Flawed policy cited in liquor tax row

Business World

BY JESSICA ANNE D. HERMOSA, Senior Reporter

REPORTED admissions of policy flaws are being used against the Philippines in an ongoing liquor tax dispute at the World Trade Organization (WTO).

This, along with Manila’s concession that brands made here are marketed to substitute imported counterparts -- a point the European Union and the United States have raised to argue for uniform tax rates -- will be considered in coming hearings, documents obtained by BusinessWorld showed.

The EU formally filed a complaint with the WTO in 2009 over the Philippines’ allegedly discriminatory liquor tax policy. The US joined the dispute early this year and the three parties submitted position papers last September and October.

The Philippines’ National Internal Revenue Code levies lower specific taxes on spirits distilled from coconut and sugarcane, raw materials which the EU and US argue are indigenous to the country and thus provide unfair advantage to domestic manufacturers.

The Philippines, for its part, claims that the tax rate is based on "objective criterion of raw materials and not on whether the products are domestic or imported", an Oct. 21 submission to the WTO showed.

The EU, however, pointed to statements made by Philippine authorities and legislators that allegedly admit to the policy’s violation of trade rules and an intention to protect Filipino industries.

Senator Ralph G. Recto was cited as saying that a bill he sponsored -- which later became the Sin Tax Law (Republic Act 9334) -- aimed to "protect local manufacturers", the EU said in its submission, quoting a Dec. 1, 2004 Senate transcript.

Letters from the Trade and Finance departments to the House ways and means committee and to Spanish authorities likewise conceded policy flaws, the EU claimed.

The Finance department reportedly wrote the Spanish embassy in 2007 to say it was attempting to have Congress reform the tax structure "to make it consistent with our commitment under the WTO agreement".

The Trade department also wrote to Congress in 2009 saying RA 9334 was "inconsistent" with WTO rules and posed a "manifest violation of the national treatment principle," the EU quoted the state agency as saying.

These admissions, said the EU, should be considered as a WTO panel decided in an earlier dispute involving Chile’s liquor taxes that "stated objectives by the government ... concerned may be relevant in evaluating the design of a measure".

The Western bloc, as did the US, went on to point out that distilled spirits, whether made from indigenous materials or not, were "competitive or substitutable" and thus merited uniform tax rates.

"In the case at hand, it is particularly remarkable how Filipino manufacturers try and present their products as being similar or equivalent to, or even better than, competing imported spirits," the EU stated, noting that local brands like Gran Matador, Emperador and Barcelona brandies are marketed as at par with Spanish counterparts.

Even as sugar-based liquor made here do not have the same raw materials as foreign liquor, the local manufacturers’ advertising strategies "support the conclusion that these products have similar end uses" as the imports, the US similarly said.

Both complainants further cited decisions in earlier liquor disputes they had won: advertising methods were also key factors in cases against Korea and Chile and the case against Korea also showed that tax rates have to be uniform for products with "potential substitutability".

The Philippines, for its part, referred to jurisprudence in its position paper.

While it conceded that "the end-use of the products at issue is objectively the same" and that there were "overlaps" in advertising strategies, similarities in the products’ physical characteristics have to be proven as well to merit uniform tax rates -- as was the case with the earlier dispute involving Japan.

"[And] in none of the three prior WTO alcohol cases were the Panels presented with the type of highly segmented market that exists in the Philippines, in which sugar-based spirits are produced for low-income consumers, and where high cost non-sugar-based spirits are priced out of reach for the vast majority of the population," Manila said.

The three parties will be submitting rebuttals this week while a second hearing is slated in February, Jose Victor v. Chan-Gonzaga, first secretary of the Philippine mission to the WTO, said in an interview last week.