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Viewing cable 05MANILA5924, KRAFT SOUR OVER TANG TARIFF DISPUTE

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Reference ID Created Released Classification Origin
05MANILA5924 2005-12-22 03:15 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Manila
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 
 
------- 
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