By Arra B. Francia and Elijah Joseph C. Tubayan
THE BEVERAGE Industry Association of the Philippines (BIAP) has proposed to lower the tax to be imposed on sugar sweetened beverages (SSB) under the tax reform program of President Rodrigo R. Duterte’s administration, which the industry said would put a strain not only on companies but also local farmers who supply their produce.
In an updated position paper sent to the Senate committee on ways and means earlier this month, BIAP presented three options for the proposed beverage tax under House Bill No. 5636, instead of the current volume-based tax rate which automatically puts a P10 per liter tax for products with locally produced sugar and P20 per liter for products with sugar produced elsewhere.
The first option is based only on caloric sweetener content, similar to laws imposed in the United Kingdom and Singapore that taxes beverage based on the amount of sugar they contain.
“Under the tiered system, the industry will be more encouraged to introduce new products promoting proper sugar intake, and invest more resources to provide Filipino consumers a wider range of low- and no-calorie beverages,” the BIAP said.
The second option suggests a tax of P10 per kilogram on all caloric sweeteners used in beverages only, which would increase the prices of products by only 12%. Under the current proposal, prices could increase by as much as 40%.
“If the tax will be imposed, the prices of these products will increase from 30-40% kasi iba-ibang varieties pa within the 3-in-1… So it will increase from P1.50 to P3 depending on the variant. For the ordinary consumer, that’s going to be a hefty increase,” Nestle Philippines Senior Vice-President and Head of Corporate Affairs Ernesto S. Mascenon told BusinessWorld in an interview in Makati last week, referring to the 3-in-1 product that mixes coffee, sugar, and creamer into one product.
Nestle Philippines is one of 14 members of BIAP that would be affected by the beverage tax. Other members are Universal Robina Corp., Kopiko, Coca-Cola FEMSA Philippines, and Zest-O Corp.
“We’re the sachet economy here in the Philippines, because the consumer will not anymore buy separately sugar or creamer so in terms of affordability. The 3-in-1 is the right format for the Filipinos based on their cash flow,” Mr. Mascenon said.
Meanwhile, the third option will place a P5 per kilogram tax on all caloric sweeteners used as raw material, which would broaden the tax base beyond the beverage industry. Aside from a lower than 5% increase on the retail price, the measure would also cover all products that contain caloric sweeteners, not just manufactured goods.
“Si Juan dela Cruz bibili sa karinderia (buys at the canteen), he will pay now the SSB tax. (But) if you go to (a coffee shop) and buy a P150 coffee latte, you will not be paying any tax because it will not be covered. Those who buy from the coffee shop will not be taxed kasi manufactured lang definition ng batas (because the definition by law only covers manufactured goods),” Mr. Mascenon said.
Mr. Mascenon also explained how the tax would affect the farmers. “(Of the) (d)irect business of the companies involved there are 14 of them will be hampered, but it will also affect the supply chain down the line. It will reverberate down to the farmers, both sugar and coffee farmers at a time when we are saying the worst sector in our economy which has the highest poverty level is the agricultural sector,” he explained.
For instance, Nestle sources its green coffee needs locally in coffee-producing provinces such as Cavite and Batangas, as well as other parts of Mindanao. One of the company’s sources is Silang, Cavite, where more than half of the 5,000 farmers are into coffee farming.
“By imposing additional charge, the consumption and the demand would drop. If this happens, processors such as Nestle would not buy as much as they have done in the past. When that happens, farmers might lose interest in coffee farming,” Silang Vice-Mayor Aidel Paul Belamide said in an interview.
Mr. Belamide noted that in 2010, Nestle bought at least 3,000 metric tons (MT) of coffee beans from Silang, which comprises 95% of their municipality’s production. Annually, Nestle’s Mr. Mascenon said they buy around 12,500 MT of coffee for their products worth P1.3 billion.
Meanwhile, the combined annual revenue of the beverage industry is at P170 billion. In contrast, the first year of implementation of the tax is expected to bring in an additional P47 billion in revenue which will be used for health programs and sugar farmers affected by the measure.
‘WILLING TO DROP SUGAR TAX’
For its part, the Department of Finance (DoF) clarified that it is open to dropping taxes for sugar-sweetened beverages under package one of the tax reform program in exchange for passing its original full version of the bill, as urged by Mr. Duterte.
“What I told Angara was I am willing to drop the sugar tax, but pass the original DoF bill,” Secretary Carlos G. Dominguez III told reporters on Friday.
This is after reports quoted Senator Juan Edgardo M. Angara, chair of the Senate committee on ways and means, as claiming that Mr. Dominguez offered a compromise to remove the P10 per liter excise tax on sugar sweetened beverages in the package, but pass the full P6 increase in petroleum tax instead of the phased-in P3-P2-P1 scheme spread over three years.
Mr. Dominguez was referring to the DoF-proposed bill filed by Senate President Aquilino “Koko” dL. Pimentel III under Senate Bill No. 1408 where the P3-P2-P1 would still remain as well as other originally-proposed measures, except for the P10 per liter sugar-sweetened beverages excise tax.
“He is quoting me as saying, go to the original… the fuel. I said no, it’s the whole package filed by Senator Koko Pimentel,” Mr. Dominguez clarified.
Senate Bill No. 1408 expects to yield P169.1-billion additional revenues in the first year of implementation, which is greater than the diluted House-approved Bill No. 5636 expected to collect P133.8 billion, and also greater than the downward-adjusted P157.2-billion DoF version.
Asked whether the sugar-sweetened beverage tax will still be part of the comprehensive tax reform program under package five together with other health measures, Mr. Dominguez replied in the affirmative.
“You don’t have to pass it this time,” he added.
The Finance chief said his department only included the sugar-sweetened beverage tax as part of the first package, after the House of Representatives “took out a lot” in their proposed version.
“That is the only reason quite frankly why that sugar came in.”
Mr. Angara for his part, when sought for comment, said that despite the proposed compromise it would make the bill even more difficult to convince legislation in passing it.
“Might be counterproductive since that would involve some repudiation of the changes made by the House. It would mean restoring the removal of VAT exemptions for seniors, persons with disabilities and cooperatives and other contentious provisions, so that may prove difficult especially at the level of the bicameral conference,” he told BusinessWorld in a mobile phone message.
Key differences between Senate Bill No. 1408 and House Bill No. 5636 included, among others, the mandatory indexation to inflation of petroleum excise taxes, withdrawing value-added tax (VAT) exemptions on cooperatives, a four-bracket excise tax schedule instead of a five-bracket and phased-in approach in the House version, a higher final tax on fringe benefits, and a lower exemption threshold on 13th month pay and other bonuses.
The first comprehensive tax reform package aims to lower personal income tax rates while it removes some VAT exemptions, increase excise taxes on oil products and automobiles, and harmonize estate and donor’s tax rates.
Succeeding packages would include reforms on corporate income tax rates and fiscal incentives, property taxes, capital taxes, health, environment, and luxury taxes.
The DoF aims to have the first package approved before the year ends and implement it immediately in 2018. The additional revenues are seen as a cornerstone of the Duterte administration’s P8.4-trillion “golden age of infrastructure,” which will drive up the economy to grow 7-8% annually in 2018-2022.