IMF cites urgency of acting on fiscal reforms as 2010 polls near

MANILA, Philippines - The current global financial turmoil validates the benefits of past fiscal reforms and should provide impetus for the government to complete its still-unfinished reform agenda, the International Monetary Fund (IMF) said in a statement sent by email to media Thursday. But with the 2010 national and local elections drawing near, "the window for legislative action may close soon," the IMF warned, hence, the need to accelerate completion of the reform agenda. Legislative experience has shown congressmen’s increasing preoccupation with informal campaigning months before election year, dooming pending priority reform bills to inaction. "Recent economic and fiscal reforms, such as VAT [value added tax] reform, have strengthened the Philippines’ ability to cope with externally induced challenges," the statement read. "The impact on domestic financial markets of ongoing global financial stress would have been greater if these reforms had not been in place," it noted. "Aside from further reducing Philippine vulnerability, such reforms would provide sustainable resources for needed spending on infrastructure and social sectors," it added. "Provision of such public goods is necessary for reducing poverty and raising growth prospects." Among others, the unpopular VAT had given the government the resources needed to undertake measures to shield the poor from the impact of high food and fuel prices. "The conditional cash transfer program is a good example of using these revenues for well-targeted spending," the statement noted. Still, the IMF cited the need for the government to complete its reform agenda, especially since the spreading financial crunch is expected to linger on until next year. Central to this agenda are measures to improve the tax effort — or the tax collection-gross domestic product ratio — which stood at 14.47% in the first half this year from 13.74% in the same period last year. "The tax effort remains a key barometer of Philippine fiscal health," the statement read. The government’s two key revenue collectors, the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BoC), are targeting to collect P844.95 billion and P269 billion, respectively. In a letter to the Finance department early last month, BIR Commissioner Lilian B. Hefti warned that the looming implementation of a law that increases tax exemptions, especially for daily minimum wage earners, would make her bureau — which accounts for nearly 70% of total revenues — miss its target by P44 billion. But the Finance department has rejected the BIR’s request to reduce its target accordingly. The IMF cited three key remaining reforms still to be adopted, namely: * rationalizing fiscal incentives in order to make sure only prioritized sectors in need of perks avail of them and to avoid situations wherein firms are able to even double their incentives. The IMF particularly cited the attractiveness of income tax holidays "for very profitable firms," and said measures to replace tax holidays by either a reduced corporate income tax rate or a low tax on gross sales would provide "both stronger incentives to invest while increasing government revenues." * raising and indexing excise taxes to enable revenues to rise proportionately with pace of price increases. "In particular, reform of tobacco taxation — having a single tier system instead of the current four tiers, raising the level of excise and indexing it to inflation — will strengthen the tax effort and bring tobacco taxation in line with [those of] other countries," the statement read. * improving the collection efficiency of BIR and BoC, particularly by administrative reforms like cleaning up the taxpayer database, as well as intensified company audits and collection of arrears. - BusinessWorld