Arroyo Urges Philippines To Bite The Tax Bullet

by Mary Swire, Tax-News.com, Hong Kong

26 April 2005

As debate between lawmakers in the Philippines over proposals to increase revenues from value added tax drag on, President Gloria Arroyo has told the country that it must be prepared to "bite the bullet" and accept higher taxes if it is to pull itself out of the current fiscal crisis and win back the trust of global investors.

"We have to bite the bullet to gain a better economic footing through the VAT bill and the Napocor rate hike," Arroyo's spokesman, Ignacio Bunye announced in a statement, referring to a request by regulators that the debt-laden national utility firm National Power Corp increase its electricity tariff.

Bunye continued: "Our worst nightmare would come from failure to act to protect the public interest in the long run. If we lose market confidence, we will lose the strength to (attract) investment which will create the jobs and livelihood opportunities."

The Philippines has already suffered a ratings downgrade by international ratings agency Standard & Poor's, and last year Arroyo warned that the country faces "death throes" unless it pulls in more tax revenues.

Currently, the nation's bicameral assembly is debating whether to raise the rate of VAT to 12% from 10%, or reduce the number of firms benefiting from tax exemption. However, the House, which favours the former option, remains in disagreement with the Senate, which favours the latter.

The situation has been further complicated by an admission from the Finance Secretary, Cesar Puri­sima that the government now needs P130 billion (US$2.4 billion) from VAT instead of the initially estimated P60 billion, as a result of higher rates of interest on the country's foreign debt.

According to Purisima, 70% of VAT revenues would be used to pay foreign debts with the remainder going towards the medium-term development plan.

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