, April 21, 2005
 (STAR) By Des Ferriols -  While both houses of Congress deliberated on adjustments in the value added tax (VAT), the International Monetary Fund warned against granting tax incentives in order to attract foreign investors.

Having one of the lowest value-added tax rates in the developing world, the IMF said the Philippines will need higher tax levels as its economy develops and the government seeks a role closer to industrial countries with twice the tax burden.

On the other hand, the government should also be wary of granting tax incentives in order to attract foreign investors.

The IMF said in a paper that developing economies like the Philippines would have to implement a sharp reduction in its reliance on foreign trade taxes and do so through tax policy changes that do not create tax disincentives.

This developed as the Bicameral committee of the House of Representatives and the Senate agreed on a single value added tax (VAT) rate although debates are still on-going on whether to retain the 10-percent rate or increase it to 12 percent.

The IMF said that tax incentives was common in developing countries but it was questionable whether they actually promote incremental investments.

"Their revenue cost may even been too high," the IMF said. "For example, tax incentives can be abused by existing enterprises disguised as new ones through nominal reorganization.

"For foreign investors which are the primary target of most tax incentives, the decision to enter a country would normally depend on a whole host of factors," the IMF said. "The availability of tax incentives is only one and frequently far from being the most important one."

But the IMF said tax incentives could also be of questionable value to a foreign investor because the true beneficiary of the incentives may not be the investor but the treasury of its home country.

"This comes about because any income that is spared from taxation by the host country could be taxed by the investors’ home country," the IMF said.

Unless a tax sparing clause was included in bilateral double tax treaties, the IMF said tax incentives for foreign investors would be meaningless to the investor.

The IMF, on the other hand, reported that the Philippines had one of the lowest VAT rates among developing countries, comparable at 10 percent with such economies as Indonesia, Thailand, Korea, Egypt and Jordan.

Indonesia and Korea, however, have multiple tax rates, so do Latin American countries such as Argentina, Colombia, Nicaragua and Uruguay.

In Latin America, however, most developing economies have standard VAT rates higher than 13 percent. Argentina has a standard VAT rate of 21 percent, while Colombia has 16 percent and Uruguay has 23 percent.

According to the IMF, however, the VAT regime adopted by developing countries frequently suffered from being incomplete despite being modeled after Western European countries where the tax is implemented through credit-invoice mechanisms.

"It is all too common to find that many important sectors have been left out of the VAT net or that the credit mechanism is excessively restrictive," the IMF said.

The IMF said multiple VAT rates are politically attractive by ostensibly serving an equity objective but the Fund said even this was not necessarily effective.

"The administrative price for addressing equity concerns through having multiple VAT rates is likely to be higher in developing than in developed countries," the IMF said.

Reported by: Sol Jose Vanzi

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