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WTO upholds cigar ruling in favor of PH, tells Thailand to comply

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By Bernie Cahiles-Magkilat

The WTO Appellate Body has upheld its panel ruling six years ago ordering Thailand to rectify in a “quick and effective manner and without delay” the imposition of discriminatory taxes on imported Philippine cigarettes that impaired benefits accruing to the Philippines.

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The WTO issued the compliance panel report on Monday, Nov. 12, 2018, in the dispute settlement 371 initiated by the Philippines against Thailand after the latter refused to comply with a ruling in 2012 requiring the Bureau of Customs of Thailand to rectify the imposition of value added taxes on Philippine cigarettes as it rejected the transaction value entered into by the Philip Morris Philippines (seller) and Philip Morris Thailand (PMTL/importer) because relationship between the seller and the buyer may have influenced the pricing but was not properly communicated to PMTL.

“The Panel concludes that, in implementing the DSB’s recommendations and rulings in the original proceeding, Thailand’s VAT notification requirement accords less favorable treatment to imported cigarettes as compared to like domestic cigarettes by exposing cigarette importers to legal risks and additional administrative burdens and costs, which the domestic producer of cigarettes does not have to face. The VAT notification requirement is thus inconsistent with Article III:4 of the GATT 1994,” the Appellate Body conclusion reads.

It cited GATT Art. X:3(b) that “prompt review and correction” requires review and correction performed in a quick and effective manner and without delay.

The multilateral body has warned that Thailand has administered its Revenue Code provisions in an unreasonable manner, inconsistently with Article X:3(a) of the GATT 1994, by imposing on cigarette importers the VAT notification requirement with which it is impossible to ensure compliance and which exposes importers to potential consequences of non-compliance.

According to the Appellate Body, Thailand’s Board of Appeals acted inconsistently in the November 16, 2012 ruling, concerning 210 entries of Marlboro cigarettes imported into Thailand by PMTL between January 2002 and January 2003 when it rejected PMTL’s declared transaction values without a valid basis.

It cited that under Article 3.8 of the DSU, in cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment.

“We conclude that, to the extent that the measures at issue are inconsistent with the Customs Valuation Agreement and the GATT 1994, they have nullified or impaired benefits accruing to the Philippines under those agreements,” the ruling added.

The WTO also said Thailand bears the burden of substantiating its assertion that Thailand Tobacco Monopoly, a state enterprise, does not enjoy any exemption from the relevant Thai competition law, and that Thailand has not provided sufficient evidence in the course of this proceeding to discharge its burden.

The Philippines is the No. 1 imported cigarette supplier of Thailand through Philip Morris Philippines Manufacturing, Inc. In 2010 alone, the Philippines holds an estimated 2/5 share of the Thai domestic cigarette market. Since 1990, the numbers have risen steadily. Local exporters place the value of Philippine current share of the $849 million Thai domestic cigarette market at around $200 million.

Tobacco is among the fast-growing resource-based exports of the Philippines. Data from the Bureau of Export Trade Promotions (BETP) showed that tobacco exports amounted to $266 million in 2010. The country’s tobacco markets include Germany, Hong Kong, Singapore, United States, Russia, and Japan among others. According to the National Tobacco Authority, the industry provides direct livelihood to 43,960 farmers and over a million industry workers and their dependents.

The National Tobacco Administration reported that the Philippine tobacco industry produced P5.3 billion worth of tobacco in 2011, with $91.1 million (roughly P3.9 billion) exported to overseas markets, including Thailand. Thailand is the Philippines’ major export market for finished tobacco goods.
During the course of the dispute, the Philippine tobacco industry suffered a 20 percent decline in exports in 2009 alone, in part due to the Thailand cigarette tax issue. The decline has since substantially hurt tobacco farmers in the South.

The industry provides livelihood to 54, 337 farmers and their families, and to thousands of manufacturing workers, traders, and retailers. In 2008, the industry contributed P32.3 billion to government coffers through taxes, duties, and other fees on tobacco products.

It could be recalled that informal consultations in the bilateral and ASEAN contexts, as well as two rounds of formal consultations under the WTO Dispute Settlement Understanding in the period 2006 to September 2008 all failed.

Thus, in November 2008, at the request of the Philippines, the WTO Dispute Settlement Body established a Dispute Settlement Panel in order to examine the Philippine claims that Thailand ’s actions constituted practices that were not consistent with, inter alia, the Customs Valuation Agreement, the provisions of GATT 1994, and Thailand ’s basic obligations with respect to transparency. The first substantive meeting of the Panel was held on 10-12 June 2009, and the second substantive meeting took place on 4-6 November 2009.

The investigation culminated in that Panel Report issued on 15 November 2010 which finds Thailand in violations of the WTO principles.

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