A QUALITY watch is a must for many people, especially business owners who consider the accessory an important part of their “armor”. For those who prefer luxury watches and who belong to the rarefied group of people who can afford to pay a premium for unique watches, there has recently been some good news regarding the taxes imposed on these products.
Under the Philippine tax code, excise taxes will be levied, assessed, and collected on certain items such as alcohol, tobacco, petroleum, automobiles, and goods deemed “non-essential.” The aim is to discourage or limit the use or consumption of these products and potentially redistribute income since only a privileged few can afford to pay the premium.
As such, a 2021 confirmatory ruling issued by the Bureau of Internal Revenue (BIR) declared that precious metal wristwatches that a luxury watch brand had imported for sale in the Philippines were subject to a tax. excise duty of 20% since they were covered by Section 150(a) of the Internal Revenue Code. The BIR emphasized the second part of the provision: “goods of precious metal or adorned, mounted or fitted with precious metals or their imitations or ivory…”, which, according to the BIR, covered imported wristwatches. The Tax Code specifies that precious metals include gold, silver, platinum and other metals of equal or greater value; imitations include platings and alloys of these metals.
On June 29, 2022, however, the Department of Finance (DoF) reversed the BIR’s decision, exempting luxury watches from the excise tax. Based on the published notice, wristwatches and clocks are not considered “non-essential goods” under Section 150(a) of the Internal Revenue Code as they are not listed in the provision specific. Returning to previous tax laws, the DoF noted that wristwatches and clocks have never been among the listed goods considered to fall under the definition of “non-essential goods.”
“Thus, it is clear that when Section 163 (renumbered as Section 150) of EO (Executive Order) No 273 was carried over as Section 150 of the Internal Revenue Code 1997 for the purposes of ‘to impose excise duty at 20%, the enumeration therein did not contemplate the inclusion of wristwatches and clocks,’ the decision states.
The DoF ruling also said revoking a product’s classification as a “semi-essential” good does not immediately render it “non-essential” because it was function – not price – that dictated whether the item was to be considered “semi-essential”. essential” or “non-essential”. A wristwatch was also deemed to be “semi-essential” as it enabled its wearer to keep track of time, unlike jewelry which is worn only for personal adornment and therefore classified as “non-essential”.
The DoF’s decision exempting luxury wristwatches from excise duty is great news not only for watch enthusiasts, but also for companies importing this luxury item into the Philippines. Without excise tax in the equation, the estimated customs duties to be paid by importers will be reduced. Unlike value added tax, which appears on the receipt upon purchase, excise tax is factored into the price of imported goods for sale in the domestic market. In turn, the market price will also not increase significantly.
On the other hand, exempting luxury watches from excise duty reduces the revenue the government can collect from those who can afford to buy these products. If the government is unwilling to impose additional taxes on luxury watches, what other initiative can it take to generate additional revenue? Should the legislature push to expand coverage of “non-essential” goods to include other high-ticket items such as works of art?
Although imposing an excise tax or expanding its coverage is intended to induce the wealthy to contribute a little more, the government should also be careful when levying additional taxes, as this could result in lower sales of these items, which could in turn lead to other problems such as business closures and job losses. Considering the current economic situation in the country, the government should carefully weigh its course of action, especially on the imposition and collection of taxes with the aim of achieving economic growth and development.
The author is Deputy Director of the Tax & Corporate Services division of Deloitte Philippines (Navarro Amper & Co.), a member of the Deloitte Asia Pacific Network. For comments or questions, email [email protected]