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PIA Press Release
2007/09/11

New RP tax measures reassure biz heads, foreign investors

Cagayan de Oro City (11 September) -- A combination of weak state revenues and high foreign debt – 70% of the government's budget went to paying interest in 2005—was spooking investors.

This, as they worried that too much of the government's budget went to service debt and not enough to fix roads, schools and the power supply.

Japan's Toshiba Corp. shut down its Philippine laptop factory in 2004 and moved the operation to China.

"Our country was going through a credibility gap with the institutional and financial community globally and needed to send a signal." said Jaime Augusto Zobel de Ayala, Chief Executive Officer (CEO) of Ayala Corp., one of the companies that redeveloped Fort Bonifacio, a sprawling military base in the heart of Manila.

Meanwhile, in 2005, Pres. Gloria Macapagal-Arroyo warned that if the Philippines didn't act decisively to improve its tax collection rate, it risked becoming the next Argentina, where economic problems led to a currency collapse.

She and her advisers began looking for ways to raise new money by increasing tobacco and alcohol taxes which wasn't enough. So she and her economic team began working to push another unpopular measure through Congress in 2005: an expanded sales tax that made demonstrators took to the streets and contest her tax plans.

One of her advisers, former stock analyst Joey Salceda, suggested that she limit the new sales tax to soften the political backlash and said that gasoline prices should be excluded because they were already spiking.

"I was determined not to sacrifice long-term gains for political expediency, even though we had to do it at the worst possible time," Ms. Arroyo, ignoring the advice, said.

At first, the sales tax increase appeared to make things worse as her opponents challenged the legality of the legislation and the Supreme Court suspended the tax law the day it was to take effect in July 2005.

Stock prices slumped at the Philippines Stock Exchange and ratings agencies Moody's and Standard & Poor's lowered their already dim outlooks on the nation's ability to pay its debt while the President's popularity took a pounding.

Eventually, the Supreme Court dismissed the objections and the tax hike took effect in early 2006 which greatly reassured business leaders and foreign investors, who were worried about the burden of the government's $54 billion foreign debt. (PIA 10) [top]

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