Asia Illicit Tobacco Indicator 216: Philippines Prepared by Oxford Economics October 217
Disclaimer The Asia Illicit Tobacco Indicator 216 Report (the Report ) on the illicit tobacco trade in selected Asian markets (including Australia and New Zealand) has been prepared by Oxford Economics (OE). OE enjoyed academic freedom and full editorial control of the Report. We are grateful for the inputs and data received from public sector and industry stakeholders. OE prepared the Report in accordance with specific terms of reference agreed between Philip Morris International Management SA, an affiliate of Philip Morris International (PM), and OE. Financial support for the Report was provided by PM. OE assume all responsibility for the Report analysis, findings, and conclusion. The terms of reference under which OE were engaged by Philip Morris International Management SA are detailed in the Asia Illicit Tobacco Indicator 216 Methodological Overview Report, available to download via the following link illicittobacco.oxfordeconomics.com 2
Foreword The Asia Illicit Tobacco Indicator 216 is a comprehensive and evidence-based study that digs deep into the complex myriad of illicit tobacco trade and evaluates the huge tax losses from smuggling, counterfeit cigarettes, and unregistered volumes which are rampant in the Philippine cigarette industry. But illicit trade of cigarettes goes far beyond smuggling and tax evasion. It has extensive backward linkages with adverse economic impacts and multiplier effects on gross domestic product, household income, and employment. This Report will serve as an instrumental guide for policymakers in the fields of fiscal reform, intellectual property protection, law enforcement, and border protection, to make informed decisions and devise an effective and holistic strategy against illicit tobacco trade. Dr. Rolando T. Dy Executive Director for Food and Agribusiness University of Asia and the Pacific Dr. Dy has managed projects covering the benchmarking of investment codes for local government units and has advised the creation of food industry roadmaps in conjunction with USAID, the Department of Trade and Industry, and the Department of Agriculture. 3 Philippines Market Summary
Philippines: Legal Domestic Sales Legal Domestic Sales in the Philippines fell by an estimated 1.5 billion cigarettes between 215 and 216, from 83.5 billion to 72.9 billion. This decline of 12.6% is the first substantial fall in Legal Domestic Sales since 213, when sales fell by more than 15% in comparison with the previous year. Legal Domestic Sales were over one-quarter lower in 216 than in 212. As of 216, PM and Mighty Corporation accounted for a total of 94% of Legal Domestic Sales. Cigarette prices have increased markedly in recent years as a result of multiple Excise Tax increases. Excise Tax was approximately 1 times higher in 216 than in 212, set at a rate of PHP 25 per pack of 2 cigarettes based on the Most Sold Brand (Low-tax tier cigarettes). 1 On 1st January 216, Excise Tax rates were increased from PHP 21 to PHP 25 for Low-tax tier cigarettes, and PHP 28 to PHP 29 for High-tax tier cigarettes. These represent increases of 19% and 3.6%, respectively. From January 217, a unitary Excise Tax rate of PHP 3 per pack of 2 cigarettes was implemented, regardless of the retail price, set to increase by 4% per annum thereafter. Philippines Legal Domestic Sales: 72.9 bn cigarettes Price: PHP 4.5 USD.86 1 Based on the price of Fortune in October 216 (the Most Sold Brand until 215). Based on PM data and Nielsen Retail Audit. 4 Philippines Market Summary
Philippines: Excise duty applied to cigarettes 2 25 19.% 25 23.5% 21 PHP per pack of 2 cigarettes 2 15 1 5 2.23 2.47 2.47 2.72 41.7% 17 341.2% 12 2.72 28 29 21 211 212 213 214 215 216 Source: Philippines Senate Tax Study and Research Office 2 Rate applied in October of each year to Fortune (the Most Sold Brand until 215). Philippines: Legal Domestic Sales and prices 3 12 Cigarette sales bn PHP per pack of 2 cigarettes 42 Cigarettes bn 1 8 6 4 35 28 21 14 PHP per pack of 2 cigarettes 2 7 28 29 21 211 212 213 214 215 216 Source: Philippines Bureau of Internal Revenue and Oxford Economics based on PM data and Nielsen Retail Audit 3 Price of Fortune (the Most Sold Brand until 215) in October of each year. Philippines Market Summary 5
