time.
o For as long as the legislative classification is rationally related to furthering some legitimate state
interest, as here, the rational-basis test is satisfied and the constitutional challenge is perfunctorily
defeated.

4 Classification freeze provision- mechanism and philosophy of the assailed law which freezes the tax classification of a cigarette brand based on its current net
retail price and which, thus, produced different classes of brands based on the time of their introduction in the market (starting with the brands in Annex “D”
since they were the first brands so classified as of October 1, 1996)
 o W/N it unduly favors old brands? NO.
 Petitioner did not clearly demonstrate how the freeze provision would lead to impossibility
of new brands to enter the market. It has not been shown that the net retail prices of other
older brands previously classified under this classification system have already pierced their
tax brackets, and, if so, how this has affected the overall competition in the market.
 Further, it does not necessarily follow that newer brands cannot compete against
older brands because price is not the only factor in the market as there are other
factors like consumer preference, brand loyalty, etc
 Even if the newer brands are priced higher due to the differential tax treatment, it does not
mean that they cannot compete in the market

(OTHER ISSUES)

 W/N RA 8240, as amended by RA 9334, and its implementing rules and regulations violate the General
Agreement on Tariffs and Trade (GATT) of 1947, as amended, specifically, Paragraph 2, Article III, Part II5?
NO.
o The classification freeze provision uniformly applies to all newly introduced brands in the market,
whether imported or locally manufactured.
 It does not purport to single out imported cigarettes in order to unduly favor locally
produced ones.
 Further, petitioner’s evidence was anchored on the alleged unequal tax treatment between
old and new brands which involves a different frame of reference vis-à-vis local and
imported products.

 W/N the RTC rather than the CTA has jurisdiction. YES.
o The jurisdiction of the CTA is defined in RA 1125 which confers on the CTA jurisdiction to resolve tax
disputes in general. BUT does NOT include cases where the constitutionality of a law or rule is
challenged which is a judicial power belonging to regular courts.
 W/N RR Nos. 1-97, 9-2003, 22-2003 and RA 8243 even prior to its amendment by RA 9334 can authorize the
BIR to conduct resurvey and reclassification. NO.
o Unless expressly granted to the BIR, the power to reclassify cigarette brands remains a prerogative
of the legislature which cannot be usurped by the former. These are however modified by RA 9334.

RULING:

WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the Regional Trial Court of Makati, Branch 61,
in Civil Case No. 03-1032, is AFFIRMED with MODIFICATION. As modified, this Court declares that:

(1) Section 145 of the NIRC, as amended by Republic Act No. 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(6), 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.

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“2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or
indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover,
no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the
principles set forth in paragraph 1.”
NOTES:

HOW DOES THE LAW WORK????

There are 4 tax brackets:

-Low-priced (less than P 5 per pack)
-Medium-priced (bet P 5- P 6.5)
-High-priced (bet P 6.5- P10)
-Premium-priced (above P10)

New brands (brands registered after effectivity of RA 8240) shall initially be classified according to their suggested
net retail price.

Provided, however, That brands of cigarettes introduced in the domestic market between January 1, 1997 [should be
January 2, 1997] and December 31, 2003 shall remain in the classification under which the Bureau of Internal
Revenue has determined them to belong as of December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall not be revised except by an act of Congress.

When a brand is introduced in the market, the current net retail price is determined through the specified procedure.
The current net retail price is then used to classify under which tax bracket the brand belongs in order to finally
determine the corresponding excise tax rate on a per pack basis. The assailed feature of this law pertains to the
mechanism where, after a brand is classified based on its current net retail price, the classification is frozen and only
Congress can thereafter reclassify the same.

WHY IS THE CLASSIFICATION FREEZE PROVISION SUCH A BIG DEAL????

Lucky Strike kept comparing itself to Marlboro and Philip Morris which entered market before October 1996 and were
taxed as high-priced. Their price increased overtime cause of inflation etc but because they were covered by the
legislative freeze, they continued being taxed as high-priced only. Lucky Strike came in in 2001. So since they were
newly introduced brands in the market, they were taxed based on their current net retail prices and, thus, fall under
the premium-priced tax bracket with a higher excise tax rate of P13.44 per pack. So the alleged discrimination stems
from how Lucky Strike is being taxed higher only because the other cigarette brands were classified based on their
“current” net retail price as of October 1, 1996 and Lucky Strike’s newly introduced brands were classified based on
their “current” net retail price as of 2003.