Philippine Supreme Court Agrees With New VAT Law

by Mary Swire, Tax-News.com, London

05 September 2005

The Philippine Supreme Court has ruled that a vital tax increase, put into place by President Gloria Macapagal Arroyo's government earlier in the year, but immediately suspended, does not violate the country's constitutional code.

Little more than a few hours after the VAT measure went into effect on July 1, the Supreme Court moved to freeze its implementation after opposition lawmakers petitioned the Court. Opponents of the VAT hike had argued that it was unconstitutional for the president to increase the tax without their approval.

However, in an announcement by a Court spokesman last week, it emerged that judges had voted 15-0 in support of the new tax law passed in May. Critics of the law now have 15 days to challenge the ruling, and the suspension of the new tax won't be lifted until the court rules on any appeal.

"The dire need for revenue can't be ignored. Our country is in a quagmire of financial woe. Congress passed the law hoping for rescue from inevitable catastrophe," the Court remarked.

Under the measures in question, certain industries previously exempt from the 10% VAT, such as petroleum, power generation, airlines and shipping companies, would be required to charge VAT. In addition, the new law entitled the president to raise the rate of VAT from 10% to 12% from January 2006 onward, as long as the government's budget deficit exceeded 1.5% of gross domestic product.

The VAT measure was a key component of President Arroyo's eight-point tax reform, which seeks to improve tax collection and raise revenues to help pay down the country's escalating level of debt. At present, one third of the government's revenue is spent making debt interest payments, leaving little for investment in vital infrastructure. The tax reforms will also result in an increase in corporate tax to 35% from 32% for a period of three years.

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