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DS: Philippines — Taxes on Distilled Spirits
This summary has been prepared by the Secretariat under its own responsibility. The summary is for general information only and is not intended to affect the rights and obligations of Members.
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Complaint by the European Communities. (See also DS403)
On 29 July 2009, the European Communities requested consultations with the Philippines concerning the Philippines' current Excise Tax regime on distilled spirits, which has been in place since 1997. The European Communities contends that the regime discriminates against imported distilled spirits by taxing them at a substantially higher rate than domestic spirits. The European Communities cites a number of specific measures under the regime in its request.
The European Communities considers that these measures are inconsistent with the Philippines' obligations under GATT 1994, in particular Article III:2. On 10 August 2009, the United States requested to join the consultations. Subsequently, the Philippines informed the DSB that it had accepted the request of the United States to join the consultations.
On 10 December 2009, the European Communities requested the establishment of a panel. At its meeting on 21 December 2009, the DSB deferred the establishment of a panel.
Panel and Appellate Body proceedings
At its meeting on 19 January 2010, the DSB established a panel. Australia, China, Mexico, Thailand, Chinese Taipei and the United States reserved their third-party rights. Subsequently, India reserved its third-party rights. At its meeting on 20 April 2010, the DSB established a panel in dispute DS403. As provided for in Article 9.1 of the DSU in respect to multiple complainants, it was agreed that that panel and the panel established on 19 January 2010 for dispute DS396 would be a single panel. On 25 June 2010, the European Union and the United States requested the Director‑General to compose the panel. On 5 July 2010, the Director-General composed the panel. On 16 December 2010, the Chairman of the panel notified the DSB that it would not be able to issue its report within six months. The timetable adopted by the panel after consultations with the parties envisages that the final report shall be issued to the parties by June 2011. The panel expects to conclude its work within that timeframe.
On 15 August 2011, the panel report was circulated to Members.
Summary of key findings
The measure at issue is an excise tax on distilled spirits, whereby a low flat tax is applied by the Philippines to spirits made from certain designated raw materials, while significantly higher tax rates are applied to spirits made from non-designated materials.
In the Philippines, all domestic distilled spirits (mostly gins, brandies, rums, vodkas, whiskies and tequila‑type spirits) are made from one of the designated raw materials, cane sugar, whereas the vast majority of imported spirits are made from non‑designated materials (e.g. cereals or grapes). Consequently, all domestic spirits are subject to the low flat tax, while the vast majority of imported spirits are subject to one of the higher tax rates.
The Panel found that because imported spirits are taxed less favourably than domestic spirits, the Philippine measure, while facially neutral, is nevertheless discriminatory and thus violates the obligations under the first sentence of Article III:2 of the GATT 1994.
On 23 September 2011, the Philippines notified the DSB of its decision to appeal to the Appellate Body certain issues of law and legal interpretations in the panel report. On 28 September 2011, the European Union notified its decision to appeal to the Appellate Body certain issues of law covered and certain legal interpretations developed by the panel.
On 21 November 2011, the Chair of the Appellate Body informed the DSB that due to the time required for completion and translation of the Appellate Body report, the Appellate Body would not be able to circulate its report within 60 days. The Appellate Body estimated that the report would be circulated no later than 22 December 2011.
On 21 December 2011, the Appellate Body report was circulated to Members.
Before the Panel, the European Union and the United States each brought a complaint with respect to the WTO‑consistency of the Philippines excise tax on distilled spirits. Under the measure at issue, distilled spirits made from certain designated raw materials–sap of the nipa, coconut, cassava, camote, or buri palm, or from juice, syrup, or sugar of the cane–are subject to a lower specific flat tax rate. Conversely, distilled spirits made from non‑designated raw materials are subject to tax rates that are 10 to 40 times higher than those applied to distilled spirits made from designated raw materials. De facto, all Philippine domestic distilled spirits are made from one of the designated raw materials — sugar cane — and are therefore subject to the lower tax rate. The vast majority of imported distilled spirits are made from non‑designated raw materials, and are therefore subject to the higher tax rates. The Panel found that, through its excise tax, the Philippines subjects imported distilled spirits made from non‑designated raw materials to internal taxes in excess of those applied to "like" domestic distilled spirits made from the designated raw materials, thus acting in a manner inconsistent with Article III:2, first sentence, of the GATT 1994. The Panel also found that the Philippines has acted inconsistently with Article III:2, second sentence, of the GATT 1994 by applying dissimilar taxes on imported distilled spirits and on "directly competitive or substitutable" domestic distilled spirits, so as to afford protection to Philippine production of distilled spirits.
The Philippines appealed certain of the Panel's findings under Article III:2, first and second sentences, of the GATT 1994. The European Union cross‑appealed certain other findings of the Panel concerning its claim under Article III:2, second sentence, of the GATT 1994.
On appeal, the Appellate Body upheld the Panel's finding that each type of imported distilled spirit at issue — gin, brandy, rum, vodka, whisky, and tequila — made from non‑designated raw materials, is "like" the same type of distilled spirit made from designated raw materials. As a consequence, the Appellate Body upheld the Panel's finding that the Philippines has acted inconsistently with Article III:2, first sentence, of the GATT 1994 by imposing on each type of imported distilled spirit internal taxes in excess of those applied to the same type of like domestic distilled spirit. The Appellate Body reversed the Panel's finding that all imported distilled spirits made from non‑designated raw materials are, irrespective of their type, "like" all domestic distilled spirits made from designated raw materials. However, the Appellate Body upheld the Panel's findings that all imported and domestic distilled spirits at issue are "directly competitive or substitutable" within the meaning of Article III:2, second sentence, of the GATT 1994. The Appellate Body also upheld the Panel's finding that dissimilar taxation of imported distilled spirits, and of directly competitive or substitutable domestic distilled spirits, is applied "so as to afford protection" to Philippine production of distilled spirits. As a consequence, the Appellate Body upheld the Panel's finding that the Philippines has acted inconsistently with Article III:2, second sentence, of the GATT 1994 by applying dissimilar internal taxes to imported distilled spirits and to directly competitive or substitutable domestic distilled spirits, so as to afford protection to domestic production. Finally, the Appellate Body reversed the Panel's finding that the European Union's claim under Article III:2, second sentence, of the GATT 1994 was made in the alternative to its claim under the first sentence thereof, and concluded that the Panel's finding that all imported and domestic distilled spirits are "directly competitive or substitutable products" applied also to the European Union's claim. As a consequence, it concluded that the finding, that the Philippines acted inconsistently with Article III:2, second sentence, of the GATT 1994 by subjecting imported distilled spirits to dissimilar taxation, applied to both the European Union and the United States.
At its meeting on 20 January 2012, the DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report.
Reasonable period of time
At the DSB meeting of 22 February 2012, the Philippines said that it intended to implement the DSB's recommendations and rulings in a manner that respects its WTO obligations. Given the technical and legal aspects as well as the extensive internal consultation and coordination needed to implement, the Philippines said it would require a reasonable period of time to do so. On 20 April 2012, the Philippines and the European Union informed the DSB that they had agreed that the reasonable period of time for the Philippines to implement the DSB's recommendations and rulings shall be 13 months and 16 days. Accordingly, the reasonable period of time expires on 8 March 2013.
At the DSB meeting on 28 January 2013, the Philippines reported that "An Act Restructuring the Excise Tax on Alcohol and Tobacco Products" was passed by Congress on 11 December 2012, and approved by the President on 19 December 2012. The Philippines considered that the adoption of this law completed its implementation of the DSB's recommendations and rulings.
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