Philippines said to have lost liquor tax dispute

reported in today’s BusinessWorld:

Taxes levied by the Philippines on alcoholic drinks from the European Union and United States are illegal under global rules, the world’s trade dispute body ruled on Monday, according to sources close to the case.

Washington’s envoy in Manila said he welcomed the decision, while the Philippines’ tax chief -- insisting that the duty system was not discriminatory -- said it would be up to legislators to change relevant laws.

Sources said that a World Trade Organization (WTO) legal panel, in a confidential report circulated to the parties involved in the dispute, had ruled that the Philippines’ taxes discriminate against brands such as Jack Daniel’s and Jim Beam as well as Spain’s Brandy de Jerez, while favoring domestic producers catering to the country’s $3-billion spirits market.

The ruling is confidential until its publication in August, and trade officials for the EU and US were unable to comment on its contents. But it is being eyed keenly by Spanish brandy makers and US firms such Brown-Forman Corp. , which owns Jack Daniel’s, and Fortune Brands Inc., which makes Jim Beam.

“We have long questioned the Philippines’ discriminatory tax approach. We are optimistic of a positive result from the WTO panel, which will be particularly welcomed by Spain since Spanish brandy constitutes the main EU spirits export to the Philippines,” said Jamie Fortescue, director general of the European Spirits Organization.

The ruling dismissed Manila’s argument that imported whiskey and brandy do not compete with locally made alcohol and that differing taxes -- set according to the raw material used -- should therefore be legal, sources said.

It found that the purpose of a lower tax on domestic alcohol that can be directly substituted for imports was to protect domestic producers, an illegal aim under WTO rules.

The EU, whose annual global spirits exports amount to about 7 billion euros ($10 billion), blames the tax for halving EU spirits sales to the Philippines between 2004 and 2007 to 18 million euros. Brussels lodged a WTO challenge against the Philippines in January last year.

The United States, which followed suit with a similar challenge in April last year, similarly says the Philippines’ tax system -- imposing duties 10-40 times higher on spirits not distilled from materials such as sugar cane and molasses produced in the Philippines -- means it has failed to gain more than 5% of the country’s market.

In Manila, US Ambassador Henry K. Thomas said Washington welcomed the WTO’s preliminary decision.

“The US looks forward to a level playing field in the country, since the consumer benefits with fair prices even from goods coming from outside the Philippines,” Mr. Thomas Jr. said at the sidelines of a Management Association of the Philippines press conference.

Bureau of Internal Revenue (BIR) Commissioner Kim S. Jacinto-Henares, meanwhile, said it would be up to Congress to amend the country’s tax laws once the WTO ruling becomes final.

“I will still collect excise taxes, as stated in the National Internal Revenue Code (NIRC). There will be no changes until Congress amends the law,” Ms. Henares told BusinessWorld.

Under Section 141 of the NIRC, alcohol products produced from the sap of nipa, coconut, cassava, camote, buri palm or from the juice, syrup or sugar of the cane are charged an P8 excise tax per proof liter.

Alcohol products not made from the identified raw materials are levied an excise tax of between P75 to P300 per proof liter Imported spirits tend to fall under this category because they are usually made of barley, wheat and grapes, Ms. Henares explained.