Philippine Business Magazine: Volume 13 No. 6 - Updates

Credit Ratings Upgrade
Two Thumbs Up from Japan

Since April, two Japanese credit ratings agencies have raised their ratings outlook on the Philippines to stable from negative.

Japan Credit Rating Agency (JCR) upgraded its ratings outlook on the Philippines to stable from negative on 24 April. It also affirmed its “BBB-” foreign and domestic currency rating on Philippine debt. According to the JCR Sovereign Quarterly Review dated 30 June 2006, the positive developments in the country that spurred the upgrade include the 5.5% GDP growth rate in the first quarter, the decrease in the fiscal deficit in the first five months, the recovery in export growth, the pick-up in inflation in February, and the solid growth of overseas Filipino workers’ remittances.

While JCR noted that the Arroyo administration has managed to defuse the political crisis following the 24 February declaration of a state of emergency, it remains concerned about political uncertainty in the country. Nevertheless, JCR has observed the economy’s strong resilience against political instability and is expecting stable economic performance backed by private consumption and OFW remittances.

Japan Rating and Investment Information (R&I), in turn, also announced on 28 June the change in its ratings outlook on the Philippines to stable from negative. Like JCR, R&I affirmed its “BBB-” foreign currency issuer rating on the Philippines and its “a-2” foreign currency short-term credit rating. R&I cited the nondisruption in the operation of the VAT; the reduction in the fiscal deficit and foreign debt; the continued strength of OFW remittances; the surplus in the current account; the size of the foreign reserves vis-à-vis the country’s short-term debt; and positive prospects in the semiconductor and electronics assembly industries and in business process outsourcing. R&I says it will consider the strength of the government’s position on “fiscal reconstruction” in evaluating the country’s creditworthiness in the future.

R&I also observed that the country has already returned to a sense of political stability. R&I pledged to monitor whether reforms in the country will improve the “unstable political conditions which have followed the Philippine government for many years.”

Creditable Input VAT
Scrap the Cap

Almost a year after its enactment into law, the reformed value-added tax is still far from perfection. Truth is, on the day the RVAT law (Republic Act 9337) was signed, a number of bills were already being filed seeking revisions in the law, mostly on how much businesses can charge against their input VAT. But Congress adjourned its second regular session without acting on the revisions.

The House Ways and Means Committee headed by Congressman Herminio Teves voted to lift the 70% ceiling on creditable input VAT

Since Congress resumed its sessions in July, only the House Ways and Means Committee headed by Congressman Herminio Teves has acted on pending bills that seek to increase the amount of input VAT that companies can claim. Last 15 August, the committee voted to lift the 70% ceiling on creditable input VAT as proposed in House Bill 4993 of Ilocos Sur congressman Eric Singson and in HB 4535 of Antique congressman Exequiel Javier.

Meanwhile, the following measures remain pending at the Senate Ways and Means Committee: Senate Bill 2038 of Senators Sergio Osmeña III and Jamby Madrigal, and SB 2080 of Senators Mar Roxas, Rodolfo Biazon, Miriam Defensor Santiago, Franklin Drilon, Luisa Ejercito, Juan Ponce Enrile, Richard Gordon, Manuel Lapid, Ramon Magsaysay Jr., and Ramon Revilla Jr.

Surprisingly, even the Bureau of Internal Revenue supports the removal of the 70% input VAT ceiling. The agency realizes that it will discourage retailers from making purchases to beef up their inventory, resulting in lower sales. The government’s original intent for placing a cap on input VAT was to prevent businesses from abusing their claims.

Prior to the new RVAT law, companies used to deduct 100% of their input VAT from their output tax payments. Under the present law, if input VAT exceeds output VAT, only 70% of output VAT may be deducted as input VAT, with the excess input VAT carried over to the following quarters. A recent informal survey among companies revealed that businesses with margins running below 30% are adversely affected by the cap on input VAT.

Meanwhile, some businessmen are asking the BIR to allow them to shift their inventory valuation methods to “last in, first out” from “first in, first out” to cushion the effect of the 70% cap until such a time when the input VAT ceiling is raised.

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