Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Philippine Taxes on Alcohol and the WTO complaint

Posted by butalidnl on 16 January 2010

The US has joined the European Union in filing a case against the Philippines with the World Trade Organization (WTO) on the issue of taxes on imported distilled drinks.  They charge that the tax on foreign-made whisky and other distillates could be from 10 to even 40 times that for locally made distillates. And that this is against WTO rules.

The Philippines has held on to its position of having lower taxes on locally made distillates on the basis of protecting indigenous communities that produce these products.  Also, the actual law on this specifies the lower taxes to alcohol products made from “nipa, coconut, cassava, carrots, buri, palm or sugarcane”. In theory, if Cuba wants to sell its rum made from Cuban sugarcane in the Philippines, this rum will be subject to the lower tax.

The US and EU want equal treatment, and charge that the law actually discriminates against foreign-made distillates, and not simply on raw materials. They want the excise taxes on their exports lowered to local levels.

This sounds fair enough, but it is not. The  price of the locally made products is much lower than that of the imported product. Thus, if they are subject to the same excise tax, the local product’s price will be affected much more.

I think that the solution to this problem will be to change the “sin tax” on alcohol products from being an excise tax – which is a specific amount taxed per unit of product – to an ad valorem tax, which is simply a percentage tax based on the wholesale price. This will not only solve the current WTO issue, but it will also solve the problem of adjusting the tax to inflation – since the tax rises with the wholesale price, it will always be adjusted to inflation.

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