Philippine Liquor Tax Is Struck Down by WTO in Win for U.S., EU Distillers

Philippine taxes on imports of spirits such as whiskey and brandy made by Brown-Forman Corp. (BF/A) and Pernod Ricard SA are illegal, the World Trade Organization ruled, upholding complaints by the U.S. and the European Union.

Yesterday’s ruling may help European and U.S. companies boost their share of the Philippines’ $3 billion liquor market. WTO judges in Geneva rejected the Philippines’ argument that imported liquor such as Jim Beam whiskey, Brandy de Jerez and Southern Comfort don’t compete with locally made distilled spirits and therefore different taxes based on the raw material used to make the liquor should be legal.

The Philippines applies a lower tax rate on sugar and palm- based drinks produced within the country. Levies on foreign spirits in some cases may be almost 50 times higher than those on domestic liquor, according to the EU. The Philippines should revise its tax to meet its WTO obligations, a panel of judges said in a ruling posted on the trade arbiter’s website.

“We urge the Philippine government to comply swiftly with the panel’s recommendations and rulings, and level the playing field for our exports immediately,” U.S. Trade Representative Ron Kirk said yesterday in a statement.

Philippines to Appeal

The Philippines will appeal the ruling, Finance Undersecretary Gil Beltran said in a phone interview today. The liquor industry “will file a motion for reconsideration immediately with the help of the government,” he said.

Members of the Distilled Spirits Association of the Philippines produced 66 million cases of liquor last year with gross sales of almost 50 billion pesos ($1.2 billion), according to the organization. The association said today that WTO judges failed to “seriously and carefully analyze the Philippines’ basic defenses.”

Ginebra San Miguel Inc. (GSMI), the Philippines’ biggest distiller by sales, was unchanged at 28 pesos at the noon close of trading in Manila. Ginebra is a unit of San Miguel Corp. (SMC), the country’s largest listed company by sales.

The 27-nation EU, the world’s biggest liquor exporter with sales overseas exceeding 7 billion euros ($10 billion) last year, shipped 16.5 million euros of spirits to the Philippines in 2010, down from almost 37 million euros in 2004, according to the European Commission in Brussels. Trade between the two economies was worth 9.1 billion euros last year.

Imports Drop

“The discriminatory taxation system has led to a decline of overall consumption of imported spirits of 1 percent since 2005, while consumption of local spirits has grown over 8 percent in the same period,” according to the commission.

U.S. distilled-spirits exports worldwide averaged more than $1 billion a year from 2006 through 2009. Philippine imports of liquor haven’t exceeded 5 percent of total sales of spirits in the nation since 2003.

“The panel report is the confirmation of what is a clear case of tax discrimination which has been and still is an important obstacle to imports into the Philippines,” John Clancy, the EU’s trade spokesman, said yesterday in a statement.

The drop in U.S. and European liquor exports “cannot be attributed to our taxation system, but is due to many factors such as sluggish economy, low purchasing power and inflation,” said Olivia Limpe-Aw, president of the Philippines spirits lobby. Domestic spirits also had lower consumption this year, she said.

Brown-Forman rose 0.8 percent to $68.58 in New York trading yesterday while Pernod Ricard lost 1.5 percent to 62 euros at 11 a.m. in Paris today. Remy Cointreau SA (RCO) fell 1.9 percent to 58.71 euros and Diageo Plc (DGE), the maker of Johnnie Walker scotch and Smirnoff vodka, slipped 1.4 percent to 1,173 pence in London.

The EU lodged its complaint at the WTO in July 2009 and the U.S. followed six months later. According to industry statistics cited by the Trade Representative’s Office, U.S. distilled- spirits companies contributed to more than $113 billion of economic activity and more than 1.2 million jobs in 2007.

To contact the reporters on this story: Jennifer M. Freedman in Geneva at jfreedman@bloomberg.net; Eric Martin in Washington at emartin21@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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