STATEMENT OF THE JOINT FOREIGN CHAMBERS OF COMMERCE IN THE PHILIPPINES ON THE HOUSE AND SENATE VAT BILLS

The Joint Foreign Chambers wish to issue the following comments on VAT legislation being considered by the Bicameral Conference Committee of the Philippine CongressHouse of Representatives and the Senate.

1. The Joint Foreign Chambers support the House Bill which raises the VAT from 10 to 12% and ends the exemption of several important economic sectors. Because of insupublic fficient progress in raising revenue collections are insufficient, from other sources, higher revenue collection from an increased VAT is an essential for the Philippines measure to raise additional public revenues to avoid a possible financdisastrous financiial crisis. While both the House and Senate bills would also end many several of the same exemptions, the Senate as the House, it maintains the current 10% VAT level, i and instead seeks to raisinge additional needed rrevenue by altering non-VAT taxes.

2. One such provision would raise corporate income taxes. We do not support the proposal of the Senate to increase the maximum corporate income tax rate from 32 to 35%. Aside from the potential constitutional issue controversial matter of whether the Senate can initiate a tax change which the House has neither considered nor passed, the proposed increase is the opposite of the Asian regional and worldwide trend to lower corporate income taxes. Already the Philippines has the highest corporate income tax in ASEAN. Raising these taxes will not encourageonly encourage tax avoidance but also makes the country less competitive vis-à-vis its ASEAN neighbors. As a capital importing country, it has to align itself with the current worldwide trend of lowering taxes and providing fiscal incentives rather than and discouraging e new foreign investment through the imposition of high corporate income tax rates..

3. Under both the House and Senate bills the VAT will be applied to previously

-exempt electricity services and petroleum products. The rate and schedule

for doing so differs between the two bills, increasing to reaching 12% under the House

bill while and a much lower rate under the Senate version contains a lower rate. These proposals will add

to the cost of doing business – significantly for especially manufacturing – making and will make the

Philippines less competitive and adding to already-high unemployment.could result in employment layoffs If

adjustments cannot be made by the Bicameral Conference Committee, some

provisions for manufacturing relief should be considered in other legislation.

4. Both the House and Senate versions contain onerous “no-pass through”

provisions which require the VAT on electricity and petroleum products to be “paid and absorbed” by the seller of petroleum products and the electricity generation companies. Such “no-pass through” language violates the very principle of a value-added-tax and turns the VAT into a gross receipts tax over and above the corporate income tax. For many covered companies, these provisions will cancel out most or all profits and force layoffs and closures.

5. For the power sector, these provisions will have the effect not only of

discouraging new domestic and foreign investment in generation facilities but also may erode their taxable income and long term financial viability, forcing are likely to force some IPPs to close, thus reducing the supply of power. This could occur during a time when shortages are already present in the Visayas and Mindanao and looming within several years on Luzon.

6. IPPs supplying power to NPC have contractual provisions allowing the buyout

by the government should taxes be significantly changed. The government clearly has neither the intention nor the funds to acquire billions of dollars of IPP assets. We find it hard to believe this is the intention of the legislators, and is contraryalthough it could to Republic Act. No. 9136 (Electric Power Industry Reform Act of 2001) which provides for the orderly privatization of the assets of the National Power Corporation.be its effect These Again, these provisions in both the House and Senate VAT bills would gravely harm the country’s foreign investment climate and needed investment in new power plants would be impossible to attract.

7. The House Bill H. B. 3705 contains language stating that “Specific provisions in contracts that are contrary to the implementation of this law are hereby declared null and void.” This language violates the important sanctity of contracts principle found both in the Philippine Constitution and international law.

RICK M. SANTOS RICHARD BARCLAY

President President

The American Chamber of Commerce Australian-New Zealand Chamber

of the Philippines, Inc. Commerce of the Philippines, Inc.

STEWART HALL WILLIAM BAILEY

President President

Canadian Chamber of Commerce European Chamber of Commerce

of the Philippines, Inc. of the Philippines, Inc. 　　　　　　

RYUKICHI KAWAGUCHI LEE GIL GU

President President

Japanese Chamber of Commerce Korean Chamber of Commerce

& Industry of the Philippines, Inc. of the Philippines, Inc.

SHAMEEM QURASHI

President

Philippine Association of Multinational Companies

Regional Headquarters, Inc.

April 15, 2005