Philippines: Cigarette Consumption The results from an Empty Pack Survey and the Nielsen Retail Audit, combined with data on withdrawals from the Bureau of Internal Revenue, and actual shipments data from PM, were used to estimate Total Consumption of cigarettes in the Philippines. 1 Total Consumption (legal and illicit) is estimated at 83.9 billion cigarettes in 216, representing a decline of 13.3% in comparison with 215. This puts Total Consumption around one-quarter lower than the level estimated for 212 in the first Asia Illicit Tobacco Indicator Report (equivalent to 24.9 billion fewer cigarettes consumed). This decline in Total Consumption is underpinned by a reduction in both Legal Domestic Consumption and Illicit Consumption. Legal Domestic Consumption experienced a decline of 12.6% from 215 to 216, falling from 83.3 billion cigarettes to 72.8 billion cigarettes. Illicit Incidence fell by.4pp in 216, from 13.5% in 215 to 13.1%. This is equivalent to a decline of around 2.1 billion illicit cigarettes consumed over the course of the year. Around 8% of this decline was driven by lower Domestic Illicit Consumption, which fell by 14.3% in comparison with 215. The decline in Domestic Illicit Consumption continues a trend set in 215 following the amendment of the National Internal Revenue Code of 1997 which introduced a system of tax security stamps to improve tax administration. 2 Non-Domestic Illicit, which accounts for less than 1% of Total Illicit Consumption, fell in 216, by 28.6% in 216. Illicit Incidence in the Philippines is similar to the ASEAN average, higher than in markets such as Thailand, Myanmar, and Cambodia, but much lower than markets such as Vietnam and Malaysia. 3 Philippine agencies such as the Bureau of Customs and the Bureau of Internal Revenue have had successes in the fight against illicit tobacco in recent years. In the southern provinces, this includes the November 216 seizure of contraband cigarettes worth PHP 5 million, found in several warehouses in the city of Davao. In addition, an estimated PHP 1 million worth of Counterfeit cigarettes were seized in Cagayan de Oro in October 216. In the northern provinces, more than PHP 1 billion worth of fake cigarettes and tax stamps were found in three provinces in Luzon. Philippines: Composition of cigarette consumption Legal Domestic Consumption (LDC) Cigarettes bn 212 213 214 215 216 % % Cigarettes bn % Cigarettes bn % Cigarettes bn % Cigarettes bn % change 215-16 12.2 94. 86.3 81.8 82.3 8.4 83.3 86.2 72.8 86.9-12.6 Legal Domestic Sales (LDS) 12.2 86.3 82.3 83.5 72.9-12.6 Outflows of domestic dutypaid cigarettes Total Non-Domestic Inflows (ND) -.1 -.1 -.1 -.2 -.1-43..4.4 2.1 2. 1. 1. 1.8 1.9 1.1 1.3-38.2 Non-Domestic Legal ().1.1.2.1.1.1.3.4.1.1-79.1 Non-Domestic Illicit.3.3 1.9 1.8.9.9 1.5 1.5 1. 1.2-28.6 Domestic Illicit 6.1 5.6 17.1 16.3 19. 18.6 11.6 12. 9.9 11.8-14.3 Total Consumption 18.7 1. 15.5 1. 12.3 1. 96.7 1. 83.9 1. -13.3 Total Illicit Consumption 6.4 5.9 19.1 18.1 19.9 19.4 13. 13.5 1.9 13.1-15.9 Source: Oxford Economics 1 The Empty Pack Survey was undertaken in 216 Q2, while the retail audit provided monthly data in 216. By comparing sales based on the retail audit with manufacturers withdrawals sourced from the Philippines Bureau of Internal Revenue (domestic manufacturers withdrawals concern domestic duty-paid cigarettes), this Report estimated the volume of domestically produced cigarettes where the appropriate Excise Tax rates were not paid. 212 results based on 211 Q4 Empty Pack Survey (see Report methodology for more details). 2 Based on Section 8 of the Republic Act No. 8424 of the National Internal Revenue Code in relation to Revenue Regulation No. 9-214. 3 http://illicittobacco.oxfordeconomics.com/ 6 Philippines Market Summary
Philippines: Composition of cigarette consumption (% of Total Consumption) % of Total Consumption 1 8 6 4 2 5.6 94..3.1 16.3 81.8 1.8.1 18.6 8.4.9.1 1.5 12. 11.8.4 86.2 86.9 1.2.1 Non-Domestic Illicit () Domestic Illicit Non-Domestic Legal () Legal Domestic Consumption 212 213 214 215 216 Source: Oxford Economics Philippines: Composition of cigarette consumption (number of cigarettes) Cigarettes bn 12 1 8 6 4 2 18.7 6.1 12.2.3.1 15.5 17.1 86.3 1.9.2 12.3 19. 82.3.9.1 96.7 11.6 83.3 1.5.3 83.9 9.9 72.8 1..1 Non-Domestic Illicit () Domestic Illicit Non-Domestic Legal () Legal Domestic Consumption 212 213 214 215 216 Source: Oxford Economics Philippines Market Summary 7
