Philippine credit rating at risk if levies cut, tax chief says

[MANILA] The Philippines would court credit rating downgrades and risk undoing President Benigno Aquino's fiscal gains if the government gives in to calls to grant more levy cuts, Tax Commissioner Kim Henares said.

Mr Aquino last year approved tax reductions for workers that will dent collection by as much as 47 billion pesos (S$1.4 billion) yearly, and a proposal in Congress to lower income tax rates will trim another 30 billion pesos if passed, Ms Henares, 55, said in an interview Tuesday in Makati City.

"Anything that will lower what we are now collecting without a measure that will compensate for it, that to me will put the five years we've worked hard for at risk," Ms Henares said.

A higher tax on tobacco and liquor in 2012 was key to the Philippines winning its first investment-grade rating in 2013 as it boosted annual revenue by at least 60 billion pesos. The Philippines is rated BBB by Standard & Poor's and Baa2 by Moody's Investors Service, two levels above junk. Fitch Ratings has the country at BBB-, one level above junk.

The Asian nation that shed its "sick man" tag under Mr Aquino must first enact revenue-enhancing measures such as allowing the tax authority to peer into bank deposits, before approving more tax perks, Ms Henares said.

The Philippines is the only country that offers deposit secrecy for tax purposes and eventually that needs to be removed, Ms Henares said. Keeping bank details away from regulators only benefits the rich and influential and scrapping it may unlock 300 billion pesos in annual revenue, she said, citing estimates by Finance Secretary Cesar Purisima.

Ms Aquino, whose single, six-year term ends in June 2016, will probably achieve his goal of doubling internal revenue collection from about 700 billion pesos in 2009 even as taxes, which make up only 14 percent of the economy, remain below the regional average, Henares said. Internal revenue rose to 1.33 trillion pesos by the end of 2014.

"Policies leading to a narrowing of the revenue base could reduce the case for positive rating action, depending on other rating sensitivities," Fitch analyst Mervyn Tang said in an e- mail reply to questions. "A reduction in personal income tax may not lead to a narrowing of the general government revenue base if accompanied by concurrent measures to improve revenue collection and limit exemptions. Fitch will monitor how the government's policies as a package will affect public finances more broadly."

Ms Henares has large taxpayers, including the nation's biggest companies, on her radar, she said, as collections from this group, which comprises 60 percent of total tax revenue, haven't been growing as fast as expected. In July, total collections from all sources by the Bureau of Internal Revenue fell 1 percent from a year ago.

"As a share of GDP, the Philippines' government revenue is one of the lowest among investment grade countries, and measures that erode revenue would thus be credit negative," Moody's senior analyst Christian de Guzman said in an e-mailed reply to questions. "Given the government's ambitious plans to ramp up infrastructure spending over the next few years, we see revenue as a key constraint to such goals." The gun-toting tax chief, credited for helping narrow the budget deficit from a record 314 billion pesos in 2010 by pursuing taxpayers including boxing champ Manny Pacquiao, said she is confident Aquino won't cave in to the demands of some lawmakers.

Neither home buyers who enjoy record-low interest rates, the government or companies would want the credit rating to go back to junk, Ms Henares said. Workers' additional take-home salary from tax cuts would just end up servicing higher loan payments.

"What disposable income will you talk about if interest rates go up because of a lower credit rating?," she said.

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