By Rea Cu & Jasper Emmanuel Y. Arcalas
A SWATH of sugarcane waved to passengers of the Tarlac-Dagupan line of the Philippine National Railways; that was more than a century ago. About 127 years later—the train line opened in November 1892—passengers of a new type of TRAIN, the Tax Reform for Acceleration and Inclusion law, are riding a bittersweet line.
For Assistant Finance Secretary Antonio Joselito G. Lambino II, the TRAIN’s effect is sweeter rather than bitter.
Lambino told the BusinessMirror the government is supportive of the agriculture sector, especially those who produce rice and sugar, among others.
“Essentially, that’s what we want to have: efficient local producers in the agriculture sector, in agribusiness and in other parts of the agriculture value chain,” Lambino, who is also spokesman of the Department of Finance (DOF), said in an interview. “That’s the priority, whether it’s in sugar or in rice, in some parts of the country rice can be produced very efficiently and we know that from the research. So that’s what we really want to support.”
Lambino issued his response after reports pointed to the TRAIN law as forcing businesses to rely on the importation of certain goods, especially sugar, for their production, putting the future of local producers in peril.
Sugar-sweetened beverages
LAMBINO told the BusinessMirror the DOF has made sugar a priority.
“The challenge with sugar is that there are so many difficulties in getting to an efficient market, so we’ve also made that a big priority, and I think [Budget] Secretary [Benjamin E.] Diokno has even announced that recently,” he added. “[Finance] Secretary [Carlos G.] Dominguez [III] also mentioned that the efficiency of the sugar industry and market is also very important because a lot of our food manufacturers need competitively priced sugar as an input.”
Reports said the new excise tax on sugar-sweetened beverages (SSBs) has pushed food manufacturers to shift from procuring locally produced sugar and rely on imports instead.
The TRAIN law, or Republic Act (RA) 10963, was signed into law by President Duterte in December 2017. The law slashed personal income tax rates while implementing offsetting measures, such as increasing fuel excise tax rates as well as imposing an excise tax on SSBs, among others.
For imported goods, the Bureau of Customs (BOC) applies a value-added tax (VAT) of 12 percent, while there is no tax on goods worth less than P10,000.
Under the TRAIN, a P6-per-liter excise tax is slapped on beverages using caloric and noncaloric sweeteners and P12 per liter on beverages using high-fructose corn syrup (HFCS). Milk and 3-in-1 coffee mixes are exempted from the SSB tax.
Under pressure
RENE E. OFRENEO told the BusinessMirror that any price adjustment in commodities, like the increase in excise taxes under the TRAIN law, pushes producers or manufactures to consider cheaper alternatives.
“You can analyze the price movement for various commodities as a result of the TRAIN. It’s quite obvious for the sugar,” Ofreneo, former dean of the University of the Philippines (UP) School of Labor and Industrial Relations (Solair), said. “We now have a liberalized and globalized economy, so any price adjustments for various commodities produced in the Philippines give producers and traders signals on whether it’s cheaper to import [affecting local producers] or cheaper to produce somewhere else [in the case of products meant for export]. I think the DTI [Department of Trade and Industry] should attend to this.”
Early January, the Philippine Statistics Authority (PSA) reported that for the third quarter of 2018, the country’s importation of sugar posted an increase of 54 percent year-on-year.
Sugar imported into the country rose to $154.37 million from $100.29 million, while shipments increased to 343,190 metric tons from the 217,320 MT recorded during the third quarter of 2017.
Government action
THE higher demand for sugar may be traced back to February 2017, when the Sugar Regulatory Administration (SRA) issued Sugar Order 3 (SO 3), outlining the rules on the importation and release of HFCS in the country.
The rules and regulations came after industry stakeholders called on the government to act on the sinking prices of sugar due to unregulated imports of HFCS, which saw a big spike in volume in recent years. The unimpeded importation of HFCS drove sugar producers to lose some P10 billion in the process.
The SRA argued that SO 3 was an exercise of its regulatory power as stipulated under the Sugarcane Industry Development Act of 2015, or RA 10659.
The regulation on the importation of HFCS signaled the start of the shift by industrial users and beverage makers to using more sugar in their products.
“Consumption of cane sugar should approach 2.20 MMT in MY 2016/17 from 2.14 MMT in the previous marketing year, as restrictions on the importation of HFCS are implemented, and industrial consumers react to the drop in domestic prices,” the United States Department of Agriculture’s Foreign Agricultural Service (USDA-FAS) in Manila said in a Global Agricultural Information Network (GAIN) report two years ago.
“Demand for sugar in market year 2017/18 is expected to further increase to 2.25 MMT on lower domestic sugar prices, an expanding food processing and beverage manufacturing sector, and a growing population,” it added.
By the time the imports of HFCS were being regulated, the sugar industry was already losing profit from below cost-to-produce prices of the locally produced sweetener.
The situation worsened as the industry suffered a glut in supply, as local output reached an all-time high of 2.5 million metric tons (MMT) of sugarcane.
To flush out some of the domestic supply, the SRA in March 2017 allowed the exports of sugar to world markets or other countries aside from the United States.