Philippines: Government Finances In 216, Philippines applied a two-tiered specific Excise Tax on cigarettes. A pack of 2 cigarettes with a net retail price 1 (NRP) not exceeding PHP 11.5 (Low-tax tier cigarettes) was liable for a tax of PHP 25 per pack, while a pack of 2 cigarettes with a NRP above PHP 11.5 (High-tax tier cigarettes) was taxed at PHP 29 per pack. The Excise Tax system was simplified in January 213 through a reduction in the number of tiers from four to two. Excise Tax rates were set at PHP 12 per pack of Low-tax tier cigarettes and PHP 25 per pack of High-tax tier cigarettes. This represented a sharp increase in the applied Excise Tax rate of 341% on the Low-tax tier (as defined in 212), 231% on the Mid-tax tier, and 18% on the High-tax tier. Excise Taxes were increased in the years thereafter. The Excise Tax rate on Low-tax tier cigarettes rose to PHP 17 per pack of 2 cigarettes in 214 and PHP 21 in 215, and High-tax tier cigarettes were taxed at PHP 27 per pack of 2 cigarettes in 214 and PHP 28 in 215. On 1st January 216, Excise Tax rates were further increased from PHP 21 to PHP 25 for Low-tax tier cigarettes, and PHP 28 to PHP 29 for High-tax tier cigarettes, which represent increases of 19% and 3.6%, respectively. In 217, a unitary tax rate of PHP 3 per pack was implemented, regardless of the NRP, with a rise of 4% scheduled by law for every year thereafter. In addition, VAT is levied at a rate of 12% on the retail price of sales. Actual revenues from Excise Taxes on cigarettes decreased 4.5% in 216 to PHP 95.1 billion, the first decline in revenues registered since the Asia Illicit Tobacco Indicator research began. The Tax Loss associated with Illicit Consumption was an estimated PHP 17.4 billion in 216 primarily consisting of lost Excise Tax revenues representing a 2.7% decline in comparison with 215. As a share of total potential Excise Tax receipts, the Excise Tax Loss was an estimated 13.3% in 216. This is.1pp higher than the previous year despite the decline in the estimated volume of illicit cigarettes consumed. Philippines: Actual government revenues and estimated Tax Loss Actual revenue from excise duties on tobacco Estimated number of illicit cigarettes purchased (cigarettes bn) Estimated Tax Loss from Illicit Consumption 212 213 214 215 216 % change in local PHP USD PHP USD PHP USD PHP USD PHP USD currency bn mn bn mn bn mn bn mn bn mn 215-16 32.9 78 71.6 1,687 82.3 1,855 99.5 2,187 95.1 2,1-4.5% 6.4 19.1 19.9 13. 1.9-15.9% 2.6 62 15.6 368 22.5 56 17.9 394 17.4 367-2.7% Lost excise revenue 1.8 42 12.7 3 19.1 431 15.1 332 14.6 38-3.1% Lost VAT revenue.8 19 2.9 68 3.3 75 2.8 62 2.8 59.% Excise Tax Loss as % of potential total Excise Tax revenues 5.2% 15.1% 18.9% 13.2% 13.3% Source for government revenue data: Philippines Bureau of Internal Revenue and Oxford Economics based on PM data 1 Retail selling price net of excise and VAT. 8 Philippines Market Summary
Philippines: Actual government revenues and estimated Excise Tax Loss PHP bn 1 8 6 4 71.6 82.3 99.5 95.1 Actual Excise Tax revenues Estimated Excise Tax Loss 2 32.9 1.8 12.7 19.1 15.1 14.6 2 212 213 214 215 216 Source: Philippines Bureau of Internal Revenue and Oxford Economics based on PM data Philippines Market Summary 9
Philippines: Trade Flows Illicit cigarettes consumed in the Philippines consist primarily of domestic non-tax paid cigarettes. In total, an estimated 11.8% of Total Consumption in the Philippines in 216 was estimated to be Domestic Illicit,.2pp lower than in 215, but significantly higher than the level estimated in the first Asia Illicit Tobacco Indicator Report in 212. Less than 1% of illicit cigarettes consumed in 216 were of Non-Domestic origin, a slight decline in comparison with the previous year. Overall, Non-Domestic Illicit Consumption fell by by 28.6% from 215 to 216 to around 1 billion cigarettes. The decrease in Non-Domestic Illicit has been driven by a sharp fall in the presence of Counterfeit cigarettes in the Philippines which account for the large majority of Non-Domestic Illicit Consumption (around 95%). 1 Counterfeit cigarettes fell from 1.4 billion cigarettes in 215 to 1 billion cigarettes in 216 (equivalent to a decrease of 27.2%). The volume of Counterfeit products identified in 216 still remains higher than 214 levels however, when an estimated.7 billion Counterfeit cigarettes were consumed. Outflows of domestic duty-paid cigarettes to the other markets covered in this Report have also declined from 173 million in 215 to 99 million in 216. 