First of all, I want to thank IOGT International for inviting us to co-sponsor this event and for giving us the opportunity to share insights on our national experience on alcohol taxation. We take this invitation as a recognition by your organization that the Philippines is doing right in preventing alcoholism and promoting a healthier population and a more inclusive society.
Our Undersecretary of Finance and Chief Economist, Mr. Gil Beltran, was here last week to participate in the CSocD meetings. He had wanted to join this event, however, he is also very much needed in the capital that the Secretary of Finance asked him to return last weekend. He asked the Mission to share with you relevant information on sin taxation in the Philippines.
The Sin Tax Reform Law was passed by Congress on December 19, 2012; it ushered in a new era of financing for inclusive development. The 2012 sin tax reform simplified the excise tax structure of sin products, meaning alcohol and tobacco, by increasing the tax rates and gradually shifting the excise taxation of fermented liquors and cigarettes to a unitary tax system starting in 2017. It also provided for an automatic 4% annual adjustment in specific taxes. It effectively indexed specific sin taxes to inflation. With the measures in place, sin tax collections, as percent to GDP, doubled from only 0.5% in 2012 to 0.9% the year after. In 2017, it hit 1.1% of GDP.
Specifically for alcohol, the sin tax reform law changed the excise taxation of distilled spirits from a specific tax to a compound tax structure in compliance with the WTO ruling on discriminatory taxation of imported distilled spirits in the country. The automatic annual adjustment of 4% on specific excise taxes of wines, fermented liquors brewed and sold at microbreweries took effect in 2014. The 4% adjustment for distilled spirits took effect in 2016 and in 2018 for fermented liquors except those brewed and sold at microbreweries.
More than a revenue measure, the sin tax reform is a health measure. When the bill to reform sin taxes was being deliberated by the Philippine Congress, there were many arguments for and against the reform but the argument that prevailed was the positive impact sin taxation will have on health. Firstly, sin taxation will necessarily increase the price of alcohol and tobacco that it will have a deterrent effect on those who consume these products. Secondly, much of the marginal increase on account of the tax reform is earmarked for health programs.
One of the main objectives of the Sin Tax Reform Law is to generate revenue to finance the Universal Health Care program. The incremental increase in excise taxes is firstly used to fund the development of tobacco farmers, to assist them to shift from tobacco farming to other high value crops. Then, eighty percent (80%) of the remaining incremental revenues from excise tax on alcohol and tobacco, after deducting the amount for the farmers’ development, is earmarked for the Universal Health Care under the National Health Insurance Program, for the attainment of the Millennium Development Goals and health awareness programs. The remaining 20% is for nationwide medical assistance and health enhancement facilities program. And if people use less tobacco and alcohol also, they are less likely to get sick and less likely to burden health care.
Furthermore, the increase in the tax rates for cigarettes was in adherence to the commitment of the Philippines to the WHO Framework Convention on Tobacco Control (FCTC) to increase excise tax incidence (ratio of excise tax to price) from 29.1% to 52.5% in 2013 and 63% by 2017. The Philippines was one of the countries which received the Bloomberg Philanthropies Awards for Global Tobacco Control in 2015.
When the sin tax reform was implemented in 2013, excise tax collection went up by 85% despite the decrease in volume of removals of sin products, except distilled spirits. Collection continue to grow the following years by 2.5% to 18.6% annually. The sin tax reform has generated an additional Php102 billion in its first two years of implementation, 80% from tobacco taxes and 20% from alcohol.
The effect of the increase in taxes to consumption is dramatic in tobacco use, however, in alcohol consumption this is not so. Studies conducted after the sin tax reform law showed that drinkers were not deterred by high prices. However, lifetime abstainers or people who have never consumed alcohol increased from 30% to 38% after the sin tax reform law was implemented.
In December 2017, the President signed RA 10963 (the Tax Reform for Acceleration and Inclusion or the TRAIN Law). Among the provisions of TRAIN was to increase further the excise tax on sin products and their indexation starting in 2024. There is also an automatic annual adjustment of 4% to the rates starting that same year. The incremental revenues coming from these increases will continue to fund the universal health care programs including enrollment coverage of the poor, hospital operations, attainment of SDGs, health policy regulations and general administration, health facilities enhancement programs, and medical assistance, including medicines to indigent patients.
The Philippine Government pursues all these measures in line with Ambisyon 2040 (Our Vision 2040), a collective aspiration of the Filipino people to build a society where no one is poor, and where people live long healthy lives in safe, inclusive and vibrant communities.
 Note that because of non-indexation to inflation, the collections, in percent to GDP, were falling