The paper presents the historical development of distilled spirits in the Philippines and discusses the implications of the newly enacted Republic Act (RA) No. 10351 (Restructuring the Excise Tax on Alcohol and Tobacco Products, January 1, 2013) in relation to the requirements of the World Trade Organization (WTO).
The imposition of an excise tax on certain goods is a policy instrument aimed at achieving two objectives, i.e., to influence the behavior of consumers of certain goods and to generate government revenue. In the Philippines, an excise tax is levied on alcohol and tobacco products, also referred to as sin products, non-essential articles, and on products that usually produce negative externalities, e.g., petroleum and automobiles.
Act No. 1189 or the first Internal Revenue law enacted in 1904 listed down the tax on distilled spirits as one among the thirteen (13) revenue sources of government. During the early years, a uniform excise tax of PhP0.20 per proof liter was imposed on distilled spirits. Subsequently, Act No. 2339, which was approved on February 27, 1914, introduced the differential tax rates on distilled spirits based on raw materials. Since then, several laws were subsequently enacted raising the rates of tax on distilled spirits, i.e., Act No. 2711, Commonwealth Act (CA) No. 466, and Republic Act (RA) Nos. 56, 219, 589, 592 and 2258.
The approval of RA 5449 on September 25, 1968 distinguished manufacturers of distilled spirits into big and small distillers and provided for lower specific tax rates as an incentive to encourage small distillers to register with the BIR and pay the specific tax. Congress took note of the fact that small distillers and their patrons generally belong to the low-income group and that small distillers cannot compete with big distillers.
On January 1, 1973, Presidential Decree (PD) No. 69 revised the tax base by differentiating between distilled spirits produced domestically from locally produced raw materials vis-à-vis imported distilled spirits or distilled spirits produced from imported raw materials. This was intended to protect the domestic industry from foreign competition. However, it maintained the proviso on small distillers.
On December 1, 1983, Executive Order (EO) No. 923 reverted to the use of the phrase “If produced from the sap of nipa, x x x” and added the phrase “Provided such materials are grown commercially in the country where the distilled spirits are produced.” It maintained the provisos on small and big distillers and importers in spite of the Philippine commitment to the General Agreement on Tariffs and Trade (GATT) on January 1, 1980. On the other hand, EO 947 (issued on March 29, 1984) abandoned the reference to locally produced and imported raw materials in adherence to the counry’s GATT commitment. This was carried over under the provisions of PD 1959 (issued on October 10, 1980).
On January 1, 1986, PD 1994 introduced the taxation of medicinal preparations, flavoring extracts, and all other preparations, except toilet preparations. It also imposed a 4% excise tax on compounded liquors. However, the effectivity of EO 273 on January 1, 1988 repealed the 4% tax on compounded liquors and in lieu thereof, a 10% value-added tax (VAT) was imposed. It also lowered the tax rate imposed under PD 1994. Effective January 1, 1990, RA 6956 raised the tax rates again to their PD 1994 tax levels.
On January 1, 1997, RA 8240 was enacted introducing the three-tiered excise taxation based on net retail price (NRP) on distilled spirits produced from raw materials other than the sap of the nipa, etc. It also introduced Annex A that listed the brands and its tax classification based on the NRP as of October 1, 1996. RA 8240 expressly provided that the brands listed in Annex A will remain in their tax classification unless revised by Congress while new brands will be classified according to their current NRPs. These provisions were carried under Sec. 141 of the NIRC of 1997 via RA 8424 or the Tax Reform Act of 1997.
Effective January 1, 2005, amendments on the tax on distilled spirits were provided under RA 9334, otherwise known as the Sin Tax Law. It removed the big and small distiller classifications on distilled spirits. It also provided for an automatic 8% increase on the excise tax rates every two years starting January 1, 2007 until January 1, 2011. Likewise, it maintained the classification of brands for the same products which, although not set forth in Annex A, were registered and were being commercially produced and marketed on or after October 1, 1996.
In 2009 and 2010, the European Union (EU) and the United States of America (USA), respectively, filed a complaint relative to the Philippines excise taxation of distilled spirits. In particular, the EU stressed that the Philippines violated GATT 1994 III:I and III:2 while the USA cited GATT III:2. It was argued that the Philippines’ taxes on distilled spirits discriminate against imported distilled spirits by taxing them at substantially higher rates than domestic spirits which were inconsistent with Article III:2 of the GATT 1994. In August 2011, the Panel found that because imported spirits are taxed less favorably than domestic spirits, the Philippine measure is discriminatory and thus, violates the obligations under the first and second sentences of Article III:2 of the GATT 1994.
In response to these complaints, the Philippine government zealously pushed for the restructuring of the taxation of sin products, particularly on distilled spirits, through RA 10351 which was enacted and became effective on January 1, 2013. RA 10351 restructured the taxation of distilled spirits based on raw materials including the three-tiered specific tax rates by shifting to a compound or a combination of ad valorem and specific tax. It also abolished the provision on the prohibition on tax reclassification of distilled spirit brands provided under Annex A of RAs 8240, 8424 and 9334. Under this new regime, distilled spirits will be taxed in two stages, the first tax is based on NRP and the second is based on per proof liter. The passage of RA 10351 addressed the complaints of the EU and USA by abandoning the use of raw materials as basis for taxation and by imposing a compound tax of ad valorem based on NRP per proof and specific tax per proof liter. Hence, all distilled spirits whether imported or locally produced are now subject to the same excise tax rates.
