Philippines to pass key tax law, borrow more

Philippines to pass key tax law, borrow more

Agence France-Presse, Manila

The Philippines is set to pass a crucial tax package that would raise the corporate income tax to 35 percent and remove exemptions to value-added tax (VAT), officials said on Monday.

Select House of Representatives and Senate members are to meet on Tuesday to pass a compromise version of the tax measure so it could finally be signed into law by President Gloria Arroyo, Senate President Franklin Drilon said.

The tax bill aims to raise about 60 billion pesos (US$1.1 billion) annually and is a crucial part of a package of tax reforms sought by Arroyo who has warned that the Philippines faces a potential debt default due to its narrow revenue base.

"It is (as) good as approved," Drilon told reporters.

"The consumer will be the one to shoulder the additional burden under the principle that when one consumes more, then one pays more taxes. That's the nature of VAT; it is progressive because the more you consume the higher you pay. Those with less consumption would pay less."

Despite the expected passage of the proposed law, however, Manila is set to go back to the international capital markets to raise more money to plug its financing gap.

Manila, the second most active debt issuer in Asia after Japan, is to sell between $500 and $750 million in securities by reopening its existing 2015 and 2030 bond issues, National Treasurer Omar Cruz told reporters.

The Philippines is scheduled to borrow $4 billion abroad to cover part of this year's projected budget deficit of about 180 billion pesos ($3.3 billion).

The last time the government was in the offshore bond market was in January, when it sold $1.5 billion worth of 25-year global bonds.

On the legislative front, Drilon said the two chambers would ditch Arroyo's preferred VAT amendment that would raise the tax by two percentage points to 12 percent and instead adopt the Senate's version, which keeps the rate at 10 percent while removing exemptions now enjoyed by key industries such as utilities.

"Basically the (VAT) rate will be at 10 percent until the end of the year. In January, the president will be given authority to increase the VAT to 12 percent when certain conditions are met," he added.

Arroyo may do so "when the collection of the VAT as a percentage of GDP (gross domestic product) would exceed 2.8 percent or where the deficit of the national government exceeds 1.5 percent of the GDP," Drilon said.

Hitting the 2.8 percent target would serve as "a test for the executive to have the will to collect more taxes," Drilon said.

Under the same bill, the corporate income tax would be raised by three percentage points to 35 percent this year. The proposed law would have the corporate income tax "taper off" to 30 percent in 2009.

Arroyo spokesman Ignacio Bunye said in a statement the president expects the bicameral conference committee meeting Tuesday "to finally act upon a measure that will have far-ranging consequences on the lives of our people."

Drilon also said the excise tax on petroleum products would be substantially cut "in order to cushion the effects of VAT on gasoline."