IMF presses RP on tax efforts

MANILA, Philippines - The International Monetary Fund (IMF) is strongly supporting the call of the Department of Finance (DOF) to adopt a moratorium on the passage of revenue-eroding measures that could aggravate the country’s deteriorating fiscal condition.

IMF Philippine Representative Denis Botman said that there is a need for the Philippines to improve its tax effort to put its fiscal house in order.

“In this regard, it will be essential to resist new eroding tax measures and instead demonstrate legislative commitment to reform excises and tax incentives while accelerating tax administrative reforms,” Botman said.

Tax effort, which refers to the tax collected as a percentage of the domestic output as measured by the gross domestic product (GDP), is expected to drop to 13.9 percent this year from 14 percent last year. It slipped to 13.5 percent in the first half of the year from 14.7 percent in the same period last year due to weak collections by the Bureau of Internal Revenue and the Bureau of Customs.

Finance Secretary Margarito Teves has repeatedly asked the Senate and the House of Representatives to put on hold the legislation of revenue eroding measures as the full impact of the global economic meltdown continued to take its toll on the country’s fiscal position.

The country’s budget deficit swelled to P210 billion in the first eight months of the year or almost seven times the P31.7 billion shortfall incurred in the same period last year.

The Philippines is staring at a record budget deficit of P250 billion or 3.2 percent of GDP this year eclipsing the previous record shortfall of P210.7 billion or 5.3 percent of GDP in 2002.

Measures that were implemented this year include the reduction in the minimum corporate income tax rate to 30 percent from 35 percent as mandated under the reformed value added tax law or Republic Act 9337, the tax relief law that exempted minimum wage earners from withholding tax and increased personal exemptions under RA 9504, among others.

“A number of tax reforms were implemented this year and a lot of those tax reforms in particular will have a lasting impact on tax collections,” Botman lamented.

He pointed out that legislators should pursue revenue enhancing measures particularly the rationalization of fiscal incentives as well as the restructuring of excise tax on sin products including cigarettes and liquor.

“We really have to really resist revenue eroding tax measures and accelerate tax administration reforms. We expect revenue collections to rebound next year when the economy recovers and we start to collect more but it will be very hard based on the existing structure to really improve the tax to GDP ratio significantly and that is where the new measures come in,” he added.

The IMF official stressed the need to restructuring the four-tier excise tax scheme on cigarettes and liquor into one-tier to reverse the decline in excise tax collections.

“We are also supportive of reforming excise tax on sin products. Excise tax rate needs to be increased to recover some of the lost revenues. It (rates) should also be indexed to inflation,” Botman explained.

He said that the government’s excise tax collections have declined by more than one percent of GDP over the past 10 years, erasing the incremental revenues from the reformed VAT law that increased the sales tax rate to 12 percent from 10 percent and at the same time removed several exemptions including that of oil and power.