Donors urge RP to complete tax reform program

The donor community appealed to the Arroyo administration not to drop its efforts to complete its tax policy reform program, suggesting that the government should also consider raising corporate taxes.

Multilateral funding agencies said the government should pursue tax policy options for the 2008 budget, particularly the indexation of sin taxes to inflation and scrapping redundant tax incentives.

Donor countries, multilateral funding agencies and investors met in Cebu last week for the annual Philippine Development Forum (PDF) where the sustainability of the country’s fiscal recovery was the main subject.

According to the International Monetary Fund (IMF), it would be critical for the Arroyo administration to avoid an abrupt end to the cycle of good news.

"In the past, good news has sometimes been followed by shocks," said IMF resident representative Reza Baqir.

Baqir said that the country’s macro-economic performance has outperformed the Fund’s expectations in 2006, owing largely to the fiscal reforms that restored confidence levels.

Baqir pointed out that gross domestic product (GDP) was originally projected to grow by 4.7 percent but the actual growth rate was recorded at 5.4 percent.

Inflation was projected to reach an average of 6.8 percent but the actual average was only 6.2 percent while export growth was recorded at 14 percent against the forecast of 5.4 percent.

"In two years, a quarter of public debt—in percent of GDP — has been eliminated and for the first time in a decade, fax effort has risen," Baqir said.

Baqir said, however, that sustaining the upswing would require sustained implementation of reforms that have already been started, beginning with raising the revenue effort further.

"The current economic gains are a direct consequence of tax policy reform," Baqir said. "Further tax policy reformwill bring further gains."

According to Baqir, the top tax policy options that government should consider for the 2008 budget is the proposal to scale back redundant fiscal incentives that have created serious leaks in the government’s fiscal incentives program.

Moreover, Baqir said the government should consider raising and indexing excise taxes to inflation — the reform long advocated by the IMF and the Department of Finance (DOF) that died in Congress and was replaced by a fixed tax structure that did not adjust to inflation.

Baqir also said that aside from scaling back redundant fiscal incentives, the country should also look at its corporate income tax structure, noting that the country’s rates were low compared to the rest of the region.

On the whole, Baqir said the IMF estimated that balancing the budget while meeting medium term expenditure needs would require an additional tax effort of about 2.5 percent of GDP.

Baqir said the incremental revenues would be necessary to finance the spending under the medium term development plan as well as to offset the pre-programmed tax decreases.

Under the revised corporate income tax law, the tax has been raised to 35 percent but this would drop to 30 percent in 2009.