This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 MANILA 005924
SIPDIS
SENSITIVE
STATE FOR EAP/MTS
STATE PASS TO USTR FOR BWEISEL AND DKATZ
USDOC FOR 4430/ITA/MAC/DBISBEE
E.O. 12958: N/A
TAGS: ECON ETRD BEXP RP
SUBJECT: KRAFT SOUR OVER TANG TARIFF DISPUTE
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION -
PROTECT ACCORDINGLY
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SUMMARY
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1. (SBU) Kraft Foods Philippines Inc. (KFPI) is frustrated
by a 2004 tariff reclassification that effectively raised
the tariff rate on imported powdered beverage products Tang
and Kool-Aid from three percent to 48 percent. The ruling
is currently being contested in the courts, but if upheld,
could result in retroactive taxation for KFPI at the higher
tariff rate. Although the Philippines is Kraft Foods'
biggest business interest in Southeast Asia with USD 111
million in revenues and USD 9.2 million in profits in 2004,
this issue is forcing the company to reevaluate its long-
term plan for the Philippines. Embassy has been following
the issue since it first arose in 2004 and continues to
press the GRP for prompt resolution.
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POWDERED BEVERAGE MIXES POSING AS SUGAR IN DISGUISE?
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2. (SBU) Since 2000, Kraft Foods Philippines Inc. (KFPI),
a wholly owned subsidiary of U.S. food manufacturer Kraft
Foods, has imported Kraft powdered beverage brands Tang and
Kool-Aid from Thailand at a tariff rate of three percent.
However, these products could be subject to a 48 percent
tariff under a 2004 reclassification that moved them from
the tariff line for "powdered beverage mixes" (used by all
other countries in ASEAN) to the much higher rate applied to
"sucrose." KFPI initially convinced the Bureau of Customs
(BOC) to revert back to the three percent rate in June 2005
only to find the higher rate re-imposed in July. KFPI
contests the reclassification and currently has an
injunction in place; it is filing an appeal on the ruling.
In the meantime, BOC told KFPI that the three percent rate
would continue to apply until the dispute is resolved in the
Court of Tax Appeals. KFPI is concerned that there is a
"retroactivity clause" that could enable BOC to
retroactively collect the differential tariff, dating back
to 2004, if the case is decided in favor of the
reclassification. KFPI's main competitor, Coca Cola San
Miguel Corporation, manufactures a similar powdered drink
mix called "eight o'clock." KFPI speculated that since the
company manufactures in the Philippines and uses domestic
sugar, it has not voiced any complaints with respect to the
tariff reclassification.
3. (SBU) During an Emboff tour of KFPI's facilities, KFPI
President and General Manager expressed frustration at the
lack of transparency in dealing with the GRP, which is
forcing the company to reevaluate whether it is worthwhile
to continue to do business in the Philippines in the long-
term. A senior KFPI representative pointed out that the
"reality is that we can always move factories."
4. (U) Embassy has been following the issue since 2004 and
has discussed U.S. concerns on many occasions with high-
level government officials, including Trade and Industry
Secretary Favila and Finance Secretary Teves. Altria, Kraft
SIPDIS
Foods' parent company, visited Manila and raised the issue
with President Arroyo and Secretaries Favila and Teves in
September 2005. The US ASEAN Business Council also raised
the issue with a Philippine Congressional delegation to
Washington DC, in October 2005.
5. (SBU) The legal basis behind the tariff
reclassification is an Executive Order (EO) signed by
President Arroyo in 2004. According to KFPI, the EO's
intent was to eliminate sugar smuggling by classifying any
product with a high sugar composition as a sugar commodity
rather than a finished good. KFPI looked into using local
sugar and manufacturing Tang and Kool-Aid in the
Philippines. However, the Philippines is the third largest
recipient of the U.S. raw sugar quota allocation and exports
most of its premium, high-quality sugar to the United
States. While domestic sugar production in the Philippines
has increased dramatically in recent years, resulting in a
sugar surplus in 2005, the GRP is also pushing for the
development of a sugar-based bioethanol fuel additive that
would create increased demand for sugar in the years to
come.
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KRAFT PHILIPPINES - LONG HISTORY AND BIG MONEY
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6. (U) KFPI has been operating in the Philippines for 42
years and is Kraft's biggest business interest in Southeast
Asia in terms of revenue and profit. The company generated
USD 111 million in revenue and earned net profits of USD 9.2
million. KFPI has 570 employees, houses a research and
development facility near Manila, and runs a back office
operation for its entire Southeast Asia business. The
company sells 155 different product lines in the
Philippines, including spreadables and processed cheese
products, manufactured at its plant in Sucat, Paranaque just
outside Metro Manila. Most locally produced goods are sold
in the Philippines, but a small percentage are exported to
other countries in Southeast Asia. The company currently
does not have any major expansion plans.
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COMMENT
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7. (SBU) KFPI's tariff dispute illustrates two common
problems with conducting business in the Philippines: lack
of transparency and lengthy judicial processes. This case
appears to be clear-cut in that Tang and Kool-Aid are
imported into the RP as pre-packaged powdered beverage
products for direct sale to the consumer. These finished
products clearly are not "sugar in disguise," because the
ingredients cannot be easily divided. Even though the
original ruling was initially reversed, it was almost
immediately re-imposed and the case is now tied up in the
legal system where it could be several years before it is
resolved. Meanwhile, KFPI continues business as usual and
is forced to plan for potentially exorbitant, retroactive
tariffs looming in the future. Cases such as these hurt the
overall investment climate and force companies to reconsider
long-term investment opportunities in the Philippines.
Embassy continues to follow the case and raise the issue
with appropriate officials.
JONES