Philippine Lawmakers Agree Corporate Tax And VAT Hike

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

10 May 2005

Philippine lawmakers have finally decided to bite the tax bullet by agreeing to increase both corporate income tax and value added tax in order to narrow the government's yawning budget deficit and reduce escalating levels of debt.

The compromise legislation reportedly calls for an increase in corporate tax to 35% from 32% for a period of three years and an additional 2% to be added to the rate of VAT, currently 10%.

The agreement breaks a parliamentary deadlock between the House and Senate, with the former favouring a VAT hike and a freeze in company tax, and the latter preferring a reduction in VAT exemptions and a four-year corporate tax hike.

Ironically, the news appears to have gone down well with the investment community, who are keen to see the government act sooner rather than later in order to avert an Argentinean-style debt crisis.

By the close of trading on Monday, the 30-company Philippine Stock Exchange Index was up 33 points, or 1.7%, which followed a 1.1% rally on Friday.

In comments made last month, Ignacio Bunye, a spokesman for President Gloria Arroyo, urged the country to "bite the tax bullet" in order to avoid its "worst nightmare" of losing the confidence of investors.

"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," he warned.

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.

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