Citi backs new taxes for new administration

MANILA, Philippines - American banking giant Citigroup stressed the need for the administration of President Aquino to lay down a comprehensive medium-term policy package, including new tax measures.

Citigroup economist Jun Tri-nidad said the package should focus on addressing the revenue erosion brought about by the package of tax policy breaks approved during the term of former President Arroyo.

“Other than improve collection efficiency, we believe Mr. Aquino’s fiscal strategy should address the revenue erosion from the tax policy breaks approved by the previous Congress such as the senior citizens’ value added tax discount,” Trinidad said.

Trinidad pointed out that Mr. Aquino should utilize political capital early in his term to push for new tax measures involving additional expanded value added tax (VAT) increases rather than later when other policy challenges may emerge.

Former Finance Secretary Margarito Teves earlier proposed an increase in the VAT rate to 15 percent from the current 12 percent.

Estimates showed that the government stands to forego between P50 billion and P60 billion annually from the tax breaks approved by the previous adminstration eroding the gains from the expanded VAT reform law.

He explained that the new government should focus on improving the ratio of the taxes to the domestic output as measured by the gross domestic product (GDP) by improving collection efficiency and reducing tax erosion.

The Citigroup economist said the Aquino administration should also overhaul the current structure of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) that is under the Department of Finance (DOF) headed by comebacking Finance Secretary Cesar Purisima.

“We believe part of the fiscal agenda should involve a restructuring plan for the BIR and the BOC to produce quasi-autonomous institutions liberated from the national and political interference,” Trinidad added.

According to him, amending the charter of both revenue generating agencies would bring permanent change to professional management, rank and file, reduce corruption while attracting fresh talent.

Citigroup said the Philippines is in dire need of fresh revenues after its budget deficit swelled to a new all-time high of P298.5 billion or 3.9 percent of GDP last year from P68.4 billion or 0.9 percent of GDP in 2008.

This eclipsed the previous record budget shortfall of P210.7 billion or 5.3 percent of GDP recorded in 2002.

Trinidad added that investors also prefer to see a comprehensive medium-term policy package that would stress investment reforms, deregulation and initiate more public sector restructuring.

Industrial reforms would attract more investments in sectors or areas where capital and technology are deficient such as port infrastructure, mass transportation systems in Metro Manila and other regional urban centers, air and water transportation in rural areas, low cost housing, disaster relief preparedness and prevention systems.

“Dealing with shortages and weakness in infra-related sectors should contribute to lowering the costs of doing business in these sectors and regions,” he added.

Furthermore, Trinidad pointed out that a phased liberalization of the services sector from tourism, air and sea transport to media would also deepen Aquino’s deregulation plan.

“We believe that the Aquino administration will finally spell out his fiscal agenda that won’t deviate from his campaign conviction to reduce corruption, improve tax compliance and thus hike in a short period of time, collection efficiency without raising new taxes,” the economist said.