Gov’t rules out new tax measures

The government has ruled out further tax reform measures until after the elections, but the International Monetary Fund (IMF) is pushing for more reforms in the financial and power sectors.

The IMF has been pushing for changes in the country’s excise tax laws as well as investment incentives laws that cost the government billions of pesos in terms of foregone revenues.

However, Finance officials said they would not push Congress to take up any major tax-related reform measures, least of all the proposed consolidation of the government’s controversial investment incentives laws.

Even with political limitations, however, the IMF said the Arroyo administration should push for reforms in the financial and power sectors.

"I don’t think the authorities necessarily require new tax measures right away, it is just something that should remain on the table," said IMF senior adviser James Gordon.

"But there are initiatives in the power and financial sectors that definitely need to be completed," he said.

Chief among these necessary reforms, Gordon said, was the proposed Credit Information Systems Act which is pushing for the creation of a credit information bureau and the Corporate Recovery Act which is intended to update the country’s bankruptcy laws.

"Right now, the mission welcomes the positive developments in the financial sector including sales of non-performing assets, bank consolidation and the introduction of new international financial reporting standards," Gordon said.

According to Gordon, the implementation of Basel II in July next year should lead to further progress in the financial sector, aligning the country with the increasingly transparent international standards.

However, Gordon said the IMF still considered it necessary for the government to complete its tax reform program. "New tax measures such as the rationalization of tax incentives will likely also be needed," he said.

Without further tax measures, the IMF said earlier that the plan of the Arroyo administration to increase spending would keep the fiscal deficit at two percent of gross domestic product (GDP).

According to the IMF, balancing the budget and increasing infrastructure spending would not be possible without additional tax measures on top of the recent tax reforms that increased the value added tax rate to 12 percent from 10 percent.

The Arroyo administration has repeatedly said it would not consider any more tax measures at least until after 2007, but few analysts believe that the increase in the value-added tax rate would be enough to sustain the fiscal momentum.

According to the IMF, achieving both objectives would require further increases in revenue and additional tax measures would be needed to sustain fiscal consolidation.

In the report, the IMF said that although additional revenue could be generated from tax administration measures that would ensure the full implementation of existing tax policies, this would not be enough.

While strengthening of tax administration has the potential to yield part of the needed additional resources, the Fund is of the view that additional tax measures will also be needed," the IMF said.

"By staff calculation, increasing capital spending by 1.5 percent of gross domestic product over the medium term while balancing the budget would require revenues to rise by about 3 percentage points of GDP," the IMF said.