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July 28, 2008

Philippines: IMF study warns about oil VAT removal
The International Monetary Fund (IMF) warned the Philippines that reducing the consumption tax rate on oil products does not work well to help the poor, who are suffering the most from skyrocketing food and fuel prices, reported local daily Manila Times.

The Philippines and other IMF member countries are under pressure to do something to blunt the effects of non-stop fuel price hikes, but they should maintain their current tax rates amid the public clamor to lower the rates as a solution, according to an IMF study released on June 30.

The plan to cut the current excise taxes on oil is also a bad idea, as that will lead to lower government revenues, the report added. The IMF said that in a country where there is a value-added tax (VAT) system in place, differential rates are difficult to administer and enforce.

Because higher-income households consume a higher share of almost all goods, the IMF explained they would also receive most of the benefit from a tax-rate reduction. And once the rates are lowered, it is also difficult to reverse.

Saudi Arabia, for example, decided in May 2006 to lower retail prices for gasoline and diesel from $0.16 per liter to $0.07, the IMF reported. The move resulted in foregone revenues equal to 1.2 percent of the economy year.

Instead, the IMF recommended that the government should strive to be more efficient in collecting taxes from oil, so it can channel the revenues to social services for the poor.

There have been mounting calls for the suspension of the 12-percent VAT on oil products since the first quarter of the year. So far, the Arroyo government has resisted such calls, even amid record-high inflation.

The Department of Finance said suspending the VAT would just worsen the economic situation, since that benefits the higher-income earners rather than the poorest of the poor who need help.

The department added that the government has a P18.6 billion windfall from oil this year. With that, the Finance department said government can share the extra revenues with the poor through subsidies on healthcare and education that are given directly to them.

Earlier, the IMF had warned that lifting the 12-percent VAT on oil would give investors a negative impression of the country.

Reza Baqir, IMF resident representative in the Philippines, said the suspension is likely to favor the rich and hurt the poor, who are the primary beneficiaries of social programs funded by the oil tax.

“The investor community has rewarded the Philippines for raising the tax effort, in large part by reforming the VAT,” Baqir added. “A reversal of these reforms could threaten to erode recent gains, which would also hurt the poor.”

IMF studies show that the poor are better protected by increasing social spending, rather than by reducing energy taxes, Baqir explained. “This is so because the benefits of social spending are better targeted to the poor than those of reducing gasoline taxes.”

Reducing fuel taxes largely benefit wealthier households, which account for the bulk of consumption of fuel products, he said, adding that government should allocate a greater share of its revenue to education and public healthcare to combat poverty.

In May, the government decided to suspend its original plan of balancing the budget this year. In the first six months of 2008, the Finance department reported a deficit of P18 billion—better than the expected P43 billion for the period.
The government is now forecasting at P75-billion budget deficit by year-end, because of increased spending on the back of skyrocketing food and fuel prices.

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