2 Philippines: Origin of total Non-Domestic Illicit Inflows 3 Other / Unspecified 48 mn (-49.7%) Total 1,46 mn (-28.6%) Counterfeit 997 mn (-27.2%) Cigarettes mn 212 213 214 215 216 Other / Unspecified 93 1 162 96 48 Counterfeit 218 1,85 79 1,369 997 Total 311 1,95 871 1,465 1,46 Source: IT Flows Model and Oxford Economics 1 Note that estimated Outflows of duty-paid cigarettes are based only on identified Inflows in the other markets covered in this Report and may therefore be an underestimate. 2 The Empty Pack Survey identifies all Counterfeit cigarettes as of Philippines market variant. However, for the purposes of this Report, we classify Counterfeit cigarettes as of Non-Domestic origin. 3 Figures in brackets reflect % change from 215. 1 Philippines Market Summary
Philippines: Consumption breakdown 216 2 Cigarettes bn 4 6 8 1 Legal Domestic Sales 72.9 Outflows of duty-paid.1 Legal Domestic Consumption 72.8 Domestic Illicit 9.9 Other/ Unspecified.2 Other/ Unspecified.5.5 Non-Domestic Legal Inflows Illicit Counterfeit 1. Total 83.9 2 4 6 8 1 Cigarettes bn Source: IT Flows Model and Oxford Economics Philippines Market Summary 11
Philippines: Other Estimates Source Comparing consumption estimates with LDC ( bottom up approach) Euromonitor Passport, 217 Comment Using data on average annual cigarette consumption per adult (age 15 and above), plus UN population data, a bottom up estimate of cigarette consumption can be made which can then be compared with LDC. This approach yields an estimate for the Illicit Incidence of 5.1%, or around 4.4 billion cigarettes (based on 214 LDC). The source for annual cigarette consumption per adult is Euromonitor (available via www.tobaccoatlas.org). Euromonitor estimates an Illicit Incidence of 11.% in 216. The methodology, sampling, and coverage are unknown, so it is difficult to assess the robustness of this estimate. Philippines: Alternative estimates of Illicit Consumption 15% 12 9 6 13.1 11. 3 5.1 Oxford Economics (216) Euromonitor (216) Bottom up consumption (214) 12 Philippines Market Summary
Philippines: Data Sources Primary source Calculation Comments Legal Domestic Sales (LDS) Industry volume based on Bureau of Internal Revenue Statement of Manufactures Exfactory Withdrawals, adjusted for actual shipments for PM. Outflows of domestic duty-paid cigarettes Empty Pack Survey data in other markets covered in this Report. Empty Pack Survey data in other markets used to identify Philippine domestic variant cigarettes based on marketspecific labelling (e.g., health warnings, tax stamps, etc.). Outflows of domestic duty-paid cigarettes to other markets are estimated at around 99 million cigarettes. Legal Domestic Consumption (LDC) Total Non- Domestic Inflows (ND) Non-Domestic Legal () Legal Domestic Sales minus Outflows of legal sales. Sum of Non-Domestic Legal and Non-Domestic Illicit. Estimated using passenger data, smoking rates, and passenger duty-free personal import allowance. Outflows of duty-paid cigarettes refer only to Outflows to other markets included in this Report. Maximum theoretical amount an individual can carry across a border. Passenger data from the Philippines Department of Tourism, UNWTO, and OE Tourism Model. Non-Domestic Illicit Empty Pack Survey. Based on Empty Pack Surveys plus OE estimates. Estimates derived from the Empty Pack Surveys conducted in 216 Q2. Estimates of illicitly imported Non-Domestic cigarettes are relatively low in comparison with Domestic Illicit. See Report methodology for more details. Domestic Illicit Nielsen Retail Audit. Estimate derived from a comparison of market shares of domestic producers in the retail audit and BIR withdrawals data. Illicit cigarettes in the Philippines are believed to be mostly domestically produced. Total Illicit Consumption Total Consumption Sum of Non-Domestic Illicit and Domestic Illicit. Legal Domestic Sales minus Outflows of domestic duty-paid cigarettes, plus estimated Non- Domestic Legal consumption, plus estimated Illicit Consumption. The IT Flows Model estimate of consumption is 83.9 billion cigarettes for 216. Total Tax Loss Total Illicit Consumption multiplied by the weighted average tax rates (Excise Tax and GST). See Report methodology for more details. Philippines Market Summary 13
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