While a dispute resolution panel of the World Trade Organization (WTO) has decided that the excise taxes applied by the Philippines on imported distilled spirits are discriminatory, it has been indicated that the Philippine government will appeal its ruling.

WTO rules generally bar WTO members from discriminating between imported and domestic products in their tax regimes. The panel was constituted in July 2010 at the request of the European Union (EU) and the United States, who had both raised concerns with the Philippines over the past several years, both bilaterally and in WTO forums.

In addition to the EU and US, Australia, China, Colombia, India, Mexico, Thailand and Taiwan also reserved their rights to participate in the panel proceedings as third parties.

It has been explained that the Philippines applies tax rates to distilled spirits that differ depending on the product from which the spirit is distilled. Domestic distilled spirits in the Philippines are made from local materials, such as sugar and palm, to create a variety of different spirits, including whisky, brandy, gin, vodka, and tequila, that are typically taxed in the Philippines at a low rate.

Imports of the same spirits made from other materials (such as whisky distilled from wheat) are then taxed at significantly higher rates (from approximately 10 to 40 times higher) than the low rate applied to domestic products. Since 2003, imports of distilled spirits - including US products – have never exceeded 5% of the total sales of spirits in the Philippine market.

Consequently, the WTO panel found that, "because imported spirits are taxed less favourably than domestic spirits, the Philippine measure, while facially neutral, is nevertheless discriminatory". Specifically, the panel found that the Philippines applies higher taxes to imported distilled spirits than to “like product” or “directly competitive or substitutable” domestic distilled spirits, in violation of GATT articles.

United States Trade Representative Ron Kirk said that the ruling “confirms that the Philippines’ taxes on imported distilled spirits are discriminatory and inconsistent with WTO rules. We urge the Philippine government to comply swiftly with the panel’s recommendations and rulings, and level the playing field for our exports immediately.”

It was pointed out by the EU that the Philippine market for distilled spirits has important potential, with a steady increase in demand over the last few years. However, the discriminatory taxation system has led to a decline of overall consumption of imported spirits since 2005, while consumption of local spirits has significantly grown in the same period.

EU Trade Spokesman John Clancy added that "the panel report is the confirmation of what is a clear case of tax discrimination which has been and still is an important obstacle to imports into the Philippines. In light of the clear findings of the panel, we hope the Philippines will take the necessary steps to remedy this longstanding situation without further ado.”

However, that is unlikely to happen in the short-term. The Philippine government has always maintained that, because the spirits are made from different ingredients, the excise tax has been correctly applied, and the Philippines House of Representatives has already agreed to postpone parliamentary consideration of a bill to introduce a unitary system of “sin” taxes in the country, pending the result of an appeal of the WTO panel’s decision.

The Philippines Department of Trade and Industry has indicated that it will review the WTO ruling with local distilling companies and discuss the form of an appeal, which it will present to the WTO Appellate Body, as required, within the next sixty days. It can be expected that the government will pursue all its options before any possible acceptance of the initial ruling.

August 18, 2011

Source: Tax News

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