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Govt caps deductible revenue for tobacco firms

The Finance Ministry has issued a regulation that caps the amount of promotional and distribution costs that can be deducted from the annual revenues of cigarette and pharmaceutical companies

Aditya Suharmoko and Benget Besalicto Tnb. (The Jakarta Post)
Jakarta
Wed, July 1, 2009

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Govt caps deductible revenue for tobacco firms

The Finance Ministry has issued a regulation that caps the amount of promotional and distribution costs that can be deducted from the annual revenues of cigarette and pharmaceutical companies.

In a statement issued Tuesday, the ministry said deductible revenues tied to such costs for companies with sales of up to Rp 500 billion (US$49 million) annually must not exceed 3 percent of total sales or Rp 10 billion.

Those with sales from Rp 500 billion to Rp 5 trillion must not exceed 2 percent of sales or Rp 30 billion, while those with sales above Rp 5 trillion must not exceed 1 percent of sales or Rp 100 billion.

The cap for pharmaceutical companies falls in one category, no more than 2 percent of sales or Rp 25 billion.

The companies are also obliged to submit a report on their promotional and distribution spending plans or they will be unable to subtract the costs from total revenues at the end of the year.

Tax office chief Darmin Nasution said the regulation was aimed at limiting the amount of promotional and distribution costs that would be subtracted from the companies’ gross revenues, which eventually affect tax revenues.

“They [pharmaceutical and cigarette companies] are two sectors with the largest promotional funds.

We allow them [to subtract promotional funds from gross revenues] but that is limited,” he said.

The new regulation has received a mixed response. Chairman of the Indonesian Clove Cigarette Producers Association (Gappri), Ismanu Soemiran, said he was baffled as to what the government was trying to achieve.

The regulation, Ismanu said, would not affect how tobacco producers advertised their products, as it would not seriously harm the profits of tobacco companies.

“I think this applies to any industry, if you have a good product and you want people to know about it, you try your best to meet the required efforts to promote it.

“No matter how high the costs are, as long as they are reasonable, tobacco producers will pay them,” Ismanu said.

The government may be aiming to reduce tobacco use in the country by introducing the new rule, he said.

“If that’s the aim, honestly, I don’t think it will work,” he said.

Parulian Simanjuntak, executive director of the International Pharmaceutical Manufacturer Group (IPMG), said the policy would affect the sale of over the counter medicines more than the prescription medication as the latter were not dependent on advertising to maintain and increase sales.

“I think impacts will also depend on the definition of the promotional and advertising costs,” he said.

He cited as an example, the costs of training or briefing doctors and medical workers on the use of medicines. “It’s not yet clear for us whether this cost is included in the definition of promotional costs.”

In 2008, the tobacco industry paid Rp 60 trillion in taxes or about 10 percent of total government earnings from taxes.

AGB Nielsen Media Research recently reported that tobacco companies spent Rp 375 billion on advertising in the first quarter of this year. Pharmaceutical companies spent Rp 610 billion in the first three months.

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