Moody’s wary of income tax reforms

MANILA, Philippines - The Philippine government should be circumspect in tweaking income tax rates as the country has one of the lowest revenues among the investment grade-rated economies, Moody’s Investors Service said.

“With regard to income tax reform, I think we want to be wary about reversing some of the gains we’ve had over the past few years,” Christian de Guzman, vice president and senior analyst at Moody’s, said in a briefing yesterday.

“In the 1990s, we’ve had a similar improvement in revenue generation but subsequently there was a backsliding, and it is only now that we’re recovering to levels of revenues as a share of GDP that we last saw about 10 years ago,” he added.

Data from the Department of Finance showed the tax to GDP (gross domestic product) ratio or the government’s revenue collections as a percentage of GDP stood at 14.09 percent as of July from 13.6 percent in end-2014.

The government aims to increase its tax effort to 15.3 percent this year and to 16.6 percent in 2016 through continuous improvement in tax administration, aggressive campaigns, and expansion of the revenue base.

“It is not for Moody’s to decide or opine whether or not lower income taxes are appropriate for the Philippines but we are looking at the overall revenue performance of the Philippines and in this regard, we note the Philippines is among the lowest revenue generators among investment-grade countries,” he said.

De Guzman, who is in the country along with other executives from Moody’s for the Asia-Pacific Economic Cooperation (APEC) meetings, made the comment as a measure seeking to lower the current income tax rates remain pending in the Congress.

Philippine lawmakers are eyeing the reduction of the 32 percent income tax rate for individuals earning a net taxable amount of P500,000 a year to just 25 percent by 2017.

But President Aquino earlier this year said he was not amenable to the proposed income tax cuts as this move would cut government revenues and also affect credit ratings.

Moody’s upgraded last December the country’s sovereign rating to Baa2, a notch above the minimum investment grade, with a stable outlook.

The rating was awarded amid the continuous decline in the country’s debt, rosy prospects of the Philippine economy, and perceived resiliency against external risks.

De Guzman noted it would be hard to determine how much the proposed law would impact government revenues and spending as well.

“One of the arguments for lower income taxes is it could stimulate the economy but we have to go back to the overall revenue performance of the government as a share of GDP because of the government’s very ambitious expenditure program,” he said.

“They want to ramp up expenditures to five percent of GDP by the end of this term and one of your major constraints in ramping up expenditures is revenues,” De Guzman added.