Ad Valorem Tax on Cigarettes Policy

Executive Order No. 960 is issued pursuant to the powers vested in the President under Section 290-B of the National Internal Revenue Code, as amended.
Section 1 adds a new Chapter IV under Title IV of the National Internal Revenue Code of 1977, as amended, titled “Ad Valorem Tax”.
The ad valorem tax is imposed in addition to the specific tax imposed under Section 149 (b) of the National Internal Revenue Code.

The order directs an ad valorem tax because the fixed nature of the specific tax on cigarettes does not provide built-in flexibility to price changes.
The order seeks to relieve policymakers from frequent amendments to cigarette tax rates and/or bases.
The order aims to upgrade cigarette taxation to a more reasonable level.
The order bases this policy on the need to improve the weighted average tax burden levels and to compare with higher cigarette tax burdens in neighboring countries.

Section 186-A imposes an ad valorem tax equivalent to 10% of the manufacturer’s or importer’s gross selling price, net of specific tax, of cigarettes to be removed from the place of production or released from customs custody.
The ad valorem tax is paid by the manufacturer or importer, “as the case may be,”.
Payment of the ad valorem tax is due at the same time as the specific tax.
The taxable base is the gross selling price (net of specific tax) of cigarettes, determined using wholesale pricing rules under Section 186-A.

Section 186-A uses wholesale prices of different cigarette brands to determine the amount of tax due.
The wholesale price “at the factory” or “in the establishment of the importer” or “through their sales agents to the public” determines the tax.
If the manufacturer or importer sells at wholesale in another establishment he owns or where he has an interest in profits, the wholesale price in that establishment determines the applicable tax.
If the wholesale price is less than the cost of manufacture or importation plus all expenses incurred until the cigarettes are finally sold, then the cost plus expenses determine the tax to be collected.

Every manufacturer or importer of cigarettes must file with the Commissioner on the date or dates designated by the latter, and as often as may be required, a sworn statement showing:
- the different cigarette brands manufactured or imported; and
- their corresponding wholesale prices; and
- the cost of manufacture or importation plus expenses incurred or to be incurred until the cigarettes are finally sold.
It is unlawful to sell cigarettes at wholesale at a price in excess of the price specified in the sworn statement without previous written notice to the Commissioner.
For imported cigarettes, the sworn statement must be accompanied by:
- verified sales invoices of the manufacturer of the cigarettes; and
- the consular invoice issued by a Philippine Consul, should one be available at the place of origin or shipment.
Every pack of cigarettes must bear the inscription “FOR EXPORT TO THE PHILIPPINES”.

Section 186-A provides that any manufacturer or importer who, in violation of this Section, knowingly misdeclares or misrepresents pertinent data or information in the required sworn statement or in sales invoices is subject to summary cancellation or withdrawal of his permit to engage in business as a manufacturer or importer of cigarettes, upon discovery.
If the violator is an alien, the violator is also liable for deportation.

Section 2 requires that the manufacturer’s or importer’s wholesale price of cigarettes subject to the ad valorem tax shall in no case be less than the prevailing wholesale price exclusive of the specific tax.
The prevailing wholesale price minimum is the one registered with the Bureau of Internal Revenue prior to the effectivity of this Order.

Section 3 authorizes the Minister of Finance to promulgate the necessary rules and regulations to effectively implement the order.
The Minister of Finance must act upon recommendation of the Commissioner of Internal Revenue.

Section 4 sets the effective date of the order as September 1, 1984, which governs when the ad valorem tax and related requirements begin to apply.