Philippines Plans to Hunt Tax Cheats, Considers Change in Cigarette Taxes

The Philippines is considering a change in cigarette and alcohol levies and will step up prosecution of tax evaders to increase revenue to a level on par with its Asian neighbors as soon as 2013, the government said.

Tax revenue in the Southeast Asian country makes up 13.8 percent of gross domestic product, compared with an average of 17 percent among Asian peers, Finance Secretary Cesar Purisima said. The difference is costing the government as much as 250 billion pesos ($5.7 billion) a year, he said in an interview at Bloomberg’s headquarters in New York yesterday.

President Benigno Aquino plans to boost the country’s credit rating and lure foreign investors by shrinking a record budget deficit. Philippine growth has lagged behind its Southeast Asian neighbors as a budget shortfall in all but four of the past 25 years curtailed the government’s ability to develop an economy where the World Bank estimates one in every four people live on less than $1.25 a day.

“The president has told us to fix the system, then simplify the process,” said Purisima, who was named finance secretary in June. “Ultimately as we improve our efficiency, we’re really going for lower income-tax rates and higher consumption taxes, but that’s down the road.”

Aquino has vowed to jail tax evaders and smugglers to narrow a deficit forecast to reach a record 325 billion pesos this year. The government, which has pledged to avoid raising taxes, may simplify the levy structure for cigarette and alcohol to yield as much as 50 billion pesos annually in revenue, Purisima said.

Record Deficit

“Philippine tax collection has always been below par compared with its peers,” said Vishnu Varathan, an economist at Capital Economics Asia Pte in Singapore. “The chronic issue of tax evasion and graft within state agencies has been a legacy issue, and increasingly steps have been taken on this.”

The government has filed at least 23 complaints against suspected tax evaders, smugglers, and corrupt officials since Aquino took office in June.

Markets have been receptive to Aquino’s proposals to cut the deficit and boost the economy, including a plan to offer investors $16.7 billion of infrastructure projects.

The Philippine Stock Exchange Index has climbed 33 percent this year. Debt issued in dollars by the Philippines has returned 16 percent, compared with a 14 percent return on all Asian emerging-market debt in dollars, according to JPMorgan Chase & Co. EMBI Global indexes. Local-currency denominated bonds and the peso advanced today.

Turning Positive

“Markets are turning more positive on the Philippines,” Varathan said. “The government’s approach is comprehensive. First, it wants the Philippines to attract investments. Second, it doesn’t want to put a dampener on consumption.”

The country’s debt is rated below investment level by Fitch Ratings, Standard & Poor’s and Moody’s Investors Service, and is graded lower than that of neighboring Malaysia, Indonesia and Thailand.

The Philippines reported a budget surplus in August for the first time in four months, a report showed Sept. 20. Spending declined 9 percent in August from a year earlier after a 1.9 percent gain previously reported for July, and revenue rose 13.5 percent after growing 4.6 percent the previous month.

The government has a deadline of growing tax revenue to the 17 percent peer average by the end of Aquino’s term in 2016, though it should be nearing that by 2013, according to Purisima.

The economy grew 7.9 percent last quarter, the fastest pace in three years, boosted by exports and remittances. Purisima said he expects the economy to expand 6 percent in 2010.

In comparison, Singapore’s economy grew at a record 17.9 percent pace in the first half, while Malaysia expanded 8.9 percent last quarter and Thailand grew 9.1 percent.

To contact the reporter for this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net; Chris Anstey in Tokyo at canstey@bloomberg.net

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