David Could Lose In Case Against Tobacco Goliath

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ANALYSIS

David could lose in case against tobacco Goliath

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.

-- The Nation 2011-03-09

[AZBill]

The David would have a shot in a fair justice system. But the Thailand courts are so corrupt and the judges are on the take or beholding to some government official who is on the take that there is no shot. I was talking to a fellow today who works with a large oil concern and he was telling me about how he was responsible for paying all the bribes to the Thai government officials.Coming from a developed country, it never ceases to amaze me how open everyone is about the required corruption payments to get anything done here. No doubt should someone get injured on their project there will be also be liability protection from the government bought and paid for with graft. Totally third world.

[asiawatcher]

This one will go nowhere other than to be fodder for some future no confidence vote in whatever government prevails. Too many powerful people behind it.

[Thai at Heart]

If I read this correctly, when the product was sold inter-company Philip Morris to Philip Morris the price was lower than when priced between Philip Morris and King Power.

Myriad reasons why this can be the case.

As for a company being the goliath when faced with a country, rather funny comparison. I wonder what on earth Thailand thought it was doing going after probably the most legally savvy company in the world. Add in the fact that the Thai system has allowed the Thai Tobacco Monopoly to hide behind restrictive tariff protection for decades, and it is a wonder that anyone even believed that there was a snowballs chance in hell that the WTO wouldn't state

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

.

It seems Thailand more often than not wants to have its cake and eat it when it comes to dealing with world bodies. An organisation like the WTO doesn't take to listening to pots calling the kettle black.

[thaihome]

... I was talking to a fellow today who works with a large oil concern and he was telling me about how he was responsible for paying all the bribes to the Thai government officials....

That is total BS. It is highly doubtful that any western "oil concern" is openly paying bribes nad even if they were the person "responsible for paying all the bribes" would never admit doing so to anyone.

Also worth noting is that there is no reason for an "oil concern" in Thailand to be paying bribes to "Thai government officials" in first place. Did he mention what the "bribes" were for?

Your example rather then showing how corrupt Thailand is only shows how ignorant you are of how business in Thailand works, especially the oil business.

TH

[biloutte]

this is a very big big problem must to spend money for that olala

maybee interresting to go inside country for help people need realy and not take care cigarrette who kill many people every day

[thaihome]

If I read this correctly, when the product was sold inter-company Philip Morris to Philip Morris the price was lower than when priced between Philip Morris and King Power.

Myriad reasons why this can be the case.

Amazing that the author was able to write this without once using the term "transfer pricing" which in fact is the key the issue.

TH

[Thai at Heart]

If I read this correctly, when the product was sold inter-company Philip Morris to Philip Morris the price was lower than when priced between Philip Morris and King Power.

Myriad reasons why this can be the case.

Amazing that the author was able to write this without once using the term "transfer pricing" which in fact is the key the issue.

TH

It gets even more complicated than that because using ASEAN tobaccos in cigarettes reduces the cost of the tobacco used to make the cigarettes themselves. I particularly liked "an industry insider stated that tax is calculated on a CIF basis". It doesn't need an industry insider to tell you that.

There is every chance that the cigarettes sold as "duty" free could have a different blend than those sold into the main domestic markets. Same name of cigarette, different blend, different cost, virtually same taste. The customs department is peeing up a tree trying to prove this case conclusively.

[whybother]

Now I understand why the opposition are saying the government are involved in all of this. With all this reporting of "PM Thailand", the opposition think they are talking about Abhisit.

[tig28]

Now I understand why the opposition are saying the government are involved in all of this. With all this reporting of "PM Thailand", the opposition think they are talking about Abhisit.

I appreciate your humor .. ... although.....

A current Bangkok newspaper headline -----

"PM denies role in tobacco scandal"

the article goes on to explain how a close aid of the PM (TTR president Kiat Sittheeamorn) threatens to sue those who alledge that he perverted justice to help "PM Thailand" at the behest of the PM -- although the allegations did not actually name Kiat.

Ironically your humorous comment may actually be close to reality ...... if the allegations prove factual.

[bkk_mike]

Is what's happening that King Power imports Marlboro to sell at the airport, whether that's from the Philippines, or, more likely from the US (as international travellers won't want their cigarettes to taste different).

Philip Morris Thailand however, imports Marlboros from their factory in the Philippines, presumably a lot more cheaply than importing from the US.

And Thailand is trying to use the King Power import price for what is a VERY similar but more expensive product in the calculation of import duty (in the past as it's now zero import duty) and asking for more money.

If King Power isn't buying from the Philippines, then Thailand's case is pretty weak. And even if they are, the price King Power is paying will probably have a higher profit margin built into it for Philip Morris that their own internal transfers would have.

On the other hand, transfer pricing between related companies is a very opaque area, as so long as the price covers costs, they can either book the profit in the country they're selling in (by having a transfer price at cost of production), or book the profit in the country they're making it, by having a transfer price close to the retail price (less taxes/duties).

Either is a perfectly justifiable position from the point of view of any manufacturer that is also a distributor internationally.

What might give Thailand a case is if the transfer price rose significantly after the removal of the 5% import duty, as then it would imply the price was held low artificially to reduce the dutiable value.

[onnut]

... I was talking to a fellow today who works with a large oil concern and he was telling me about how he was responsible for paying all the bribes to the Thai government officials....

That is total BS. It is highly doubtful that any western "oil concern" is openly paying bribes nad even if they were the person "responsible for paying all the bribes" would never admit doing so to anyone.

Also worth noting is that there is no reason for an "oil concern" in Thailand to be paying bribes to "Thai government officials" in first place. Did he mention what the "bribes" were for?

Your example rather then showing how corrupt Thailand is only shows how ignorant you are of how business in Thailand works, especially the oil business.

TH

Bribes are a part of daily life in Thailand. I've had to do it in business here many many times. It's normal for me now as that is how it's done here.

So I would say it is you who are ignorant on how Thailand works.