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Moody's Calls For Philippine Tax Reform

by Mary Swire,, Hong Kong

13 July 2011

In an analysis similar to the views previously expressed by Standard and Poor’s (S&P) last month, Moody’s, another credit rating agency, has expressed the view that the Philippines will require reforms to produce additional tax revenue, particularly if it wants to acquire an investment grade rating.

However, when he assumed office in June last year, Philippine President Benigno Aquino stressed that, to reduce the country’s then-increasing fiscal deficit, the collection of taxes should be improved before there was to be any thought of increasing tax rates, or of any new taxes.

In fact, in response to S&P, the government has already reiterated its view that it currently has no intention of introducing additional taxation, as it believes there are still significant increased revenues to be garnered by improving tax administration - by strengthening the authorities’ powers to collect unpaid taxes and chase tax evaders.

Moody’s has confirmed that its rating for the Philippines, which was upgraded in June to two notches below investment grade, is stable for the foreseeable future, but pointed out that the country’s tax revenue-to-gross domestic product (GDP) ratio, at an average of 14.7% in the period from 2006 to 2010, is way below its rating peers. In fact, it has been estimated that, without additional revenues, the ratio will still be around 15% this year, and will reach only 16% in 2014.

Therefore, while the government has been successful in reducing the country’s budgetary shortfalls, reducing its fiscal deficit down to 2.9% of GDP, lower than the government’s target of 3.2%, Moody’s has suggested that, to fulfil its development objectives and improve its credit rating, it should go further and pursue a tax reform programme.

Moody’s cited legislation for the rationalization of fiscal incentives, which is already being considered by parliament and supported by the government, as well as a reorganization of ‘sin’ taxes on alcoholic and tobacco products, as providing some movement towards its suggestion.

TAGS: tax | economics | tax incentives | fiscal policy | Philippines | tax reform

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