Is there a sweet spot in the new tax laws?

(First of two parts)

When Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law took effect on Jan. 1, 2018, it introduced Section 150–B of the Tax Code, which imposes excise tax on manufacturers and importers of Sweetened Beverages (SBs). This article specifically covers importers of SBs.

In drafting the law, the framers intended the imposition of excise tax to serve as a preventive health measure to address the alarming rates of diabetes and obesity in the Philippines. According to the World Health Organization, SBs are more strongly associated with high-energy intake and weight gain than any other form of processed food. In the Philippines, both the proportion of the population that consumes SBs and per capita consumption increase with age.

Imposing the tax increases the cost of production of SBs which, in turn, is expected to increase prices and reduce consumption. At the same time, it is believed to encourage consumers to look for healthier alternatives in the market. The new excise tax on SBs also serves as a good source of additional revenue for the government.

While there is still no study on the effect of the new excise tax on SBs on the overall health of the population given that it is fairly new, it nevertheless allows the government to increase its tax collection. According to the Department of Finance, for the first 10 months of its implementation, the total excise tax collection on SBs is around P30 billion.

Given its far-reaching implications, we will now look into some details that businesses will need to consider with regard to taxes, costs and compliance requirements.

EXCISE TAXES AND OTHER COSTS
Given, as mentioned, the government’s intent to generate additional revenue, beverage producers and retailers should note that, except for SBs containing purely coconut sap sugar and purely steviol glycosides, SBs may be subject to an excise tax depending on the kind of sweetener used. The requirements for the imposition of excise tax may be found in Revenue Regulations (RR) No. 20–2018 dated July 25, 2018.

At the same time, an importer must also pay a corresponding VAT on imports corresponding to the excise tax, since excise tax is included in the tax base for computation of the VAT on the importation of goods. In any case, the VAT paid on imports may be used as credit against any output VAT payable.

Additionally, importers should note that they are required to post a surety bond amounting to P100,000.00, at least for 2018. For subsequent years, importers may be required to post a surety bond based on the total excise tax paid during the preceding year. Thus, if an importer pays a total of P1 billion in excise tax on SBs for 2018, then it must also post a surety bond based on the P1 billion amount for 2019, and so on. For some importers, this can be a very onerous amount.

ENSURING COMPLIANCE
One of the possibly challenging aspects of complying with the SB excise tax guidelines is the fact that various regulatory bodies have their own sets of rules that require compliance. For example, the BIR has set the fine for any violations on the excise tax on SBs at treble the aggregate amount of deficiency taxes, surcharges and interest. For the BoC, on the other hand, the Customs Modernization and Tariff Act (CMTA) provides its own set of penalties for failure to pay the correct amount of duties and taxes on imported goods, including imported SBs. Furthermore, beverage producers or importers who are unsure if their products are classified as SBs may need to seek guidance and advice from the Center for Food and Research of the Food and Drug Administration. Specifically, these offices can confirm if the type of sweetener used in a particular product will categorize such product as an SB.

Given these and other possible requirements, it may be beneficial if the government could look into the applications of excise tax into SBs to help simplify the processes for SB producers and importers.

PRIOR DISCLOSURE PROGRAM UNDER THE CMTA
Going back to the CMTA, we should note that importers have an option to simplify things, which is to avail of the Prior Disclosure Program of the CMTA. In the event that the excise tax on importation of SBs has not yet been paid, an importer may volunteer to pay the tax to the BoC. The Commissioner of Customs is authorized under the CMTA to settle any administrative case involving the imposition of fines and surcharges, including those arising from a post-clearance audit, subject to the approval of the Secretary of Finance.

By availing of the PDP, importers can mitigate their customs penalty exposure, if any. Given the relative novelty of the excise tax on SBs and the availability of the PDP mechanism as an option to address potential exposures, importers may find it advisable to conduct an internal determination on whether a PDP application is in their best interest to ensure full compliance with all regulatory requirements.

Understandably, this new excise tax will have further implications on business operations, processes and risk management considerations for companies. We will discuss these further in the second part of this article.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Fahkriemar Limpasan is a Tax Senior Director of SGV & Co.