On August 15, 2011, a World Trade Organization (WTO) panel issued a ruling in the case brought by the European Union and the United States regarding “Philippines — Taxes on Distilled Spirits” (DS396 and DS403). The establishment of a panel to examine this matter was initially requested by the European Union in December 2009. Subsequently, the United States made a similar complaint in March 2010 and it was decided that, due to the multiple complainants, the panel established in January 2010 to examine the complaint by the European Union would also examine the US complaint.

This dispute concerned the long-debated question of whether the Philippines’ excise tax regime on distilled spirits discriminated against imports by taxing them at a substantially higher rate than domestic spirits. Under the now condemned tax regime, the amount of taxes levied on distilled spirits differs depending on the raw materials from which the spirit is distilled. According to the criteria set out in the relevant legislation, a distinction is established between spirits made from certain designated raw materials that are locally available (e.g., sugarcane, coconut, and nipa), which are subject to a low flat tax, and spirits made from other non-designated raw materials such as wheat, to which significantly higher tax rates are applied.

First, the panel examined the facts presented and agreed with the complainants that such distinction led to a situation where all domestic-made spirits (e.g., gins, brandies, rums, vodkas, whiskies and tequila-type spirits) are subject to a low flat tax, while the vast majority of spirits imported into the Philippines are subject to higher tax rates. Then, the panel looked at the question of whether such dissimilar taxation has been applied by the Philippines “so as to afford protection” to its domestic production of distilled spirits. In doing so, the panel found that “the design, architecture, and structure of the measure, including the magnitude of the tax differential applicable to imported and domestic products” revealed its protective nature and concluded, therefore, that, although facially neutral, the Philippines’ excise tax regime is discriminatory and violates the obligations under the first and second sentences of Article III:2 of the GATT 1994.

US Trade Representative Ron Kirk said in a statement that this panel report “… confirms that the Philippines’ taxes on imported distilled spirits are discriminatory and inconsistent with WTO rules” and urged the Philippine government to take action and comply swiftly with the Panel’s recommendations and rulings. The EU Trade Spokesman John Clancy also applauded the decision when he affirmed that this is “the confirmation of what is a clear case of tax discrimination” and revealed his hope that “the Philippines will take the necessary steps to remedy this longstanding situation without further ado.”

It is not yet clear how the Philippine government will respond to this decision and whether it will appeal to the WTO Appellate Body. In any event, businesses involved in the production, exportation, or importation of distilled spirits into the Philippines should follow this issue closely as we are almost certainly on the verge of seeing significant changes in the $3 billion spirits market in the Philippines.

For more information about this decision, or any other matter raised in this Legal Update, please contact Duane W. Layton at +1 202 263 3811, Paulette Vander Schueren at +32 2 551 5950, or Felipe Berer, of Tauil & Chequer Advogados, at +55 11 2504 4289.

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