British American Tobacco - v - Camacho



Facts:
1.        August 20, 2008, the Court rendered a Decision partially granting the petition in this case à Section 145 of the NIRC, as amended by Republic Act No. 9334, is CONSTITUTIONAL; and that 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. (Prior case)
2.       In its MR, petitioner insists that the assailed provisions
a.       violate the equal protection and uniformity of taxation clauses of the Constitution,
b.       contravene Section 19, Article XII of the Constitution on unfair competition, and
c.       infringe the constitutional provisions on regressive and inequitable taxation.
3.       Petitioner further argues that assuming the assailed provisions are constitutional, petitioner is entitled to a downward reclassification of Lucky Strike from the premium-priced to the high-priced tax bracket.
Issue: WON petitioner’s MR should prosper. NO. Denied.

Held:
-          The assailed law does not violate the equal protection and uniformity of taxation clauses. The instant case neither involves a suspect classification nor impinges on a fundamental right. The rational basis test was properly applied to gauge the constitutionality of the assailed law in the face of an equal protection challenge.
-          Under the rational basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate State interest. As the Court ruled in the assailed Decision, viz:
 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.
-          The 1st, 3rd and 4th requisites are satisfied. 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[1].
-          For the 2nd requisite:
o    Congress may have reasonably conceived that a tax system which would give the least amount of discretion to the tax implementers would address the problems of tax avoidance and tax evasion. The periodic reclassification of brands would tempt the cigarette manufacturers to manipulate their price levels or bribe the tax implementers in order to allow their brands to be classified at a lower tax bracket even if their net retail prices have already migrated to a higher tax bracket after the adjustment of the tax brackets to the increase in the consumer price index.
o    The classification freeze provision was intended to generate buoyant and stable revenues for 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. Previously classified cigarette brands would be prevented from moving either upward or downward their tax brackets despite the changes in their net retail prices in the future and, as a result, the amount of taxes due from them would remain predictable. The classification freeze provision would, thus, aid in the revenue planning of the government.
-          Churchill v. Concepcion: a tax is uniform when it operates with the same force and effect in every place where the subject of it is found. It does not signify an intrinsic but simply a geographical uniformity. The assailed law applies to all cigarette brands in the Philippines.
-          No unfair competition. Petitioner: classification freeze constitutes a substantial barrier to the entry of prospective players. Failed to establish, no evidence.
-          The assailed law does not transgress the constitutional provisions on regressive and inequitable taxation.
-          Regressivity à it may be conceded that the assailed law imposes an excise tax on cigarettes which is a form of indirect tax, and thus, regressive in character. While there was an attempt to make the imposition of the excise tax more equitable by creating a four-tiered taxation system where higher priced cigarettes are taxed at a higher rate, still, every consumer, whether rich or poor, of a cigarette brand within a specific tax bracket pays the same tax rate.
-          This does not mean that the assailed law may be declared unconstitutional for being regressive in character. Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress shall evolve a progressive system of taxation.
-          Petitioner is not entitled to a downward reclassification of Lucky Strike. Petitioner acknowledged that the initial tax classification of Lucky Strike may be modified depending on the outcome of the BIR market survey which will determine the actual current net retail price of Lucky Strike in the market. *BIR failed to conduct 3-month survey. It is a basic principle of law that the State cannot be estopped by the mistakes of its agents BUT it cannot make the initial tax classification of Lucky Strike based on its suggested gross retail price permanent.

Note: I made this case digest when I was still a law student. The ones posted on my blog were not due for submission as part of any academic requirement. I want to remind you that there is no substitute to reading the full text of the case! Use at your own risk.


[1] The current net retail price, similar to what was used to classify the brands under Annex D as of October 1996, was thus the logical and practical choice. 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 1997 and any new brand that will be introduced in the future.