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MANILA, Philippines – International credit ratings agencies welcomed the House Committee on Ways and Means’ move to endorse a bill that would reform the Philippines’ sin taxes, but said the legislation alone would have little impact on the country’s ratings.
"While the passage of the sin tax bill is a positive step, we need to take it into consideration in the broader context of fiscal consolidation and in combination with other factors when reviewing the sovereign rating of the Philippines," Agost Benard, Standard & Poor's associate director of sovereign and international public finance ratings, told InterAksyon.com in an email.
Fitch Ratings said the eventual passage of the sin tax bill “could help to broaden the Philippine sovereign's tax base.”
“As Fitch views Philippine sovereign's narrow tax base and broader public finances as a rating weakness, if the government can successfully enhance revenue streams it would be viewed as a positive for the credit profile,” Philip McNicholas, Fitch director for Asia sovereign ratings, said in a separate email.
The House Committee on Ways and Means last week endorsed House Bill 5727, but not after amending certain provisions. Instead of the annual increase in the tax rate to reflect inflation, the amended bill now provides for rate adjustments every two years starting January 1, 2015 until January 1, 2025.
The amended bill also put in place two tax-tiers for tobacco products, and three for liquor products – a departure from the original proposal that removed such classifications altogether. The committee-endorsed bill also calls for reclassification every two years, but prohibits cigarette products from being reclassified to a lower tax rate.
On the heels of the bill’s endorsement by the House Committee on Ways and Means, Malacanang said it was confident that credit rating agencies can give the Philippines an investment grade status.
“Based on their commitment that if they see the sin tax reform bill passed, then there should be no reason for them not to give us investment grade status,” Palace spokesman Edwin Lacierda said last week.
Fitch assigns a ‘BB plus’ rating to the Philippines, the highest among the three major international credit rating firms, while S&P rates the sovereign a ‘BB.’
Both credit scores however are below investment-grade, which means the country has to pay higher rates whenever it borrows money from abroad. The government has to borrow money because its tax collections fall short of its expenditures.
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