TAX
VAT Amended…Finally
On 24 May 2005, President Arroyo signed into law Republic Act 9337, thus amending the expanded value-added tax (EVAT) law. The VAT measure was one of the eight priority revenue measures submitted by President Arroyo to Congress when it convened in July 2004.
The new law authorizes the president to raise the VAT rate to 12% from the current rate of 10% by January 2006. The new rate of 12% is the average VAT rate across Asia. But the president can only do so upon the recommendation of the finance secretary, who, in turn, determines first if VAT collections will exceed 2.8% of the gross domestic product or if the fiscal deficit goes beyond 1.5% of GDP. Moreover, the new law lifts VAT exemptions on certain transactions and increases the corporate income tax rate to 35% from 32%, which will be brought down to 30% in 2009.
The Department of Finance expects to collect a low of P28 billion and a high of P31 billion more in revenues this year when RA 9337 takes effect on 1 July 2005. Next year, the DOF projects that incremental revenues from the EVAT measure will reach P97 billion to P105 billion.
The passage of the EVAT bill drew mixed reactions. The private sector complained against the rise in the corporate income tax rate. Three international credit rating agencies – Standard and Poor’s, Moody’s, and Fitch – have not given any indication of an immediate credit rating upgrade for the country with the approval of the new measure. However, visiting International Monetary Fund deputy managing director Agustin Carstens said the passage of the bill is a “major step forward in the reform process” and hopes that “it will generate sufficient revenues” to balance the budget and “reassure markets about the authorities' commitment to tackling the fiscal problem.”
| EVAT SNAPSHOT |
| 1. The President has standby authority to raise VAT rate to 12% in 2005 |
| 2. Corporate income tax rate raised to 35% from 32% |
3. VAT exemptions lifted on the following:
- nonfood agricultural products and marine and forest products
- cotton and cotton seeds in their original state
- sale or importation of coal and natural gas
- sale or importation of raw materials used in the manufacture of petroleum products
- electric cooperatives
- sale, importation, or lease of passenger or cargo vessels and aircraft
- importation of fuel, goods, and supplies for international shipping or air transport operations
- doctors’ and lawyers’ fees
- works of art, literary works, musical compositions, and similar creations
- educational services rendered by the Technical Education and Skills Development Authority (TESDA)
- lease of a residential unit with a monthly rent not exceeding P10,000
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4. Grants 0% VAT rate to the following:
- power or fuel generated from renewable sources of energy
- goods, supplies, equipment, and fuel for international shipping and air transport operations
- international air and sea transport operations
- services rendered to a person engaged in business conducted abroad or to a nonresident person not engaged in business who is abroad when the services are performed
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| 5. Removes franchise tax on electric utilities |
| 6. Removes excise tax on locally extracted natural gas and liquefied natural gas |
| 7. Brings excise tax on kerosene, diesel fuel oil, and bunker fuel oil down to zero |
| 8. Removes percentage tax on shipping |
| 9. Subjects the sale of real properties valued at P2.5 million and above to VAT |
10. Raises the gross receipts tax on royalties, property rentals, and profits from exchange, as well as on net trading gains on foreign currency, debt securities, derivatives, and other financial instruments to 7% from 5%
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REGIONAL BOARDS REVIEW WAGES
Fruits of Labor
Following the series of price increases of petroleum products, electricity rates, and basic commodities and the petitions for fare hikes, labor groups are clamoring for an increase in the minimum-wage rate. The Trade Union Congress of the Philippines (TUCP), the largest alliance of labor unions in the country, and the Kilusang Mayo Uno (KMU) are asking for an across-the-board wage increase for private workers of at least P78 and P125, respectively. Employers are reportedly amenable to a P30 minimum-wage increase at most.
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| Waiting for wage increases |
In this connection, President Arroyo, in her Labor Day speech before leaders of the moderate Labor Solidarity Movement, ordered the Regional Tripartite Wages and Productivity Boards (RTWPBs) through the Department of Labor and Employment to review, within 30 days, the wage rates in the private sector.
With the passage of Republic Act 6727, or the Wage Rationalization Act, the determination and setting of the minimum wage lies with regional wage boards. Each wage board is composed of the Department of Labor and Employment regional director, who sits as chair, the National Economic and Development Authority (NEDA) regional director, the Department of Trade and Industry regional director, and two representatives each from labor and management. The board determines the extent of wage adjustments in the region in accordance with employers' capabilities and the prevailing economic situation.
In order to assess the effects of the proposed wage increases to the total cost of production, the prices of goods and services, and the cost of personal consumption expenditures, the National Statistical Coordination Board (NSCB) conducted a price-cost analysis. The NSCB computations yielded the following results:
- With a P78 across-the-board wage increase, which is what was filed with RTWPBs, the total cost of production will rise by 9.7%, prices of all goods and services will rise by an
average of 9.4%, while cost of personal consumption expenditures will increase by 9.5%. The rates are all above the “normal” inflation.
- On the other hand, should a legislated P125 increase be approved, this would translate to a 15.5% increase in the total cost of production, a 15.1% increase on the average in the price of goods and services, and a 15.2% increase in the cost of personal consumption expenditures.
- Finally, if a P30 increase – favored by employers – is implemented, this will increase the total cost of production by only 3.7%, prices of goods and services will increase by an average of 3.6%, while the cost of personal consumption expenditures will increase by a moderate 3.6%.
NEDA has called for caution on wage hike increases because these are inflationary and could worsen unemployment. NEDA believes that a P125 wage hike could cause inflation to shoot up by 7.9% and slow down economic growth by 3.87 percentage points. The average inflation for January-May 2005 was 8.5%. A P125 increase could also raise unemployment by 3.55 percentage points and render 1.1 to 1.5 million workers jobless. The unemployment rate was at 11.3% as of January.
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