Sugar tax could leave PHL vulnerable to WTO complaints -- DFA

Posted on June 16, 2017

THE Department of Foreign Affairs (DFA) warned that the Department of Finance’s (DoF’s) plan to tax sugar-sweetened beverages (SSBs) is allegedly discriminatory to foreign products and may leave the country vulnerable to a World Trade Organization complaint.

The Tax Reform for Acceleration and Inclusion (TRAIN) or House Bill (HB) 5636 was passed on third and final reading by the House of Representatives on May 31.

Section 26 of HB 5636 or the provision on SSBs imposes a P10 excise tax on every liter of sugar-sweetened beverage containing locally-produced sugar and a P20 excise tax on internationally-produced sugar-sweetened beverages and on products which use imported sugar.

Sought for comment, DFA Assistant Secretary for International Economic Relations Leo M. Herrera-Lim said that the two-tier structure is “discriminatory” under World Trade Organization (WTO) rules.

Such a tax would violate the National Treatment Principle under Article III of the General Agreement on Tariffs and Trade (GATT), which prohibits a member country from favoring its own products to the disadvantage of similar imported products of another member country.

GATT provides that “the products of the territory of any member imported into the territory of any other member shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products.”

The DoF expects P47 billion in additional revenue in the first year of implementation of the tax on SSBs. Further, the department gave the following estimate of retail price increases, based on latest price data: one liter of Coca-Cola will increase to P38 from P27; sachets of powdered drinks such as Nestea, Tang, Eight O’ Clock (P20.75 from P9.75); C2 Apple Green Tea (P22.50 from P16.50); Cobra Energy Drink (P23 from P19); Zest-O Big (P13 from P10); and Yakult (P11 from P10).

Ways and Means Committee chairman Juan Edgardo M. Angara said in an interview that he does not approve of the two-tier provision.

“Most of the experts, their opinion is that it is illegal especially if the basis is (taxing sugar originating) from other countries. We will really encounter a problem with the World Trade Organization ... The other countries might get back at us. Our local industry might be affected,” Mr. Angara said.

On the other hand, the Department of Trade and Industry proposes that an excise tax be imposed based on sugar content of SSBs, and not on volume per liter.

“Instead of implementing excise tax based on products with sugar, we would like to suggest that the excise tax be based on the actual sugar content or usage of the goods, as not all products with sugar are included in the proposed measure,” Abigail R. Zurita, Assistant Director at Bureau of Trade and Industry Policy Research said.

“We are of the view that in order to make it fairer, tax should be based on the sugar usage or tax at source, may it be local or imported sugar. This will mean a lower tax rate but a broader tax base,” she also said.

“Imposing excise tax on specific products might be regressive, especially with SSBs which impact on MSMEs (micro, small and medium enterprises) including sari-sari stores and the consumers who consider these SSBs as one of their sources of energy,” she added.

Mr. Angara added: ”If we really want to encourage healthy habits, it should not be volume-based but content-based. According to the DoF, they will study [taxation] on sugar content basis.”

Senator Emmanuel Joel J. Villanueva, who plans to file a senate bill on the SSB tax, said that he would delay the filing of the legislation due to such concerns, which surfaced during the Ways and Means Committee hearing.

“I’m filing a bill actually on SSBs. I think I will delay it a bit because I’ve heard some very interesting figures. For example, the one liter of Cola worth P20 will increase to P30. Maybe a 50% increase is too much,” he said.

Mr. Villanueva said that he will push for a single tier of taxation but added he approves of the P10 excise tax.

“One-tier definitely. I would go for one tier not only because it’s very difficult for the administration [to figure out] where sugar came from, and another reason is that we’ll have problems with our treaties,” he said.

“As of this time, I agree with the P10. I have not finalized the bill yet. I want to get all the data I asked for earlier,” he added.

In addition, the Committee wants to deliberate on taxing products with high fructose corn syrup (HFCS), a sugar substitute.

“We want to carefully look into the high fructose corn syrup. If sugar is deadly, it appears that HFCS (may be more dangerous),” he said.

The sugar industry claims it has been suffering from competition from HFCS, which is preferred by industrial users because of its low cost.

The Sugar Regulatory Administration (SRA) has assured that the volume of HFCS imports has fallen from 2016 levels after a crackdown on imports, during which it claimed the authority to regulate HFCS based on its impact on sugar growers.

“[The] SRA has been approving clearances of imported HFCS but the total volume, so far, is less, vs. last year,” SRA Administrator Anna Rosario V. Paner said in an earlier mobile message.

Sugar Order No. 3 issued on Feb. 20 made the import of HFCS subject to its approval.

Beverage makers and food processors imported around 800,000 metric tons of HFCS last year, displacing demand for an estimated 20 million 50-kilo bags of locally produced refined sugar, or 33% of total domestic sugar output.

Sen. Joseph Victor “JV” G. Ejercito, chairman of the Committee on Health, told BusinessWorld via text message that he is “against imposition of additional taxes on sugar-sweetened beverages as it might have an effect on the sugar industry as a whole.”

Sought for comment on the Department of Health’s contention that the measure will help fight obesity and other sugar-related health concerns, Mr. Ejercito said that the department should “strengthen information campaign and education of the populace regarding healthy lifestyles” instead. -- Jil Danielle M. Caro, Janina C. Lim