Philippine Supreme Court Gives Green Light To VAT Law

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

20 October 2005

The Philippine Supreme Court has ruled that legislation expanding the scope of value added tax is legal, allowing President Gloria Macapagal Arroyo's government to implement a key part of its fiscal overhaul programme, designed to drag the country out of debt and restore the faith of the international investment community.

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

The legislation also allows the President to increase the rate of corporate tax, currently 32%, to a maximum of 35% for a period of three years. The tax rate is then set to decline to 30% by 2009.

The government's tax reform agenda was thrown into doubt when Francis Escudero, the opposition leader in the lower house of Congress, filed a motion in the Supreme Court in September arguing that the power given to the president to raise VAT was an illegal delegation of the legislature's duties. Initially, the court threw out the motion and ruled that the President's actions were not unconstitutional. However, the court allowed its decision to be appealed, but it arrived at the same conclusion in a second ruling, issued on Tuesday.

The news was welcomed by traders on the Philippine Stock Exchange as the 30-company index advanced by 0.4% after the announcement, ending five days of losses.

The VAT measure is 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, and the country's sovereign ratings have suffered as a result of the crisis.

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