Sep 212014
Reference ID Created Released Classification Origin
2005-10-18 10:01
2011-08-30 01:44
Embassy Manila

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A
SUBJECT: Supreme Court Clears Expanded VAT Law

Refs: A) Manila 4112
B) Manila 4528
C) Manila 2879
D) Manila 2167

Sensitive But Unclassified. Protect Accordingly


¶1. (SBU) The Philippine Supreme Court upheld the
legality of the Expanded Value Added Tax (EVAT) law, the
key element in President Arroyo’s revenue-enhancement
agenda, boosting the credibility of her economic reform
efforts. This measure could reduce debt accumulation and
fund increases in social expenditures and infrastructure
from the expected 80 billion pesos ($1.4 billion) in
additional revenue in 2006. Financial markets responded
positively to the Court’s decision. The Government
expects political opposition and possibly militant groups
to hold street protests opposing the measure. End

¶2. (U) On October 18, the Philippine Supreme Court (SC)
upheld with finality its September 1 decision declaring
the EVAT law constitutional (Ref A) and lifted the
Temporary Restraining Order (TRO) it had issued July 1.
The decision effectively rejected three motions for

¶3. (U) According to Department of Finance (DOF)
officials, the amended EVAT law will be implemented on
November 1. To address business concerns, the GRP will
refine the implementing rules and regulations (IRRs) to
provide a more liberal interpretation of the measure
capping input VAT credits during any given quarter to 70%
of output VAT. Under the revised IRRs, input VAT may be
credited in full as long as the input VAT does not exceed
the output VAT due. DOF officials expressed confidence
that this language would spare the GRP from the tedious
process of seeking legislative amendments.

¶4. (U) The GRP did not assume any revenues from the
EVAT in its 2005 fiscal program. The incremental
revenues during the last two months of 2005
— estimated at 4-6 billion pesos — will go to reducing
the 2005 fiscal deficit further. The GRP budget expects
to generate an additional 80 billion pesos ($1.4 billion)
for the full year in 2006 and will apply this revenue to
increase spending on infrastructure and social services
while keeping the GRP’s fiscal deficit in check and
tempering the pace of debt accumulation (Ref B).

——————————————— —
No to Deferment of EVAT on Electricity and Fuel
——————————————— —

¶5. (SBU) DOF Undersecretary Emmanuel Bonoan — who
shepherded the GRP’s centerpiece tax measure through the
legislature and helped defend it before the Supreme Court
— downplayed initiatives in both houses of Congress
seeking to defer to June 2006 the implementation of the
amended EVAT law on the previously exempt petroleum and
electricity sectors. U/S Bonoan told econoffs that
following mixed signals from the Palace, the chairs of
the Ways and Means Committees of both houses of Congress
met with President Macapagal-Arroyo to urge her support
for implementing the EVAT law in full. According to U/S
Bonoan, DOF’s marching orders are now clear: a) to
implement the EVAT in its entirety; b) to continue to
promote a deeper understanding and awareness of the
measure and of its importance to longer-term fiscal
consolidation and macroeconomic stability; and
c) to collect the targeted incremental revenues.

Financial Markets React Positively

¶6. (U) The Supreme Court decision elicited some
positive reaction from the stock and foreign exchange
markets, although concerns over the political backlash,
uncertainties over the short-tem impacts on inflation and
the economy, and some reservations on the GRP’s ability
to effectively implement the new tax measure may have
tempered the optimism. The local currency, which closed
at 55.815 pesos/$ on October 17, strengthened to as high
as 55.670 pesos/$ during afternoon inter-bank trades on
October 18 before closing at 55.780. The peso closed at
55.765 on October 19. Stock market trades (which end at
noon daily) had closed before the Supreme Court issued
its decision in the afternoon of October 18, but closed
on October 19 at 1,954.29, up 0.4% from October 18’s
closing level. Foreign bond markets rewarded the Supreme
Court’s final ruling with narrower bond spreads. At
about mid-afternoon Manila time, spreads on New York
trades for Philippine sovereign bonds maturing in 2010
and 2019 and 2025 had narrowed by 9 basis points and for
bonds maturing in 2025 by 6 basis points.