Data from the SRA showed that the Philippines exported 34,611 MT and 174,789 MT of sugar in crop years 2016-2017 and 2017-2018, respectively, to world markets.
Arrival of TRAIN
JUST as things were looking brighter for the sugar industry, an unintended challenge came in the form of the Duterte administration’s tax-reform initiative.
The TRAIN law imposed a higher tax on imported HFCS compared to locally produced sugar, which was indeed beneficial to the local industry.
However, the difference in tax levied on the two sweeteners signaled one thing: higher demand.
After coming from an all-time high output, the sugar industry ended crop year 2017 to 2018 with production volume of 2.083 million MT, which was below the government’s and industry’s projections.
The decline in output was attributed to frequent rainfall that resulted in lower sugar content of canes. The lack of farm laborers, particularly sugarcane cutters and especially in the Visayas region, aggravated the situation.
As the TRAIN law took effect, the USDA FAS-Manila projected that the demand for sugar would remain at about 2.25 MMT, which would mean that the country would have a shortfall of about 150,000 MT based on their estimates.
“Demand for sugar in MY [2018-2019] is expected to remain at about 2.25 MMT,” the GAIN report read. “Consumption of cane sugar remains strong despite high sugar prices and increased taxes on sugar-sweetened beverages, as soft-drink manufacturers increase the usage of cane sugar and shift away from high-fructose corn syrup used.”
In fact, the GAIN report projected that the Philippines would need to import a total of 500,000 MT from 2017 to 2019 to augment its local supply to meet the demand of domestic users.
And true enough, the Philippines imported sugar of almost this same volume last year.
Rates, decrease
THE Americans’ assessment jives with the view of DOF Chief Economist Gil S. Beltran.
In his economic bulletin, Beltran explained that even before the implementation of the TRAIN law, sugar prices have been decreasing on a year-on-year basis.
Beltran explained that sugar imports peaked during the second quarter of 2016 with nearly 400,000 MT, decreasing to around 110,000 MT for the same period in 2018. By that time, food manufacturers were already urging the SRA to approve more imports, he added.
“Note that in the first semester of 2018, domestic prices surged to as high as P2,790 per 50-kilogram bag, more than double that of the landed price of their imported counterpart, at P1,300 per kg,” Beltran told the BusinessMirror. “It should have occurred to [Mr.] Ofreneo that a spike in imports would be something that was expected to occur anytime given the tightness in domestic supply, with or without TRAIN. And supply is tight because domestic sugar cane production dropped by 16.7 percent during the crop year 2018, at the same time that imports were declining.”
Beltran emphasized that the new excise tax on SSBs is two-tiered, which gives additional protection to domestic sugar producers.
“Another issue is why SRA did not allow sufficient sugar imports despite the 16.7-percent drop in domestic sugar production? Does SRA want consumers to cut unhealthy consumption and stop the spread of diabetes? Does SRA want food and beverage manufacturers who employ millions of workers to stop operating and throw them all out of work?” Beltran said. “Unfortunately, [Mr.] Ofreneo conveniently avoided these issues,” he added.
Sugar production
EMILIO BERNARDINO L. YULO, SRA board member, said one effect of the TRAIN law on the sugarcane industry was the higher excise tax slapped on fuel products. This, Yulo pointed out, led to a domino effect on the industry, increasing the costs of production and retail prices.
“Sugarcane for that matter is driven by fuel from cultivation time until milling stage. We are using trucks to bring canes to the mills, and all of these are affected by petroleum products,” Yulo told the BusinessMirror. “Another main component of our production is fertilizer, which also increases due to higher fuel prices.”
He further explained that the industry was somehow caught off-guard by the increase in sugar demand caused by the change in the sweetener used by beverage makers.
“Hopefully we can increase production this year and cope up with the demand of the industrial users,” Confederation of Sugar Producers Spokesman Raymond Montinola told the BusinessMirror.
Montinola added it would be good if consultations can be held between sugar producers and users to discuss supply and demand. This way, sugar planters would be able to calibrate their planting intentions according to the demand of the domestic market, he added.
Existing research
LAMBINO said that the DOF is looking to collate all existing academics on the sugar industry in order to “unleash” efficiencies in the sugar market, as a lot of food manufacturers rely on sugar as a key input for the production of their goods.
“I think a lot of insight already exists; the DA has a lot of experience on this, the SRA has been around for a while, there are a number of academics who have already looked at the agricultural economy of sugar,” Lambino said. “And so there’s existing materials, there’s existing research, we have to bring that together to a policy proposal or a set of policy proposals.”
On January 28, it was reported that the Duterte administration’s economic team is mulling over the removal of fees for importing sugar and to stop the SRA from regulating shipments to further open up the Philippine market for the sweetener.
Socioeconomic Planning Secretary Ernesto M. Pernia has said liberalizing the local sugar industry will bring down the cost of the sweetener, similar to what the government intends to do with rice via the shift to tariffication.
Importers are charged around P200 per 50-kg bag of imported sugar.
The economic team enlisted the help of Ramon L. Clarete of the UP School of Economics to conduct a study on the impact of liberalizing the sugar industry.
