Is there a sweet spot in the new tax laws?

(Second of two parts)

In the previous article, we discussed the salient points of the excise tax on Sweetened Beverages (SBs), the costs associated with its implementation, compliance with applicable regulations, and the applicability of the Prior Disclosure Program (PDP) to importers of SBs. In this second part of the article, we will examine some business considerations which importers as well as producers in the SB industry should consider, including possible opportunities brought about by the new excise tax law.

IMMEDIATE IMPACT
Given the law’s health objective, its impact was immediately felt upon implementation. According to Nielsen Retail Index, the sales of SBs weakened in the first few months due to the implementation of the excise tax. This was expected considering price increases normally push away consumers.

An importer should consider ways to manage the immediate short–term impact of the new tax while waiting for the market to adapt and adjust to the increase in prices. There should be initiatives to address additional costs, while at the same time, maintain market share.

For instance, sales efforts may become more targeted, such as towards SB consumers who are not price sensitive, or for whom promotional activities may be effective. At the same time, companies may wish to consider making price increases more gradual to ease the price impact on existing consumers and better manage their expectations.

An importer of SBs may also consider sourcing goods from suppliers in countries that have Free Trade Agreements with the Philippines to avail of lower or preferential tariff rates, if any. This would help manage the cost that would have to be incurred by the business and passed on to customers.

TAX SAVINGS VS IMPORTATION COSTS
Based on the letter of the law, the only way for an SB importer to be exempt from the tax is to use purely coconut sap sugar and purely steviol glycosides. Otherwise, the importation becomes subject to the excise tax.

Some companies have already gone this route and changed their formulations to use purely coconut sap sugar and steviol glycosides as sweeteners. Previously, this was considered a more expensive option, but with the imposition of the excise tax, these companies opted to reconstitute their imported products.

However, the importers should consider the actual costs of the sweeteners exempt from excise tax. For instance, stevia is more expensive compared to the sweeteners subject to excise tax. Importers will need to conduct proper cost-benefit studies specific to their processes and operations to weigh the benefits of a change in sweetener used.

Moreover, the importers should also consider the possibility of losing market share if there is a change in the sweetener used in the SBs, particularly if their market is taste-sensitive. While a change in the sweetening ingredient of the SB may result in possible tax savings, an importer should also factor in the preferences of the target market.

OPPORTUNITY TO TARGET A HEALTH-CONSCIOUS MARKET
The reality is that the Philippines is not the only country to implement a tax on SBs. Other countries have implemented or will implement similar taxes. The underlying factor among all these is the objective of improving the overall health of a country’s population.

Given this general direction among different jurisdictions, there is an opportunity for players in the SB industry to cater to a specific market, i.e. those who look for healthy alternatives to SBs. In fact, developing “healthier” SB brands or formulations may even present new market possibilities abroad, with local producers eventually exporting SBs to health-conscious consumers outside the Philippines.

In the Philippines, according to the National Tax Research Center, citing data from the Philippine Statistics Authority in 2015, the annual family expenditure on soft drinks reached as high as 20%. On the assumption that only half of this number would look for healthy alternatives, such number may constitute a good enough market size for an industry player to target.

Companies should also take notice of the change in the consumption behavior of Filipinos. In a recent study, Filipinos are slowly becoming more health conscious in their food and beverage choices, opting for “light” variants or those with more nutritional benefits. While the increase in product cost is solely attributable to the excise tax, the decline in sales, however, may not be solely attributed to the same as changes in consumer behavior may also be a substantial factor.

Resourceful companies can take this business gap as an opportunity to cater to the change in consumption behavior as well as meet the legislative intent to promote better health and address the alarming rates of diabetes and obesity in the country. In this way, perhaps a new “sweet spot” can be found that balances business gain with innovative product development and socially responsive market strategies.

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.