GRP Vows to Monitor Prices Closely…

¶7. (U) The GRP has vowed to monitor prices of basic
commodities closely to prevent unscrupulous traders and
businessmen from taking advantage of the amended EVAT law
to justify significant price increases. The law
continues to exempt basic agricultural food products
(i.e., rice, corn, fish, vegetables, chicken, pork) from
the tax and the Department of Agriculture estimates that
potential price increases for such commodities (mainly
from higher distribution costs) should not exceed 0.5%
when the law goes into effect. Department of Trade and
Industry officials estimated that processed food products
consumed by low-income groups (i.e., sardines, noodles,
milk, cooking oil, etc.) would increase by 2% or less.
(Note: Food items make up 50% of the Philippines’
consumer price index. End Note.) GRP officials also
continue to stress that other vital services will remain
exempt from the new tax measure, including low-income
rentals and sales of low-cost housing units; educational
services; and books, newspapers, magazines. (Refs C-D)

¶8. (U) Imposing VAT on the previously exempt fuel and
electricity sectors at a time of high and volatile world
oil prices remains the most politically contentious
issue. The Department of Energy (DOE) estimates that the
reducing excise taxes, eliminating the franchise tax on
power distribution utilities, and lowering tariffs on
fuel imports back to 3% should keep petroleum prices from
increasing by the full 10% VAT. The DOE expects the cost
of diesel to rise by 2.5%, unleaded gas by 8.2%, kerosene
by 6.1%, bunker fuel by 6.6%, and liquefied petroleum gas
by 7.9%.

¶9. (U) The Department of Energy is asking the Energy
Regulatory Commission to approve revisions in the scheme
to discount electricity rates for poor households (i.e.,
“lifeline rates”). The proposal includes doubling the
eligibility threshold for electricity consumption to 200
kwh/month. However, more affluent households (i.e.,
those consuming more than 1,000 kwh/month) will have to
absorb higher electricity rates (roughly 75
centavos/kwh), as will commercial/industrial customers
(by roughly 85 centavos/kwh). (Note: Investors here
continue to air concerns about high power rates in the
Philippines as a competitiveness issue. The country
currently has the second highest average electricity rate
among ASEAN member countries, after Cambodia. End Note.)

…While Opposition Lashes Out

¶10. (SBU) While President Arroyo’s supporters have by
and large supported implementation of the EVAT law, the
Opposition has consistently criticized it in the harshest
terms. The opposition swiftly condemned the Supreme
Court’s October 18 decision to lift the temporary
restraining order and promised a “national day of
protest” in response. Representative Crispin Beltran of
leftist Anakpawis party called the tax “blood money,” and
leftist Bayan Muna Representative Teodoro Casino warned
that the Court’s decision would “worsen the political
situation.” Catholic Church Archbishop Oscar V. Cruz, a
cleric who leans toward the Opposition, also asserted
that the decision would fuel unrest and increase
opposition to the Arroyo administration. The Opposition
is certain to take this issue to the streets and use it
as a rallying point to sustain its efforts — reflected
in its almost daily street protests, which so far remain
quite small — to oust President Arroyo.


¶11. (SBU) The Government has gone on road shows over
the past few months to promote a better understanding of
the amended EVAT law. The business sector, financial
market players, and economists have generally accepted
the measure as a bitter fiscal pill that will benefit the
economy over the longer-term. Ordinary, non-militant
citizens seem resigned although not necessarily accepting
of the measure, reflecting disenchantment with
corruption, waste, and tax collection inefficiencies.
The opposition can be expected to hammer on these
weaknesses to continue to embarrass and discredit
President Macapagal-Arroyo. Given the fractious
political climate and the likelihood of more intense
public scrutiny, the challenge for the Administration
will be to concretely demonstrate that the short-term
pains will indeed redound to longer-term gains. Jones



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