Government determined to prosecute big tax evaders - DOF

The Arroyo administration yesterday took exception to criticisms that it was having difficulties making its supporters pay more taxes, saying the elite and upper middle income groups are not exempt from prosecution if found violating tax laws.

The Department of Finance in a statement said the Arroyo administration is determined to "prosecute and jail the so-called big fish" as the Bureau of Internal Revenues (BIR) cracks down on erring large taxpayers.

The DOF was reacting to the stinging evaluation of investment bank Morgan Stanley which observed that the Arroyo administration would have an uphill battle trying to convince its supporters to pay more taxes.

Morgan Stanley’s east Asian expert Daniel Lian had reported that major corporates and landlords have used the tax laws to their advantage and minimize their tax exposure. Because of the judiciary is overburdened, the chances of prosecuting tax evaders are slim.

"It is important to understand that Mrs. Arroyo came to power with the support of the oligarchies such as the Catholic church, landlords and big business interests," Lian said. "It will be an uphill battle for her to convince these supporters to pay more taxes."

Lian also said that while the Arroyo administration is taking a pro-restructuring stance and has unleashed many important reform measures in the past 20 months, the efforts at boosting government revenues so far has not yielded any tangible result.

According to the DOF, however, the administration’s policy was to enforce the tax laws equally to all individuals and corporations.

"While the President’s strong support base came from the elite and the upper middle income groups, they are by no means exempt from prosecution if found violating the tax laws," the DOF said.

The DOF also claimed that despite its fiscal crisis, the administration was "close to meeting its growth target for the year," with the gross domestic product projected to grow between four and 4.5 percent. This target range, however, had been revised downward from 4.5 to 5.5 percent. "The deficit has not led to fiscal instability," the DOF said. "It has not put pressure on the interest rates, defying market expectations." Morgan Stanley had reported that the Philippines faces a dim future unless the government managed to cut the "cycle of fiscal blowout" through radical tax reforms.

In a paper titled "The Philippines: Still No Magic", investment giant Morgan Stanley said structural fiscal woes and restructuring inertia caused the country’s dismal performance relative to other east Asian countries with comparable economies such as Malaysia, Thailand and Indonesia.

Morgan Stanley is one of the biggest fund managers with over $451-billion worth of assets under its management.

Lian said poor tax collection has been central to the lack of economic development and restructuring inertia for the country for many decades. He said that before any meaningful economic reform could take place, the Philippines has to overhaul its tax collection system.

Lian’s description noted the whimsical nature of the tax collection effort, becoming more lax when the regime lost restructuring momentum and rebounding when the political regimes pursued more aggressive reforms.

According to Lian, the country is capable of generating tax revenue to the tune of about 25 percent of gross national product (GNP) based on its 33-percent corporate tax rate and 33-percent top-tier income tax rates as well as its system of indirect taxation.

However, tax collection effort ratio never exceeded 20 percent of GNP and the country is already running the risk of plummeting below 10 percent for the first time since the Marcos Regime.

Against this backdrop, Lian noted that the Philippines has suffered greatly from macro mismanagement that sent its total indebtedness to a staggering $110 billion, equivalent to 130 percent of the country’s 2002 GNP estimated at $97.7 billion.

According to Lian, the central government debt accounts for 66 percent of GNP. The Philippines, he said, is also the largest and most consistent source of external debt issuance in Asia, excluding only Japan, and the country remains the most exposed to shifts in global emerging market sentiment.