The excise tax reform in the Philippines, commonly known as the “sin” tax bill, is creating great political drama and intrigue—on par with a Greek tragedy.

For the past 10 or more years, excises have been “screaming out” for reform in the Philippines. Now is the time for all interest groups and stakeholders to come together to find a balance of their objectives—revenue, employment and health—and pass a bill. Some excise reform is better than no reform.

One of the greatest risks to the Philippine economy will be if the excise reform bill does not correct the discriminatory excise tax on distilled spirits that has caused a World Trade Organization (WTO) dispute with the European Union (EU) and the United States of America (US).

In 2011 the WTO Panel and Appellate Body ruled that the current excise- tax structure on distilled spirits is discriminatory against imported spirits and in violation of the national treatment provisions of the General Agreement on Tariffs and Trade (GATT).

The Philippines is a member of the WTO. On a number of occasions, the Philippines made use of WTO’s dispute settlement process, including its most recent dispute with Thailand on measures affecting cigarette exports from the Philippines. The Philippines won this case, curiously under the same national treatment rules on which the EU and the US filed their WTO complaint.

One would therefore expect the Philippines to respect the WTO ruling on distilled spirits. However, the current version of the excise bill (Senate Bill 3299) reported out of the Senate Committee on Ways and Means proposes to continue taxing distilled spirits in such a way that is still discriminatory against imports. The Philippines has until March 8 next year to amend its domestic legislation to comply with the ruling.

If the Philippines fail to comply, it risks retaliatory measures from the EU and the US, likely in the form of counter tariffs on sensitive export products like tuna, pineapples, bananas and integrated circuit boards.

In short, the discriminatory tax on a miniscule part of the Philippine  economy (less than 2 percent of all distilled spirits consumed in the Philippines are imported) puts at risk the competitiveness of some of the Philippines’s key export sectors.

The Philippines can avoid a protracted trade dispute with its large trading partners by reforming the distilled spirits tax in a WTO complaint manner.

Committee on Ways and Means members from both the Senate and the House should consider previous proposals to enact an overall specific tax structure based on alcohol content of distilled spirits.

Indeed, a single specific rate for all spirits is the most WTO-compliant outcome.

Of course, the government could consider a phased approach toward WTO compliance where a two-tiered structure could initially be put in place where the rate of the highest tier is no more than double the rate of the lowest tier.

This should transition to a fully harmonized single rate over several years. Such an approach would demonstrate good faith efforts to comply with WTO rules and remove the risks of a trade war that will disrupt the economic growth of the Philippines. Complying with the WTO rules is best international practice. But in this particular case it is also pragmatic, smart and common sense for the Philippines.

Daniel A. Witt is the president of the International Tax and Investment Center, an NGO promoting pro-growth tax and investment reforms in emerging countries. He recently chaired the ninth meeting of the Asia-Pacific Tax Forum in Manila earlier this month. He also cooperates with the European Chamber of Commerce of the Philippines in tax matters.

Source: Business Mirror; Opinion; 29 October 2012