Bridges Weekly Trade News Digest • Volume 14 • Number 2 • 20th January 2010

US, EU Ramp up Cases against Philippines Liquor Tariffs

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Taking the first step in the WTO’s dispute settlement process, the United States requested formal consultations with the Philippines on Monday, alleging violations of national treatment in the Philippines’ tax scheme on distilled spirits.

“The Philippines continues to tax distilled spirits from the United States at much higher rates than distilled spirits produced in the Philippines,” US Trade Representative Ron Kirk said in a statement.

The central issue is the permissibility of Section 141 of the Philippines Internal Revenue Code, a specific tax on alcohol and tobacco products. The US alleges that the tax section and implementing regulations violate Article III.2 of the General Agreement on Tariffs and Trade (GATT), which, among other things, forbids parties from subjecting other member nations’ products to taxes or other internal charges in excess of those applied to domestic products.

The US joined a similar consultation regarding Section 141 between the Philippines and the European Union last year. In December, the EU requested that a WTO panel hear that dispute, as the consultations in Manila last October did not lead to a “satisfactory resolution of the matter.” Brussels renewed that request this week.

In 2009, the Philippines implemented Section 141 to tax distilled spirits produced from the “sap of nipa, coconut, cassava, camote, or buri palm or from the juice of, syrup or sugar of the cane” at 13.59 pesos (US$ .29) per proof litre, while all other distilled spirits carried taxes of between 146.97 and 587.87 pesos (US$ 3.01-12.78) per proof litre. The EU also alleges that the Philippines’ tax regulations refer to categories as ‘local distilled spirits’ and ‘imported distilled spirits’.

The US is one of the world’s largest exporters of spirits, the USTR website announced, its distilled spirits exports averaging more than US$ 1 billion per year from 2006 to 2008. But the US has had little success in the Philippines, where its spirits account for only 5 percent of consumption.

“These exorbitant taxes have made it nearly impossible for US spirits exporters to break into the US$ 3 billion Philippines spirits market,” said Peter Cressy, president of the Distilled Spirits Council, a US national trade organisation.

Manila responds

Representatives of the private sector in the Philippines cite a different reason for US difficulty in establishing a foothold in their domestic market.

“If, indeed, American brands are having difficulty penetrating the Philippine market, perhaps it is because US exporters have not put in the required effort to develop and build their brands here,” said Olivia Limpe-Aw, president of The Distilled Spirits Association of the Philippines, Inc,, in an e-mail, Business World reported.

Manila counters the EU and US claims by arguing that the spirits receiving favourable tax rates are not comparable to the spirits that are imported.

“EU or United States products are in an altogether different market from those targeted by local brands,” Philippine Ambassador Manuel Teehankee said, as reported by Business World. Last summer, Ambassador Teehankee also said that the local products are “in a different price range” and that the law provides “assistance to indigenous communities using low-cost products.”

But Manila thinks that the parties can find a solution.

“The Philippines continues to believe that this matter can be resolved to the mutual satisfaction of the Philippines, and the United States as well as the European Union if all parties remain open and balance all affected parties interests,” Ambassador Teehankee said.

If consultations fail, Washington may take the same path as Brussels and request a panel to determine if the Philippines is violating its WTO obligations.

ICTSD reporting; “EU set to Formally seek WTO Intervention in Liquor Tax Row,” BUSINESS WORLD, 17 January 2010.