“Philippines rules out new taxes”
from: Country Digest
Reprinted from Tax Notes Int’l, March 19, 2012, p. 885

(In the following article by Stephanie Soong Johnston by Tax Analysts, Inc., John Nye gives his opinion on proposals for new tax measures in the Philippines. John is adjunct professor at the U.P. School of Economics and professor of economics at George Mason University.)

Following the release of an IMF report calling for the Philippines to raise more revenues through additional taxes, the Philippine government confirmed that it is not planning to introduce new taxes, insisting that its focus on sin tax reform and rationalization of fiscal incentives will be enough to drive economic growth.

Edwin Lacierda, a spokesman for Philippine President Benigno Aquino, ruled out the idea of new taxes after the IMF released a country report on March 5. In the report, Vivek Arora, IMF mission leader to the Philippines, recommended that the government adopt new tax measures to improve revenue collections to ensure steady economic growth. The report called for broadening the tax base by eliminating VAT inefficiencies, excise tax reforms, and rationalizing fiscal incentives.

‘‘In order to achieve both fiscal consolidation and more spending on key priorities, they need to raisemore revenue. They are trying to meet this revenue need through effort on tax administration [and] tax collection,’’ Arora said in an IMF video report released on March 5. ‘‘In addition, they may also need measures to raise more revenue from fiscal incentives and value added taxes.’’

Lacierda pointed out that the Philippines’ focus is on improving tax collection efficiency and that the country is already accomplishing a couple of the IMF’s recommendations through current draft legislation. The government is pushing a sin tax bill that would increase taxes on such products as alcohol and tobacco, as well as a bill that would streamline incentive granting government agencies and limit incentives to investors. The sin tax and incentive rationalization bills are expected to bring in PHP 60 billion ($1.41 billion) and PHP 19 billion ($445 million), respectively.

‘‘We believe that should be sufficient to drive the economy,’’ Lacierda said, as quoted in a March 7 report in the Business Mirror, a Philippine daily paper. ‘‘We don’t see the need to raise new taxes right now.’’

Arora reported that the Philippines has a projected GDP growth rate of 4.2 percent in 2012 and that it could reach 5 percent growth in the medium term if it adopts new tax measures, but there is some doubt mong economic professionals whether a focus on taxation is crucial to strengthening the Philippines’ economy.

‘‘In my view there is too much of a focus by both the IMF and [government] officials on taxation and spending as if the primary problems facing the Philippines were Keynesian deficiencies in aggregate demand,’’ John Nye, professor of economics at George Mason University, told Tax Analysts. He added that even though taxation and spending may be relevant in major Western economies during the global financial crisis, the two issues do not hold the same implications for the Philippine economy.

Nye disagrees with the IMF’s recommendations, saying that broader issues, such as the lack of movement of workers from the agricultural sector to the industrial sector, a lack of competition, and insufficient foreign investment, should take precedence over taxation as top concerns for the government. Nye said that while tax reform is a worthwhile pursuit, it should not be upheld as the key to Philippine economic growth.

‘‘Some analysts seem to believe that giving the government more money to spend would fundamentally make the Philippines better off,’’ he said. ‘‘Since current spending and regulatory rules already indicate distorted priorities, I don’t believe that a sudden jump in revenues would necessarily move the Philippines onto a higher growth path.’’

‘‘Many tax reforms are necessary and desirable, but to think that low tax collection is the major impediment to Philippine growth is a case of mistaken priorities,’’ he added. ◆

♦ Stephanie Soong Johnston, Tax Analysts.
E-mail: sjohnsto@tax.org