GHANA: COKE ON THE ROCKS

UNCLAS SECTION 01 OF 02 ACCRA 001289

SIPDIS

NSC WASHDC FOR MICHELLE GAVIN
AF/EPS FOR ELLIOT REPKO
DOC FOR MAC DAS HOLLY VINEYARD

E.O. 12958: N/A
TAGS: ECON EFIN EINV BSSR GH
SUBJECT: GHANA: COKE ON THE ROCKS


1. SUMMARY: On November 18, the Minister of Finance and
Economic Planning proposed a legislative change to the
GOG's excise tax regime, moving from a specific tax to an
ad valorem tax at an increased rate. Responding to beverage
industry concerns with the proposed change, Ambassador
proposed a meeting between Coca-Cola and MOFEP to discuss
the impact on the industry. The Minister agreed to his tax
policy experts meeting with the company prior to the
legislation's enactment in mid-December. The Minister
explained two reasons for the change: first, that the
excise tax regime was performing poorly compared to GDP
growth and needed fixing, and second, the current system of
calculating excise tax was too burdensome on MOFEP. Given
the current economic malaise and fiscal crisis, the GOG is
seeking ways to get more creative in enhancing much-needed
government revenues. At the same time, Coke feels it would
shoulder an unfair share of the new, and regressive, tax
burden. Post continues to lend its good offices to Coke in
order to create a mutually beneficial solution to the
current impasse with the GOG. There is no evidence that
the proposed change would be applied in a discriminatory
manner against U.S. or other foreign products. END
SUMMARY.


2. Post was approached by Coca-Cola Equatorial Africa
(Coke's franchise in Ghana) and their Spanish bottler,
Coca-Cola Bottling Co. of Ghana Ltd., with concerns about a
bill in Parliament to change the excise taxation system
that was announced by the Minister of Finance and Economic
Planning (MOFEP) on November 18. Coke is worried that the
proposed change will increase their excise tax burden by
USD 10-12 million in 2010 and the effective excise tax rate
would jump from 13 to 20 percentage points.


3. In response to a request by the company, Ambassador used
a previously scheduled opportunity to meet with Minister
Duffuor to also query the GOG about the proposed change to
the tax system, and to request that the ministry's tax
policy unit meet with the firm to hear their concerns and
hopefully work out a more equitable way to increase GOG tax
revenue. Minister Duffuor agreed to make his staff
available to meet with Coke and talk about the proposed
changes before they become law. He admitted that he had
not consulted with Coke and other affected companies
because the change was a return from a specific tax back to
the ad valorem tax system that had been in place until
2007, albeit at higher rates (20 percent vs a range of
13-16 percent in 2007). (NOTE: The excise tax is currently
GHC 0.056, or USD.038, per liter. END NOTE.)


4. The Minister explained to Ambassador the GOG's rationale
for the change. First, MOFEP is unhappy with the
performance of the specific tax. Duffuor said the share of
excise tax revenues to GDP over time has not kept pace with
GDP growth. Ambassador acknowledged the GOG's need to
raise revenues as it continues to cope with the effects of
its fiscal crisis. He reminded the Minister of the USG's
past support for the GOG at the IFIs during the global
financial crisis.


5. Second, the Minister claimed that the specific tax in
use now was difficult for MOFEP to accurately calculate.
He also asserted that the return to an ad valorem tax would
be simpler to apply as it is applied to the ex-factory
price -- basically the wholesale price of the product when
it leaves the factory. Duffuor pointed out that the
proposed changes would correct a previous discrepancy in
the tax rate for carbonated and malted beverages. NOTE AND
COMMENT: Coke, representing 94 percent of the carbonated
beverage market in Ghana, in the past complained to the USG
of tax discrimination -- their beverages had a higher tax
than non-alcoholic malted beverages produced by Guinness
Breweries.


6. NOTE AND COMMENT, CONTINUED. Separately, Econ staff was
told by a MOFEP tax bureaucrat that their initial plan to
use the Consumer Price Index (CPI) as the measure of
inflation for excise tax computation was successfully
opposed by firms including Coke last year, and the previous
NPP government substituted the Producer Price Index (PPI)
in its place -- with a reduction in government revenue,
given that the CPI reflected a higher rate of inflation
than the PPI. It is natural that the GOG would prefer to
capture more tax through the CPI, and firms would seek to
reduce their tax burden through use of the PPI. Coke
officials told Econ and Comm Offs their belief that the ad

ACCRA 00001289 002 OF 002


valorem tax was regressive, more complicated, and seldom
used by other developing countries. PriceWaterhouseCoopers
published an analysis of the GOG budget proposal, which
said that the re-introduction of ad valorem excise duties
may lead to increased costs, which will have to be passed
on either to the producers or consumers, increase
inflationary pressures, and reduce demand. It concludes
that the GOG should consult with industry more closely in
order to optimize revenue as a whole. Leaving aside the
technical tax issues, it is apparent to Post that ministry
officials are still smarting about the way the issue was
resolved last year. However, Post reviewed the proposed
wording and believes the new taxes would be applied in a
non-discriminatory manner against all imports and domestic
products, and against all soft drinks including bottled
water. At the same time, the beverage industry feels it is
taking the brunt of the GOG's efforts to improve its
balance sheet. END NOTE AND COMMENT.


7. On November 30, Post debriefed Coke on the GOG meeting
and urged the company to send its tax experts to meet with
the GOG at the earliest possible opportunity, so that
meaningful change can be affected before the legislation
moves too far through Parliament, which must vote on
pending legislation, including this bill, on December 18.
The General Manager of Bottling, Conrad Van Niekerk,
responded that Michael Goltzman, a Public Affairs executive
resident in Cairo was the most appropriate official to
visit, but given his current travel plans to Nigeria he
would be unable to get to Accra until December 7. The
Franchise Manager is currently on travel in the U.S. Van
Niekerk also mentioned that he had reached out to the
Spanish Trade Office for assistance with MOFEP, and is
interested in sharing the PriceWaterhouseCoopers survey
with the Ministry. He promised to brief Post on the
results of these efforts and requested Post assistance in
arranging a meeting at the appropriate level in MOFEP for
Mr. Goltzman. Post offered assistance in arranging meetings,
but stressed that Goltzman should arrive as soon as
possible, preferably well before December 7, as currently
scheduled.


8. COMMENT: There is no evidence to suggest that the GOG's
proposed change to the excise tax system is targeted at
foreign firms, or Coke specifically. Although Coke's tax
burden would rise by the re-introduction of an ad valorem
tax, all bottlers would be hit in the same way, and items
such as alcohol and tobacco products will rise by an even
higher rate. It is apparent that the GOG seeks creative
ways to improve its tax governance and raise much-needed
government income as it tries to reign in the rampant
deficit under austerity budgets. There is a feeling among
GOG economic planners that the government restricted its
expenditures too much in 2009, which excessively hurt
Ghana's growth rate in an economy that is overly dependent
on public spending. The attempt at capturing more tax
revenues is part of the government's attempt to rebalance
that equation in 2010, and as such should not be seen as a
policy to punish U.S. imports. Coke, reflecting the view
of domestic bottlers, feels that it would be forced to pay
an unfair amount in new taxes. There is still room for a
win-win scenario if the company can replicate its positive
government relations in other markets with the tax
authorities in Ghana. END COMMENT.
TEITELBAUM