KRAFT SOUR OVER TANG TARIFF DISPUTE

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 -------------- SUMMARY -------------- ¶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. -------------- -------------- POWDERED BEVERAGE MIXES POSING AS SUGAR IN DISGUISE? -------------- -------------- ¶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. -------------- -- KRAFT PHILIPPINES - LONG HISTORY AND BIG MONEY -------------- -- ¶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. -------------- COMMENT -------------- ¶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