Commentary: Implications of SSB tax in the Philippines

Companies want to invest in the Philippines. The country’s greatest asset is its incredible people and their skills, commitment to hard work and team orientation. While American business supports most parts of the Tax Reform and Acceleration and Inclusion (TRAIN) bill, which was passed by the Senate and House, there is one particular part of the bill which could send the wrong signal to international investors and long-term friends of the Philippines.

Specifically, the sections of the TRAIN bill that seemingly overlooked the consumers, who want lower prices for their foods and drinks and the right to choose what they consume. If passed, by the bicameral review process this week, the new law would raise prices for Filipinos, restrict choice and result in reduced investment, lost jobs and send a message to investors from around the world that the Philippines is willing to violate global trading rules. The Congress moved forward despite opposition coming from domestic associations and international players who are long-term investors in the Philippines.

This new legislation should be carefully reconsidered. The House of Representatives and the Senate are currently reconciling their respective versions of the bill and are aiming to submit the final version to President Duterte before they recess on December 16, 2017.

But if Congress passes this bill, with the unequal provisions on the sugar-sweetened beverages (SSB) intact, it won’t be Christmas for the consumers or to companies considering investments in the Philippines. The SSB provisions call for a doubled tax rate on sweeteners that are produced largely outside the Philippines but play a critical role in meeting Filipino demand for high quality and affordable food and beverage products. If passed as drafted, the legislation will hurt Philippine competitiveness at a time when other countries in ASEAN are stepping up their competitiveness for foreign direct investment.

Companies base investment decisions on a range of factors—and stability and pragmatism of tax and fiscal policies are very important. Thus, this discriminatory SSB tax provision sends the wrong message at exactly the wrong moment. If passed, the law will draw complaints in the World Trade Organization (WTO) and have a substantial chilling effect on foreign direct investment (FDI).  Even the Philippines Department of Foreign Affairs has warned that the two-tier SSB tax structure is discriminatory under WTO rules. These consequences would undermine the Duterte administration’s 10-point socio-economic plan and directly contradict initiatives to improve the investment climate by easing restrictions on foreign investment, reducing red tape, and increasing spending on infrastructure.

There are also unintended economic consequences that could arise from this tax. Attempts at taxing SSBs in countries like Indonesia, Mexico, Denmark, and in cities like Chicago, Philadelphia, among other areas, have resulted in crippled beverage manufacturing industries, significant job losses, loss of revenue for small businesses, backlash against politicians in favor of such taxes, and lower than targeted tax revenues. 

Beverages are one of the key export sectors cited in the Philippine Export Development Plan 2015 to 2017. Notwithstanding the two-tier tax structure, the imposition of such an exorbitant tax will have a negative impact on the further development of and investment in not only the agricultural sector, but also the beverage and food processing sectors in the Philippines.

Strong opposition to the proposed taxes on sweetened beverages has already been voiced by consumer groups and experts who understand international business and economics such as the Beverage Industry Association of the Philippines, Bantay Konsyumer, Kalsada, Kuryente and the Philippine Association of Stores and Carinderia Owners, which is conducting a petition against the tax, among others.

Micro, small and medium-sized enterprises and low-income earners are poised to be hit hardest by the measure, as 40 percent of sari-sari store and carinderia earnings come from sweetened beverages, and 80 percent of sweetened-beverage consumers are low-income earners, according to surveys conducted by the Nielsen Corporation, a global marketing research firm.

As friends of the Philippines responsible for promoting new investment in the country and trying to attract the world’s best companies here to invest, bring technology, develop communities, create jobs, build infrastructure and ramp up Philippine exports to the rest of Asia and the world, we want our friends here to know that this kind of policy will pull the country down in its competitiveness ratings. It will send the wrong message that governance in the Philippines has slipped backward rather than attracting new world-class technology, high paying jobs and linkages to the world’s fastest growing markets.

We know that the judicious legislators will reconsider and reject these provisions in the TRAIN bill—moving instead to adopt measures that treat all sweeteners equally regardless of source or origin. We believe that choosing a fair and equal tax policy for SSBs will send the right message to American and other foreign investors—and the Philippines on track to grow economically while continuing to attract investment which will help propel this growth benefiting all Filipinos.

Ernest Z. Bower is Trustee of think tank Stratbase Albert del Rosario Institute and Southeast Asia Advisory Board of the Center for Strategic & International Studies (CSIS) while Alexander Feldman is President & CEO of the US-ASEAN Business Council.