Philippines Needs to Boost Sin Tax to Win Investment Ratings Upgrade

Philippines tax commissioner

The Philippines must pass a law increasing the excise levy on liquor and tobacco, or sin tax, to meet its goal of winning an investment-grade rating in four years, Tax Commissioner Kim Henares said.

"This is one of two measures that the three major rating agencies have identified as important," Henares said in an interview in Bloomberg's Manila office yesterday. "We want to correct a defective system that will increase our revenue and use the funds for health care. Once passed, we think the measure will trigger rating upgrades and positive outlook."

Standard & Poor's raised the nation's credit rating twice in the past two years, bringing it to one level below investment grade in July, citing a reduced debt burden and improved public finances. The bill that seeks to boost annual collections by at least 60.6 billion pesos ($1.46 billion) and introduce an inflation-adjustment mechanism will test the resolve of President Benigno Aquino, a smoker himself, to battle some of the country's biggest companies.

"One of the key ratings constraints of the Philippines is the low revenue mobilization relative to peers," Christian de Guzman, a Singapore-based assistant vice president at Moody's Investors Service, said by e-mail. "It would be an indication that the Aquino administration can leverage its high approval ratings and political capital into meaningful progress on legislative reforms."

Shares Rise

The Philippines' benchmark stock index, which has risen 24 percent this year, rose 0.1 percent at the close in Manila. The yield on the benchmark three-year bonds fell the most in a month, dropping by 7 basis points to 3.97 percent, its lowest level in more than two weeks, according to midday fixing prices at Philippine Dealing & Exchange Corp. The peso rose 0.4 percent to 41.208 per dollar.

When he was elected to office two years ago, Aquino pledged to fight corruption and tackle an entrenched culture of tax evasion that's contributed to the budget deficit and hampered growth as neighbors prospered. Aquino, with the highest approval rating for a president since actor Joseph Estrada in 1999, also received rating upgrades by Fitch Ratings and Moody's.

The tiered excise sin tax rates were approved in 1996 based on cigarette and beer costs at the time, and weren't raised until an amendment in 2004 that called for increases every two years, according to Henares.

The government collected about 26 billion pesos in excise taxes from tobacco last year. It wants to boost revenue from smokers by 30 billion pesos in the first year, intending to collect the rest from alcohol drinkers.

'Moderate Smoking?'

"Between the two, we think smoking is more hazardous to health," Henares said, explaining the focus on tobacco. "Have you ever heard of moderate smoking?"

Seven of the 10 leading causes of death in the Philippines, where 28 percent of people aged 15 and older smoke, are diseases related to tobacco consumption, according to data from the Department of Health.

The Philippines has the fourth-lowest price per pack of cigarettes worldwide, according to the World Health Organization, and has one of the lowest excise tax rates, Henares said. A Marlboro pack of 20 cigarettes sells for 40 pesos, about a 10th of its cost in Singapore.

The low price has encouraged usage, placing the nation at the top in the region for per-capita consumption, based on government data. Smoking costs the economy about 188 billion pesos, including expenses related to health care, productivity losses and premature death, according to government estimates.

The Bloomberg Initiative provided a $255,626 grant to an advocacy that seeks to reform and increase tobacco taxes in the Philippines, according to its website. The grant ends in April 2013. The program was started by Michael Bloomberg, the founder and majority owner of Bloomberg News parent Bloomberg LP.

Fiscal Boost

The tobacco and liquor levy and the rationalization of tax incentives can increase fiscal revenue as a percentage of gross domestic product to at least 16 percent from about 15 percent now, Henares said.

The tax bill "could broaden the fiscal revenue base, and potentially increase fiscal space for the government to increase capital expenditures, public investment and other discretionary spending items such as health and education," Philip McNicholas, Fitch's Hong Kong-based director of Asia Pacific Sovereigns, said in an e-mail. "This could lead to a higher investment rate for the economy as a whole and potentially higher-trend GDP growth."

Corporate Opposition

San Miguel Corp. (SMC), the nation's largest company, has about 90 percent of the beer market. Eduardo Cojuangco, Aquino's uncle, is the chairman of San Miguel. Philip Morris Philippines Manufacturing Inc. and Fortune Tobacco Corp., controlled by billionaire Lucio Tan, formed a venture in 2010 that was projected to control 90 percent of the market.

"We support the president's reform agenda," Michael Tan, son of the billionaire, said in an interview today. "What we don't want is to have an increase that is so huge that it will disrupt what's working. We are for a reasonable and moderate increase."

In March, the companies opposed the 60 billion-peso sin tax proposal. The Philippine Tobacco Institute, in a paid ad, said the measure will increase the tax on low-cost brands by more than 1,000 percent. San Miguel and rival Asia Brewery Inc., also controlled by billionaire Tan, said in a separate ad that month that a 140 percent increase in the tax on economy beer brands will hurt sales and put 8,000 jobs at risk.

Additional revenue from the bill approved by the House of Representatives in June was cut to 31.4 billion pesos, almost half the Department of Finance target, according to a government presentation. The Senate ways and means committee under Senator Ralph Recto endorsed a version this month that cut the revenue goal to 15 billion pesos, according to his sponsorship speech.

Competing Interests

Recto quit as head of the committee on Oct. 15 and withdrew the measure. A group called Action for Economic Reforms called on the senator to resign and in an Oct. 12 statement said "civil society groups describe the ways and means committee report as Philip Recto or Recto Morris report."

"In any taxation exercise, you are always caught in a vise-grip of competing interests," Recto said in a speech the day he resigned. "If you try to seek the middle, chances are you will be crushed in between."

The Senate will resume discussions on the bill in early November and the country has enough time to pass the law by December, Henares said. What's acceptable to the government is no less than 40 billion pesos in incremental revenue and the defects must be addressed, she said.

Face Delay

"We will face delay in getting the upgrades that may already be in the pipeline if we don't pass it in a credible form this Congress," the tax commissioner said. "Think also of the poorest of the poor who will benefit from health services that we can provide from the sin tax revenue."

The Bureau of Internal Revenue, which collects more than 60 percent of the government's annual earnings, will "without a problem" collect a record 1 trillion pesos in taxes this year, Henares said. She declined to say if the agency's 1.066 trillion-peso target will be met. Revenue in the first nine months of the year rose 13 percent to 772.5 billion pesos from a year earlier.

Bloomberg