In the spirit of fair competition

The pending case of some European and US makers of distilled spirits against the Philippine government before the World Trade Organization is expected to drastically change the local alcohol drinks industry scene should the international trade arbiter’s initial ruling hold.

The WTO, in a decision officially released in August this year, said that taxes imposed by the Philippine government on brands such as Jack Daniel’s, Southern Comfort, Jim Beam and Brandy de Jerez were unfair and went against the spirit of global free trade, i.e., Article III:2 of the 1994 General Agreement on Tariffs and Trade (GATT).

The WTO dispute panel is reviewing the Philippine government’s appeal and is expected to subsequently rule on it come February next year.

Merrymakers looking forward to a more liberal dose of spirited cheers this coming holiday season, however, may not see any changes, at least this year. Prices of distilled spirits – local or imported – will remain pretty much the same until the end of the year.

Battle for P50-billion market

As expected local distillers who are enjoying the low tax rates are vigorously opposing the WTO ruling, warning of a major drop in sales should the WTO ruling result in a restructuring of the current revenue code on distilled spirits made from sugar (or molasses) and other local base materials.

The European and US distillers had complained that certain products exported to the Philippines were being taxed 10 to 50 times higher than their local comparable counterparts. In the WTO panel report, such claim was upheld to be true.

The Philippine government’s appeal, however, argued that the base materials used by imported brands are different. In addition, the state prosecutors deny that there is prejudice in the amount of excise tax slapped against the foreign brands.

At stake is the P50-billion local liquor sector that makes up about 40 percent of the country’s total alcoholic beverage industry. According to the WTO, local brands have been growing at about eight percent a year while those of imported brands have been penalized with sales restrained to a mere one-percent rise annually since 2005.

There is no arguing that the price disparity between local whiskey and rum is miles apart from its imported competitor. Even in a market that is not price sensitive, such a gap will dictate market preferences. Obviously, Filipinos would rather pay less if they had a choice for such temporary pleasures.

Even playing field, narrow price gap

In their crusade for a level playing field, European and US liquor manufacturers are looking forward to major shifts in the local market’s spending and taste preference once the price gap caused by huge disparity in taxes between domestic and imported spirits is narrowed.

This is certainly the last thing that local distillers want. At the moment, the price disparity makes their brands the easy choice by those who wish to temporarily numb their senses.

Too accessible

The issue at present with WTO is whether there is unfair disparity in taxes being imposed on imported alcohol drinks vis-à-vis local products to the point of being arbitrary and contrary to the spirit of fair competition.

Apart from the above, the other issue our government should seriously consider is whether we are taxing alcohol products, local or imported, too low – so low that these health hazard products are easily accessible to the detriment of public health. 

Do we really want the fishermen and farmers to spend part of their meager income on alcohol and cigarettes? Wouldn’t an increase in the price of a bottle of gin or whiskey or products harmful to health due to higher taxes be enough to make our farmers and fishermen, their housewives, or all those young tykes oozing with testosterones think twice about buying?

It would be well and good if this segment of the market would wean itself from spending on liquor and cigarettes and save their health from debilitating and costly alcohol and cigarette related diseases.

Restructuring ‘sin’ taxes

On several columns, I have touched on the issue of “sin” product taxes and advocating for the restructuring of the excise taxes on cigarettes and alcohol.

The most compelling reason for doing this, aside from the fact that this has pegged excise taxes at levels unchanged for 14 long years particularly for tobacco, is the lopsided expense of the state for tobacco- and alcohol-related health care delivery.

Restructuring the current “sin” tax system would also dampen consumption of liquor and cigarettes not only among those who can ill-afford these vices, i.e., our farmers, fishermen and workers with meager income but also on our adventurous youth who are curiously drawn to these “sinful” adult habits.

While domestic tobacco and liquor manufacturers and distributors are warning that restructuring the excise tax could reduce government revenues because of a resulting decrease in sales, this is pure speculation. The ultimate objective of reduced consumption is in itself a laudable outcome.

However, data from other countries that initiated hefty increases in cigarette and alcohol drinks taxes indicated that after an initial dip, volume of sales eventually leveled off at previous level.

Given the most conservative assumptions, government should be able to raise its current collections from “sin” taxes by at least P60 billion, surely a big boost to the government’s health care delivery budget.

And in some cases, like with the tobacco excise taxes, the rules in the existing excise tax structure are blatantly lopsided in favor of the vested interest of the monopolies who have enjoyed the windfall benefits for the past 14 years.

Restructuring the “sin” taxes is urgently needed but it would require the political will of this government, particularly of P-Noy who is an acknowledged smoker.

Aiming for the national championship

Congratulations to the Ateneo Blue Eagles for capturing their fourth consecutive UAAP championship. They now join the elite group of multiple consecutive champions composed of the UE Warriors, DLSU Green Archers and UST Growling Tigers.

As the UAAP champion, the Blue Eagles are automatically seeded to the Final Four championship round of the Champions League (PCCL) 2011 National Collegiate Championship where Ateneo will aim for the record-setting three-peat national title.

In addition to Ateneo, the following teams are already in the Sweet 16 Finals: FEU Tamaraws, Adamson U Falcons, UST Growling Tigers, San Sebastian Golden Stags, San Beda Red Lions and Letran Knights.

Visit www.ChampionsChampionsLeague.net and join for free the ongoing survey to pick the other qualifiers to the Sweet 16 Finals. Your correct choices may win for you gifts from Champions League sponsors.   

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.