Philippines Targets Taxis, Hotels as Arroyo Seeks More Revenue

July 24 (Bloomberg) -- The Big Mouth deli was starting what promised to be another busy June day on the central Philippine vacation island of Boracay when 29 tax officers and policemen came to shut it down.

Since the 48-seat restaurant opened July 2008, it avoided paying an estimated 983,000 pesos ($20,437) in taxes by using unregistered cash machines and false sales receipts, according to the Bureau of Internal Revenue.

“This is really psychological warfare,” said Deputy Commissioner Nelson Aspe, who flew from Manila to supervise the closure of three Boracay businesses June 8. “We are sending a strong signal to our taxpayers that we mean business.”

President Gloria Arroyo is taking unprecedented steps in her final year in office to tackle an entrenched culture of tax evasion that’s contributed to the budget deficit and hampered growth while neighbors prospered. Moody’s Investors Service raised the Philippines’ debt rating yesterday, saying efforts to boost revenue will help improve the country’s finances.

“The country’s long-term fiscal outlook would improve with more progress in shoring up government revenues, both through tightened administration and the introduction of new tax measures,” Tom Byrne, a Moody’s senior vice president, said in a statement from Singapore.

The internal-revenue agency, seeking to recover about 560 billion pesos of lost taxes annually, has increased collection targets and plans to hire 3,000 more accountants and lawyers. By cross-checking taxpayer records with local authorities, it has discovered 30,000 unregistered businesses in Manila’s Marikina municipality alone.

Counting Bed Sheets

Agents are counting hotel bed sheets and will soon scour electricity bills to expose companies that under-declare income. A meter system for taxis was implemented in June.

Authorities have closed 58 restaurants, hotels and shops since January, including Big Mouth, which began getting warning letters in February, the tax bureau said. When the bureau got no response, it closed the restaurant.

“This is unfortunate because business is doing good,” said Randy David, Big Mouth’s manager, as authorities padlocked the shop. He declined to comment on the government’s allegations and said the head office in Manila handled taxes.

Benjamin Diokno, a professor at the University of the Philippines who served as budget secretary under former President Joseph Estrada, said the campaign will have “marginal” effect. “Poor governance and lack of political will” mean enforcers target only “small fry,” he said.

Least Efficient

The Philippines is the fourth-least-efficient tax collector in the world, according to Fitch Ratings. In 2007 and 2008, it booked revenue amounting to 14 percent of gross domestic product a year, two-thirds of the 21 percent the government estimates it should have received, Finance Undersecretary Gil Beltran said.

The only countries with lower revenue-to-GDP ratios are Guatemala, Bermuda and Costa Rica, according to Fitch. It rates Philippine debt BB, two levels below investment grade.

In the past 20 years, the Philippine economy expanded an average 3.9 percent annually, lagging behind Thailand’s 5.4 percent, Malaysia’s 6.5 percent and Singapore’s 6.7 percent. Growth slumped to a decade low of 0.4 percent in the first quarter as exports collapsed, crimping company profits and taxes, which were reduced to 30 percent from 35 percent by a 2005 law that took effect this year.

Revenue Drain

Arroyo, whose presidency ends in 2010, has exacerbated the revenue drain with programs to help Filipinos cope with inflation that soared to a 16-year high of 12.4 percent in August 2008. Last year, she exempted half a million minimum-wage workers from income tax and raised exemptions for salaried employees.

To help ease the crunch, Finance Secretary Gary Teves is asking lawmakers to simplify the cigarette- and liquor-levy structure and reduce tax incentives to boost collections by at least 35 billion pesos annually.

The government trimmed its 2009 spending target last month to 1.489 trillion pesos from 1.495 trillion after revenue declined 5.4 percent in January through May. It has widened the 2009 budget-deficit estimate three times this year to 250 billion pesos, the most since Bloomberg data began in 1985.

“There’s an urgency to bring about change, but how much change can really be achieved” during an economic slump, asked Vishnu Varathan, an economist at Forecast Singapore Pte. “It’s not the right time.”

Caught in Dragnet

Alice Matsuo was caught in the dragnet. Her Alice in Wonderland Boracay Resort failed to pay an estimated 5 million pesos of taxes after she fell ill with cervical cancer in 2006. Authorities closed it June 8.

Matsuo, 55, said there wasn’t anyone to do the paperwork when she got sick. “We weren’t able to pay for two years, but others haven’t been paying for years. They just keep bribing.”

The government has charged 108 tax and customs officers with corruption as part of a program started in 2003 to weed out dishonest officials, Department of Finance data show.

Taxes account for two-thirds of government revenue, putting pressure on people like Araceli Francisco, Internal Revenue regional director for the central island provinces of Samar and Leyte. She must collect 3.44 billion pesos this year from her region, 21 percent more than 2008.

“What we need is support in terms of manpower, logistics and training,” Francisco said. “Collection is becoming harder.”