To note, the Confederation of Sugar Producers said that around 200,000 people working in the sugar industry in Negros island alone could be displaced if the government will allow the unregulated entry of imported sugar.
Consumers included
YULO explained that importation is part of the regulatory powers of the SRA. “When prices shoot up, importation of sugar is one of the schemes being used to protect consumers so that prices will trickle down,” he said. “But prices will not go down if you will give the volume to biscuit makers, beverage makers and manufacturers, etc.”
This was the case for the sugar industry in 2018.
The industry admitted that there was a tightening in local supply that led to unabated hikes in the retail prices of sugar.
It was not only the consumers that felt the impact of the shortfall on local output; industrial users also succumbed to a lack in supply.
Beverage makers, snack and biscuit manufacturers, and even the sugar planters and millers urged the government to allow the entry of imported sugar to arrest the high prices of the sweetener and augment local supply.
Last year, the SRA allowed two batches of importation: a volume of 200,000 MT in the first half and another 150,000 MT in the second half.
Industry stakeholders said some 130,000 MT of sugar were allowed to enter the country, which were beyond the allocation of the government, bringing total imported volume to almost 500,000 MT, the highest in recent years.
After all the lessons they learned from these series of events, Yulo said the sugar industry would be able to determine this year the “actual” demand for refined sugar by the domestic market, as the sector would have already adjusted to the effects of TRAIN law.
Tax payments
EARLIER in the month, the DOF instructed the Bureau of Internal Revenue (BIR) to closely check the tax payments made by beverage manufacturers in the country, as a discrepancy of P10 billion was reported in the payment of taxes for SSBs as of end-October 2018.
According to Finance Undersecretary Karl Kendrick T. Chua, the BIR has so far collected only around P30 billion in excise taxes from SSBs as of October 2018, as opposed to the programmed target of P40 billion.
Chua blamed SSB manufacturers for the shortfall, saying he suspects these businesses might not be paying the correct taxes. He said companies that are supposed to pay the P12 tax rate are only paying P6.
Data from the Department of Health (DOH) and the Food and Drug Administration showed that as of October 2018, only one company has secured an FDA approval to convert its sweetener from HFCS to sugar or other caloric or noncaloric sweeteners: Coca-Cola FEMSA Philippines Inc.
Chua further emphasized that other companies using HFCS as beverage sweeteners still have to apply for FDA approval. Such approval is a requirement before they could shift to caloric or noncaloric sweeteners with the lower tax rate of P6 per liter.
Operational target
BIR Deputy Commissioner Arnel S.D. Guballa said excise tax collections on SSBs from large taxpayers amounted to P29.74 billion from January to October 2018, while another P184.4 million was collected from other SSB taxpayers, for a total of P29.92 billion.
Dominguez said the newly imposed SSB tax has significantly contributed to the state coffers despite the shortfall of P10 billion, bringing in an additional P100 million a day in revenues or about P3 billion a month.
The DOF set an operational target for the collection of SSB taxes at P100 million a day.
In 2018, the BIR created its own task force to inventory sugar stocks and monitor shipments of the commodity into the country, amid the increased demand for refined sugar, in order to ensure that the correct taxes are paid on these imports.
The task force was tasked to monitor not only importers, but millers, planters, traders and dealers, as well as refined sugar.
The finance chief also ordered the BIR and Beltran to review the SRA’s current policy of allowing farmers and planters’ associations that were awarded import allocations to sell their rights to traders.
Dominguez said local sugar millers and planters who sell their importation rights should also be taxed as they make a profit from such a privilege.
According to preliminary data gathered by the BIR, traders pay around P500 per bag to local millers and planters who sell their rights.
Remaining confident
EARLIER in January, the DOF reported that revenue collections of the government’s main collection agencies reached P41.9 billion in the nine months after TRAIN took effect on January 1, 2018.
This means that the TRAIN law attained 94.7 percent of its programmed goal of P44.3 billion for the first three quarters of 2018.
Broken down, collections from oil excise taxes hit P43.4 billion versus a P43.3-billion target. Excise tax slapped on automobiles reached P12.2 billion versus a target of P11.6 billion. Tobacco excise tax collections hit P5.9 billion against a P3.30-billion target, while corporate income tax hit P800 million in collections as against a target of P400 million. Collections from documentary tax stamp hit P49.1 billion against a target of P21 billion.
Meanwhile, revenue collections that failed to meet their respective target estimates under the TRAIN law include: SSBs at P31.2 billion versus a P43.3-billion target; other excise taxes, P2.3 billion versus a P3.1-billion target; value-added tax at P3.6 billion versus a P24.8-billion target; and, financial taxes at P2.4 billion versus a P5.2-billion target.
The DOF remains confident it will hit its annual TRAIN target collection of P63.3 billion for the full year on the back of the improved collection performance of the BIR and the BOC.
It said the full-year impact of the TRAIN law is expected in March.
Till then, the “TRAIN riders” will just have to continue surviving an arguably bumpy ride.
Image credits: Aaronneilletigio | Dreamstime.com