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The EU and the WTO | Brussels, 15 August 2011

Questions and Answers on the final WTO panel report in the case brought by the EU and the US against the Philippines over discriminatory taxation of distilled spirits

What is this issue about?

Since 1914, the Philippines have maintained an excise tax regime on distilled spirits that favours local production. The Philippines did not remove this tax discrimination upon membership to the WTO in 1995. To the contrary, the discriminatory tax regime was consolidated in the reform of the National Revenue Code in 1997 and discrimination has been worsening since, seriously undermining the competitive conditions of imported spirits in the Philippines market.

The Philippine excise tax regime establishes a distinction between: (a) spirits produced from raw materials available in the Philippines (essentially locally produced spirits); and (b) spirits produced from other raw materials (the vast majority of imported spirits). While spirits produced from raw materials available in the Philippines are subject to a flat tax rate, imported spirits are subject to a price-band system with tax rates from 10 to 50 times higher than that imposed on domestic spirits, depending on their net retail price.

What is the impact of this trade barrier to the EU industry?

The discriminatory tax regime in the Philippines has been an obstacle to normal market penetration of imported spirits in the growing Philippine market, which is concentrated in the hands of big and powerful conglomerates such as San Miguel Corporation and Tanduay Holdings Inc:
- While imported spirits in similar markets hold an average market share of 15%, imported spirits in the Philippines only account for 2% of total consumption.
- It is estimated that, from 2004 to 2007, EU exports of spirits to the Philippines more than halved (from around €37 million to €18 million).

In addition to the discriminatory excise tax regime, the competitive position of EU spirits is being undermined by the use by local producers of clear references associated to imported products in their marketing strategies, unfairly taking advantage of the reputation of imported spirits.
Which are the main conclusions of the panel report?

The report concludes that the excise tax regime in the Philippines discriminates against imported distilled spirits and is therefore in violation of Article III: 2 of the General Agreement on Tariffs and Trade (GATT).

Which are the consequences of this report for the Philippines?

Unless the Philippines introduce an appeal within 60 months, the Philippines are bound to comply with the recommendation of the panel report to bring their excise tax regime in conformity with their WTO obligations. This means amending their excise tax regime in order to remove the tax discrimination against imported spirits.

Work on a tax reform has been already under way in the last few years in the Philippines. The EU hopes that this work will duly take into account the findings of the panel report and put an end to this longstanding discrimination.

What are the next steps in this dispute?

The panel report will be adopted by the WTO Dispute Settlement Body within 60 days, unless the Philippines introduce an appeal. In case of appeal, the Appellate Body will re-examine issues of law invoked by the parties to the dispute and issue a ruling within 60 to 90 days.
Does this WTO action by the EU take in due consideration the special needs of the Philippines as a developing country?

WTO action to ensure fair conditions of competition in the Philippine market for all spirits is by no means inconsistent with the Philippines development goals.

Calls for a reform of the excise tax regime in the Philippines are not exclusive to the EU, and the Government of the Philippines has been working on a tax reform over the last few years. The World Bank and the International Monetary Fund have also supported governmental initiatives to restructure the existing four-tiered excise tax regime into one tier in order to reverse the decline in excise tax collection. According to estimates available to the EU, the 2% segment of the Philippine market held by imported spirits currently accounts for more than 35% of total tax receipts from the spirits sector.

The EU is an important contributor to development efforts in the Philippines. As part of a Multiannual Indicative Programme (€ 69 million for 2007-2010), the Philippines receive dedicated trade related assistance (€ 6.5 million for 2007-2010) in order to support sustainable poverty reduction through further integration into the international trade system. In addition, there are several regional trade-related assistance programmes from which the Philippines also benefit, such as APRIS and ECAP III, as well as various technical assistance initiatives directly provided by services of the European Commission (on sanitary and phyto-sanitary issues in particular). 

See also the press release on WTO panel report on distilled spirits from EU to the Philippines