Taxing times seen frustrating Philippine reforms

MANILA (AFP) - The sacking of a tax collector has raised fears that corruption and unrealistic expectations may scupper government revenue targets, jeopardising the fiscal reform package in the Philippines.

That package had been winning President Gloria Arroyo plaudits from foreign investors and ratings agencies for turning around an economy long considered moribund and corrupt.

But that changed when Jose "Jojo" Bunag, head of the Bureau of Internal Revenue (BIR), was fired on June 20 after his agency fell short on first quarter collection targets by 10 billion pesos (218 million dollars).

May figures, which accompanied the very public sacking of Bunag, showed poor revenue collections had led to a government deficit of 1.7 billion pesos, from a 12 billion surplus in April.

In his defence Bunag claimed government targets were too high while he also found support from politicians and government academics calling for reform of a system shrouded by a lack of transparency.

"Tax collection has always been a problem in this country. There has to be a clear, transparent system of collection. It is as simple as that." said Ben Diokno, an economist with the University of the Philippines.

Neal Cruz, a columnist writing in the Philippine Daily Inquirer, said: "No other revenue agency in the world adopts such target setting performance criteria, for the simple reason that it can never be accurate because of too many variables in the economy.

"If the BIR is not able to achieve the collection target, then it is assumed that its personnel must be corrupt and not collecting the correct taxes."

Following Bunag's removal, the government said it remains confident the BIR will reach its target of 730 billion pesos by the end of the year.

It is also planning to add a further 105 billion pesos from asset sales, which include offloading a 24 percent stake in brewer San Miguel and a 60 percent stake in Philippine National Oil Company-Energy Development Corp.

But Diokno warned the selling of those enterprises would only get the government over a current short term hump while raising taxes on cigarettes and alcohol were obvious areas to move on.

"But they raise certain political issues which this government, in particular, will not address because of its relationship with some of the tycoons who own these businesses," he said.

The Value Added Tax (VAT) Reform Act better known as the expanded VAT law was passed in May 2005 and implemented on November 1, 2005. The controversial law is seen as the key plank in Arroyo's economic reform programme.

The law increased VAT from 10 percent to 12 percent taking in transport and power generation, which had previously been exempt.
It also cut excise tax on petroleum products and increased corporate taxes to 35 from 32 percent.

At the time the government said it was determined to increase revenues, bring the budget deficit down and balance the budget by the end of 2008.

Coupled with record remittances by Philippine overseas workers, revenues have played a key role in boosting the country's fiscal position.

Renewed investor confidence has been reflected in the stock market hitting a record 10-year high in the first quarter.

But without new tax measures the pressure is now on the BIR and Bureau of Customs to increase tax collections to help finance infrastructure, healthcare and education spending.

The outgoing country head of the World Bank, Joachim von Amsberg, has also stepped into the fray and warned the government's fiscal reform programme was at stake if it allowed revenue collection to slip backwards.

Von Amsberg said the Bank was encouraged by signs that the government was "concerned and recognises the risk of backsliding" in its reform programme.

But he warned: "The credibility of the government's reform programme and the fiscal targets are very much at stake."

And Diokno added that salaried workers still pay the bulk of the taxes. Their numbers are not growing while the informal sector, which is not taxed, is growing.

He said until there was a genuine will to improve the country's tax system, little would change.