MANILA,  July 8, 2004
By Des Ferriols  -  They wanted drastic tax reforms, but they didn’t expect proposed new tax measures to be too drastic.

After making stern recommendations for drastic tax reforms, the International Monetary Fund (IMF) slammed the Arroyo administration’s plan to shift to gross income taxation as risky and unlikely to raise new revenues.

An IMF mission has been in the country for the last two weeks to meet with Philippine officials for the IMF’s annual post-program monitoring (PPM) review.

Topping the IMF agenda is the country’s economic performance and the national government’s fiscal crisis, which has been threatening to explode into a full-blown debt crisis.

Sources privy to the ongoing discussions between the IMF and various government agencies said President Arroyo’s proposal to shift to gross income taxation "raised eyebrows" among IMF officials.

In one of her first policy pronouncements, the President floated the idea of shifting from net income taxation to gross income taxation to simplify tax collection.

Under existing laws, the government is allowed to shift to gross income taxation, but it may only do so once tax collection has become efficient enough to raise the tax-effort ratio by 20 percent.

If this shift in tax system is approved by Congress, it will happen at a time when the government’s tax-effort ratio plummeted from a high of 17 percent in 1997 to the current 12 percent.

According to sources, the IMF’s opposition to the scheme was conveyed by Philippine mission chief Masahiko Takeda to Internal Revenue Commissioner Guillermo Parayno Jr. during their meeting.

According to the source, the IMF was "quite concerned" about the implications of the shift.

Existing laws provide that individuals and corporations are taxed based on their net incomes. Corporations, in particular, generally pay 33 percent based on their net earnings.

The source said the IMF was concerned that the BIR would be "overwhelmed" by the amount and complexity of the exemptions that various business groups would lobby for if Congress opens the floodgates for discussion.

"When you think about it, gross taxation is actually a very complicated process starting with the definition of gross income itself," the source said.

According to the source, similar debates took place in the mid-1990s, when the Tax Reform Act was deliberated upon in Congress, spawning a "bewildering array of lobbies for various exemptions."

According to another source, touching the income tax regime at this time poses "significant risks," as the gross income tax scheme is untested and could backfire.

The IMF has been very vocal in its recommendation that the Philippines enact drastic tax measures to increase revenues by increasing tax rates and imposing new taxes.

Painful But Necessary

Speaking before the weekly Citio Fernandina Forum in Greenhills, San Juan town, Albay Rep. Joey Salceda said that unless strong measures to stem the tide are implemented immediately, the country could face a fiscal crisis within six to 18 months.

Besides gross income taxation, some of the proposed tax measures include new excise taxes on sin products, additional excise taxes on petroleum products, franchise taxes on telecommunications instead of a text-messaging tax and a hike in the expanded value-added tax (EVAT) from 10 to 12 percent over five years.

In addition to the proposed tax measures, Salceda said the government is also mulling the implementation of a lateral attrition program for government employees, cost-cutting measures in all government offices, a tax amnesty with mandatory statement of assets and liabilities, an extension of the motor vehicle users charge and an increase in administrative fees and charges, such as those charged for drivers’ licenses.

Salceda said he expects the public to initially reject these new tax measures, but he said there is no other feasible way to raise the P102 billion needed to stave off a fiscal crisis triggered by the P312 billion budget deficit.

While admitting that the proposed tax reforms are a painful cut, he also said "we are a crisis waiting to be triggered. It’s either we sink or we swim."

"Everybody must share the pain," he said. "But there must be more gain than pain." Salceda defended the President’s revenue measures, saying belt tightening and new taxes are needed to bridge the deficit gap.

Salceda said that if a fiscal crisis is not averted, the government will no longer be able to provide the basic services and safety nets needed for economic growth.

"We will go into a crisis," he said. "This will severely affect the government’s ability to provide services, provide safety nets for the people and provide economic growth. We will go into a period of economic destabilization."

"We really need to make a down-payment," he added, estimating that this would take a "minimum of six months to 18 months."

While Salceda expects rough sailing in Congress for the proposed tax measures, he is also confident these will be approved. "These are painful measures," he said. "But I think it will be faster now because the urgency of the situation is palpable to all. We should have a credible deficit reduction program."

Battling the ballooning budget deficit, however, will not put moves to amend the 1987 Constitution on the back burner, he added.

Though Congress may provide the legislative support needed for Mrs. Arroyo’s drastic measures to succeed, there is still a pressing need to shift to a parliamentary system of government.

Salceda said that even if the government is able to collect all existing taxes, the total sum collected would still not be enough to cover the budget deficit because of natural leakages in the tax collection system.

Salceda said Congress can simultaneously tackle Charter change and fiscal crisis issues, adding that cha-cha and the looming crisis "can be taken together. The idea of multiple tasking, especially on two basic tasks, can be done." — With Mike Frialde, Paolo Romero

Reported by: Sol Jose Vanzi

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