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British American Tobacco Corporation v.

Finance Secretary Camacho, BIR Commissioner Parayno (2008)

Doctrine: Classification if rational in character is allowable. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Facts: British American Tobacco is the distributor of Lucky Strike Cigarette in the Philippines The company is questioning the constitutionality of RA 8240, entitled "An Act Amending Sections 138, 139, 140, and 142 of the NIRC, as Amended and For Other Purposes," which took effect on January 1, 1997 The law provided a legislative freeze on brands of cigarettes introduced between the period January 2, 1997 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. In effect: older brands or existing brands will have, in the long term, lower price and tax rate as inflation and price appreciation were not factored in. o Their tax rate shall remain until Congress changes it o Hence, a legislative freeze in the class of cigarettes Net Retail 2005 Tax 2007 Tax 2009 Tax 2011 Tax Supreme Price Court (excluding Classification excise tax and VAT Less than P2/pack P2.23/pack P2.47/pack P2.72/pack Low-priced P5 per pack Bet P5P6.35/pack P6.74/pack P7.14/pack P7.56/pack MediumP6.50 priced Bet P6.50- P10.35/pack P10.88/pack P11.43/pack P12/pack High-priced P10 Above P25/pack P26.06/pack P27.16/pack P28.30/pack PremiumP10 priced New brands shall be classified according to current net retail price New brands are the ones registered after January 1, 1997 In 2001, Lucky Strike was introduced in the market Lucky Strike was classified as premium-priced hence was imposed the Above P10 tax rate Lucky Strike protested the P22.77M tax assessment pegged at P25/pack Lucky Strike interposes that the legislative freeze is discriminatory against new brands and poses barrier to entry in the cigarette industry o Legislative freeze means: existing or "old" brands shall be taxed based on their net retail price as of October 1, 1996. o Hence, the classification based on pricing is lower for older brands compared to new entrants Lucky Strike found it unfair that Philip Morris and Marlboro are classified only as High-priced while it is classified as Premium Priced.

WON: 1. The pertinent portions of RA 8240, as amended by RA 9334, discriminates against new cigarette brands and favors old cigarette brands? 2. The classification freeze provision unduly favors older brands over newer brands? Held: In applying the rational basis test, the Court found the questioned law Constitutional. A legislative classification that is reasonable does not offend the constitutional guaranty of the equal protection of the laws. 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. classification freeze provision uniformly applies to all newly introduced brands in the market, Finding that the assailed law seems to derogate, to a limited extent, one of its avowed objectives (i.e. promoting fair competition among the players in the industry) would suggest that, by Congresss own standards, the current excise tax system on sin products is imperfect. But the Court cannot declare a statute unconstitutional merely because it can be improved or that it does not tend to achieve all of its stated objectives.