Position Statement on House No. 3555 and House No. 3705 (Value-added Tax)


        We wish to comment on the two bills on the Value-added Tax (VAT) passed by the            House of Representatives.

1.  The Foreign Chambers support the increase in the general VAT rate from 10 to 12% as an essential measure to raise additional public revenues to avoid a possible crisis.

2.    We understand the reason for a lower VAT rate of 6% on seven socially-sensitive products in order to reduce the burden for the lower-income majority of the population.

3.    We support the removal of sectors previously exempted from VAT, such as medical and legal services and the sale or importation of electricity and petroleum products.  

4.    H. B. 3705 applies a VAT on electricity and petroleum of 4% rising in increments to 12% in four years. This will add to the cost of doing business and make manufacturing in the Philippines less regionally competitive. Hence, provisions for relief should be considered in other legislation to avoid employment layoffs as the result of higher VAT rates on electricity and petroleum.

5.    We strongly oppose two provisions in H. B. 3705 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 turns the VAT into a tax on earnings (in addition to corporate income tax), which will make some of these companies unprofitable and force them to lay off workers and close operations. Since many are foreign investors, the country’s foreign investment climate would be gravely harmed and needed investment in new power plants would be impossible to attract.

6.    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 and is not acceptable.

7.  Should the non-pass through language become law this may constitute a major breach of contract, activating provisions in contracts of Independent Power Producers (IPP) with NAPOCOR which could require NAPOCOR to buy out IPPs, a consequence neither desirable nor fiscally feasible and which would reverse the power sector privatization reform under EPIRA.   

8.  We support the continued exemption from VAT of the sale or importation of coal and natural gas, both important fuels for power generation, on the grounds that applying VAT would add to the already-high cost of electricity.

9.    We question the justification for exempting from VAT passenger and cargo vessels and aircraft including parts, fuel and supplies. What policy goal is served by favoring these industries over others which are required to pay the VAT?  

10.    We are concerned by the provision in Section 4 of H. B. 3555 (approved in late January) that requires the input tax credit for VAT paid on capital goods to be equally distributed over five years. As a sales tax, VAT should be fully creditable in the same year paid. Unfortunately, the provision of the House Bill means the private investor will in effect lend the government interest-free funds by paying the government a VAT sales tax on the purchase of capital goods but taking five years to recover the amount paid.





            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                                 ILL KYOUNG PARK
                 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.
   

March 8, 2005