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WTO Rules Again Against Philippines Excise Taxes

by Mary Swire,, Hong Kong

26 December 2011

In a decision issued on December 21, the Appellate Body of the World Trade Organization (WTO) has rejected the Philippines’ appeal against the dispute resolution panel ruling in August, that the excise taxes applied by the Philippines on imported distilled spirits are discriminatory.

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.

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 (approximately 10 to 40 times higher) than the low rate applied to domestic products. Consequently, it was said that, since 2003, imports of distilled spirits - including US products – have never exceeded 5% of the total sales of spirits in the Philippine market.

It has been 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.

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.

The Appellate Body has now upheld all of the panel's findings, and confirmed that, in its opinion, the “dissimilar taxation imposed by the Philippine excise tax on imported distilled spirits and on directly competitive or substitutable domestic spirits is applied so as to afford protection to Philippine production of distilled spirits.”

It therefore recommends that the Philippines should be requested to bring its measures into conformity with its obligations.

Following the WTO decision, the United States Trade Representative Ron Kirk announced that “the Philippine tax system for these products is discriminatory, plain and simple. The Appellate Body Report affirms the decisive US victory in this dispute. We urge the Philippine government to comply swiftly with the Panel and Appellate Body findings and eliminate the discriminatory treatment of imported distilled spirits in its market.”

TAGS: tax | commerce | World Trade Organisation (WTO) | Philippines | excise duty | trade disputes | tax rates | United States | trade | European Union (EU) | Europe

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