No excise tax on luxury watches

A QUALITY timepiece is a must for many folks, especially business leaders 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 one-of-a-kind timepieces, there was good news recently regarding taxes imposed on these commodities.

Under the Philippine Tax Code, excise taxes will be levied, assessed and collected on certain articles such as alcohol, tobacco, petroleum, automobiles and goods that are considered “nonessentials.” The purpose is to discourage or limit the use or consumption of these products and potentially to 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) stated that wristwatches made of precious metals that a luxury watch brand had imported for sale in the Philippines were subject to 20-percent excise tax since these were covered by Section 150 (a) of the Tax Code. The BIR emphasized the second part of the provision: “goods made of, or ornamented, mounted or fitted with, precious metals or imitations thereof or ivory…,” which according to the BIR covered the imported wristwatches. The Tax Code specifies that precious metals include gold, silver, platinum and other metals of same or higher value; imitations include these metals’ platings and alloys.

On June 29, 2022, however, the Department of Finance (DoF) reversed the BIR ruling, making luxury watches exempt from excise tax. Based on the opinion released, wristwatches and clocks are not considered “nonessential goods” under Section 150 (a) of the Tax Code as they are not listed in the specific provision. Circling back to the previous tax laws, the DoF noted that wristwatches and clocks were never among the enumerated goods deemed falling within the definition of “nonessential goods.”

“Thus, it is clear that when Section 163 (renumbered as Section 150) of EO (Executive Order) No. 273 was carried forward as Section 150 of the 1997 Tax Code for the purposes of imposing excise taxes at 20 percent, the enumeration therein did not contemplate the inclusion of wristwatches and clocks,” the ruling states.

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The DoF ruling also said that revoking the classification of a product as “semi-essential” goods did not right away make it “nonessential” as it was the function — not the price — that dictated if the item was to be considered “semi-essential” or “nonessential.” It was also held that a wristwatch was “semi-essential” for the reason that it allowed a wearer to keep track of time, unlike jewelry that is worn solely for personal adornment and hence classified as “nonessential.”

The DoF ruling exempting luxury wristwatches from excise taxes is great news not only for watch enthusiasts but for businesses that import this luxury item into the Philippines. With no excise tax in the equation, estimated customs duties to be paid by the importers will be reduced. Unlike value-added tax, which appears on the receipt upon purchase, excise tax is factored into pricing of the goods imported for domestic sale. In turn, the market price will also not increase significantly.

On the other hand, exempting luxury watches from excise taxes lowers the revenue the government can collect from those who can afford to buy these products. If the government is not willing to impose extra taxes on luxury watches, what other initiative can it undertake to raise additional revenue? Should the legislative branch push for expanding the coverage of “nonessential” goods to include other expensive items such as artworks?

While the imposition of excise tax or the expansion of its coverage is meant to get the rich to contribute a bit more, the government should also be cautious when levying additional taxes since doing so could lead to a decline in sales of these items, which may, in turn, lead to other problems such as business closures and job losses. Given the country’s current economic condition, the government should carefully weigh its course of action, particularly on the imposition and collection of taxes for the purpose of achieving economic growth and development.

The author is an assistant manager with 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]