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Parliamentary Committee Approves Philippines 'Sin Tax' Reform

by Mary Swire,, Hong Kong

11 May 2012

The Ways and Means Committee of the Philippines House of Representatives has approved an amended version of the bill to reform the existing ‘sin taxes’ on alcohol and cigarette products.

Current cigarette excise taxes operate on a tiered system that is not indexed to product prices, but relies on the year the product was introduced to establish the relevant price and rate of duty, which, for example, fixes and protects older and more-favoured brands at 1996 duty rates.

With regard to distilled spirits and fermented liquor, the excise duty level is based on the raw material from which the alcohol is distilled and, effectively, favours locally-produced drinks over imported products. That has been ruled non-compliant by the World Trade Organization (WTO).

The previously-proposed structural change and simplification of sin taxes would have established a unitary rate, but had attracted strong opposition from within the industry. A compromise was, however, arranged by the Department of Finance and agreed in the Committee, and, while establishing a tiered, not unitary, system, still links tax rates to product prices.

For distilled spirits, a three-tier progressive tax rate based on the net retail prices of less than PHP90 (USD2.12), between PHP90 and PHP150, and above PHP150 per bottle has been agreed, while a two-tier tax structure based on net retail prices below and above PHP11.50 would be introduced for cigarettes. Both would have an 8% indexation mechanism, every two years from January 1, 2015 until January 1, 2025.

The rationalization of sin taxes has been a priority measure of President Benigno Aquino’s government, which is now looking forward to having the bill passed by next month in a full parliamentary vote, and enacted into law by the end of this year.

Presidential Spokesperson Edwin Lacierda said: “The rationale for reform is clear. This measure seeks to help fund public healthcare, which is a key thrust in the administration’s drive for inclusive growth. It also seeks to improve the efficiency of tobacco farmers, strengthen the current tax structure, and sustain revenue growth.

In a statement, Finance Secretary Cesar V. Purisima added that the bill “paves the way for a significant restructuring of excise taxes on tobacco and alcohol after more than 15 years. The restructuring of the tax system will also create a more level playing field in the tobacco market as well as enable us to comply with our WTO commitments.”

However, the amount of additional tax revenues that now can be expected to accrue to the government from the revised measure has been reduced from PHP60bn annually to only an expected PHP33bn.

TAGS: tax | business | public health | law | Philippines | excise duty | legislation | tax rates | retail

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