Philippines optimistic on winning cigarette case against Thailand, 01/05/11

 

MANILA, Philippines – The Philippines is optimistic the Appellate Body (AB) of the World Trade Organization (WTO) will rule in favor of the Philippines on a cigarette case versus Thailand.

“We are optimistic the Appellate body will uphold a WTO panel ruling on the Philippine cigarette case with Thailand,” said Trade and Industry undersecretary Adrian S. Cristobal Jr.

Cristobal himself went to Geneva last week to respond to an appeal filed by Thailand before the AB. Thailand’s move stemmed from the WTO Panel Report released last November. The WTO ruled in favor of the Philippines saying that Thailand acted inconsistently with the WTO rules in valuing Philippine cigarette exports for customs purposes and failing to treat imported cigarettes the same way as locally manufactured cigarettes.

Cristobal led the Philippine delegation including officials from the Permanent Mission of the Philippines to the WTO, DTI’s Bureau of International Trade Relations, and Philippine government counsel Sidley Austin LLP.

“We will continue to ensure that our exports are competitive. This is why we are strongly defending the WTO Panel’s ruling in favor of the Philippines. The hearing of the tobacco case with Thailand provided an effective opportunity to address both parties’ rights for due process and we are confident that the case will be resolved soon,” said Cristobal.

During the hearing, the Philippines countered the arguments used by the Thais seeking to reverse the Panel ruling.

In 2008, the Philippines requested the WTO to examine Thailand’s customs, fiscal, and health measures imposed on imported cigarettes. Following the substantive meetings, the WTO panel issued a report last year declaring that Thailand acted inconsistently with its WTO obligations.

Tobacco is among the fast growing resource-based exports of the Philippines. Data from the National Tobacco Authority showed that the country’s tobacco exports amounted to US148 million in 2010. Tobacco-growing in the Philippines began in the 16th century during the galleon trade.

Related Stories:  David could lose in case against tobacco Goliath, 09/03/11, by Achara Deboonme, The Nation

The Department of Special Investigation (DSI) made headlines in September 2009 when it launched a “David’s move” against Goliath – or Philip Morris (Thailand) – a subsidiary of US-based Philip Morris International, for understating import prices.

The case made headlines again with the refusal in January by prosecutors for special cases to proceed with it, convincing the Opposition that some influential figure close to the ruling Democrat Party was pulling the strings. The public will hear in detail during the coming no-confidence debate whether the allegation of political intervention has substance.

With or without such figures, it is worth considering what is the future of the case if prosecuted, considering there’s a dispute between Thailand and the Philippines at the World Trade Organisation (WTO).

 

 

In its case, the DSI accused 14 parties in PM Thailand, the distributor of Marlboro and L&M cigarettes, of deception from 2003-2007, causing a loss of Bt69 billion in taxes. The DSI said PM Thailand understated the cost, insurance and freight price of the products imported from the Philippines. By doing this, it evaded taxes, the agency said.

The best way to answer whether these parties understated the price of the cigarettes produced and exported by Philip Morris Philippines Manufacturing to study the WTO dispute in detail.

The dispute between the two countries over differing views on valuation methods goes back years. The case started in 2006 when the Philippines filed a complaint against Thailand before the WTO dispute settlement body. The case was docketed DS371. The Philippines accused Thailand of violating the GATT 1994 regarding the valuation methods of customs and value-added tax on imported cigarettes from the Philippines.

Both countries had held negotiations on these issues in many occasions, including two rounds of formal consultations under the WTO Dispute Settlement Understanding in the period of 2006 to September 2008.

The DSI was assigned to the case in 2006. Three years later, the Thai agency announced the case contained some grounds for action. However, a year before that, on September 29, 2008, the Philippines requested the establishment of a panel to decide on the dispute.

The Philippines is the home of Philip Morris Philippines Manufacturing (PMPMI), established in 2003 ahead of the Asean Free Trade Agreement. Before January 1, 2010, the company’s exports – mainly Marlboro and L&M brands – to Thailand were subject to a 5-per-cent import tariff. This was reduced to zero after the FTA took effect.

Manila’s claim to the WTO concerns Thailand’s customs and fiscal measures on cigarettes imported from the Philippines.

On customs, Thailand during the period levied an import tariff according to the transaction value. But while PM Thailand declared a transaction value, another value was applied to customs calculations based on the import price of another importer, presumably King Power International – the operator of Duty Free, the Philippines said.

The Philippines said that PM Thailand imported the cigarettes for domestic reselling, while King Power imported the products for sale in the duty free shops. As such, it said it was inappropriate to apply one importer’s transaction value to another importer.

According to a source in the industry, custom taxes are based on the CIF price – cost, insurance and freight. However, with higher costs reported, the taxes would be higher too.

The Philippines reasoned that although Thailand disclosed it had used a deductive method for such valuation, Thailand did not disclose the starting point of the deductive calculations, the nature or amount of the deductions made, the data sources used, and how the deductive method differed from deductive valuation.

“Thailand acknowledged that PM Thailand’s declared transaction values were the ‘price paid or payable’, but it rejected PM Thailand’s declared transaction value for two reasons – the importer and exporter are related and another, unspecified importer imports ‘the same type of goods’ at ‘three to four times’ the value of PM Thailand’s declared transaction value,” the Philippines said.

It said that the relationship of PM Thailand and Philip Morris Philippines Manufacturing was known years before the Thai authorities began rejecting PM Thailand’s declared transaction values.

“Thailand’s second reason – that another, unspecified importer imports ‘the same type of goods’ at ‘three to four times’ higher prices – is also flawed. The price declared by one importer cannot, in itself, be the grounds for rejecting the declared transaction value of another importer.

“Thailand’s reliance on this benchmark is also logically inconsistent, because Thailand relied on the other operator’s prices to reject PM Thailand’s declared transaction value, but then assessed PM Thailand’s customs value at a much lower value than the other operator’s prices,” it added.

In the DSI cases, Bangkok Airways and King Power were named as “other importers”.

On the VAT calculation method, it is generally known that the 7-per-cent rate is on top of the reselling price. In the Philippines’ claim, while the actual reselling prices of domestic cigarettes are applied for VAT calculation, imported cigarettes including Marlboro and L&M are subject to “maximum reselling prices” (MRPs).

The landmark verdict by the WTO was handed down on November 15, 2010, when Thailand was held guilty of protecting domestic cigarettes. On February 22 this year, Thailand filed for partial appeal. Without the appeal, the WTO’s ruling would have been effective on February 24 and Thailand would have had to conform to the rules of the multilateral trading body.

If Thailand loses the appeal, it will need to adopt a similar calculation method. Given that the import tariff is zero, much of that would cover VAT. Significantly, Thailand would lose all the reasons to back its case in Thailand, if the case against PM Thailand goes to court.

Worse, the source in the industry said earlier that PM Thailand might consider a counter-lawsuit, claiming compensation for defamation. Goliath’s punch would be more disastrous than David’s.

All eyes are now on the appeal, and during this period it is wise for Thailand to delay the case, with or without any party pulling the strings behind it.

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