Gloria Macapagal-Arroyo

President of the Republic of the Philippines 2001 - 2010

The Inside Story Behind EVAT

We have to understand the historical perspective of the fiscal reform measures. The country was in a bad standing because of the burgeoning budget deficit, and the tax effort ratio was critically low. From the time that the Comprehensive Tax Reform Program (CTRP) was passed in 1997, nagkaroon ng declining tax collections. Certain provisions in the CTRP had sort of relaxed taxation. And so eight fiscal reform measures were given top priority to be passed by President Gloria Macapagal-Arroyo. And tax measures are never easy to pass.

Dito kasi sa atin, in our country, paying taxes is not a sacred duty unlike in the United States. The government can only spend what it has—it's like your household, the income of your parents is low, so what happens? The basic needs of the household are not met. Some children don't eat three times a day, they are not healthy. Some children cannot go to school.

And the family holds a lot of credit. Konti na nga yung kinikita, 1/3 pa ng kinikita pambayad lang ng interest. And there was already a trend na ang pinagkakautangan, because of your low income, hindi ka na pauutangin. Yung present utang mo, tataasan ng interest rates kasi binaba yung credit rating, kasi considered kang high risk. Dahil high risk ka, tatagain ka na lang.

The Philippines at that time, 33% of the national budget was just on interest payment, not even principal. Can you imagine, ang liit na nga ng kinikita mo, close to 1/3 pa hindi mo magamit? O di lalo nang lumiit yung tinapay. So you have problems in education, agriculture, health, there's going to be unrest. The IRA is going to be smaller. Crisis, certain crisis. There's not even a need for a coup d'etat. If that happens, we have a very unhappy population. Not only that, we also have unhappy political leaders because they are not getting support from the national government sa IRA.

So I had no question in my mind that it had to be done. And I'm not even a member of LAKAS. Nung nasa Congress kasi ako, I was with NPC. But my background is really with finance, trade and industry. I come from the private sector. So I knew increasing taxes was imperative, crucial to survival. As a country, where do we get our money from? From our own income, from our borrowings, foreign donations, foreign assistance, yung ODA na tinatawag, Official Development Assistance, and grants. And all the lenders rely on our credit rating – Fitch, Moody's, Standard & Poor's. That's worldwide.

In the Philippine Development Forum which is an annual meeting of all donor countries, nagkaroon din ng resolution: "No vat, no aid." In other words, 'patulong ka nang patulong sa amin, wala ka namang ginagawa. Hindi ka naman nagbabanat ng buto para mangolekta ng tax.'

I led a mission to Peru – a World Bank mission to observe the tax reforms that they did there. Peru was in trouble at the time. They were asking for IMF bailout and the IMF said "(Put) your revenue collection in shape first." They demanded drastic reforms. Peru complied and Peru was able to increase their collection.

In-abolish nila yung BIR nila, they created what they call SUNAT, it's an acronym in Spanish. They started from scratch. They fired everybody, tapos nag-reorganize. Qualification number one, must have no work experience, fresh graduate. Accountants, computer people, lawyers, economists. Average age is 26. "We have a new army, we have a new agency, it's not budgeted. Its operating funds will come by way of 2% commission from whatever we collect, and it is run by a board of directors."

To make a long story short, six percent of GDP in Peru went up to 20%, with that young organization. That's history. Yung kanilang SUNAT became a sterling agency. In a few years, the government decided to put Customs under them. Isang revenue agency na lang. It became so sagrado, minsan ang kwento sa 'kin nung executive director, "Pati murder eh, tinatawag nung mga mamamayan, kami na raw mag-imbestiga. Kasi walang tiwala na raw sila sa pulis."

I actually fought for a bill like that in Congress, to abolish the BIR in consultation with the then BIR commissioner Parayno, and create a NARA (National Revenue Authority). We were almost there. Napa-agree ko na si then BIR commissioner Parayno, pati yung mga BIR na nung una ay nag-refuse. Pati yung Customs pumapayag na. Pag dating dun sa korporasyon, board na ang magde-decide ng reorganization. It was the DOF which got cold feet to push it.

That's where we were at that time. The threats were very clear, the dangers were very clear. Ang isang consequence din ay hihina ang pera natin. Kasi hihina ang ekonomiya, hihina ang mga fundamentals. The peso will weaken against the dollar. Our oil is imported. Each time you buy oil, you're subject to world oil price increase, but it is denominated not in pesos but in dollars. Therefore, the second commodity you must buy is dollars. And if your money is weak, na-"double bok" ka.

With the recent oil price increase, patay na sana tayo sa isang oil price increase lang. Pero ngayon, tumaas ang oil prices in the whole world, pero ang Philippines, malakas pa rin ang Peso because of fiscal reforms. Consolation natin yun, hindi tayo na-double bok.

You've seen my biodata. In no doubtful terms, I claimed that the crucial 2005 fiscal reform measures saved the country from certain economic crisis. Hindi lang probable—from certain economic crisis.

After the effects of a fiscal crisis on the creditors and donors, your foreign currency exchange rate, pagkatapos yung economy naman will be affected. Lalong liliit yung taxes that you can collect because the corporations will have fewer profits, less people to tax, and then this leads to possible unrest. Talagang literally high stakes.

At that time, in my committee, Ways and Means, I had 52 members. The new tax reforms would not be easy because you're amending the old Comprehensive Tax Reform Program. This was the law passed in '87. There were some legislators defensive of the CTRP kasi baby nila yan. And here I was, reforming the tax reform, reforming that CTRP.

Tax effort is the amount of tax divided by GDP—the international norm was 20% at that time. But how can you have say 11% of other taxes when your VAT is already 10%? Where is the room for your income tax, where is your excise tax, where are your other taxes? Ako, I believe in the Anglo-Saxon way of taxation which is based on honesty or self declare your taxable income and then you pay the taxes. But it won't work in Asia daw, kasi human nature ng Chinese, ng Malay na magpalusot. Pati sa South America.

Kaya yung ibang countries, they're heavy on consumption tax. In other words, you will be taxed as you consume. And you pay as you are able to afford. The poor are not going to be taxed because they're not consuming heavily, unlike the wealthy. It is the wealthy who buy expensive luxury stuff. They will be taxed as they consume. No more income tax, pero 25% VAT, 30% VAT? Ok lang yun eh. Yung may pera ang nagbabayad ng tax na ito.

Pero ang inuna ko ay yung excise tax which is called sin taxes – tax for alcohol, tax for cigarettes, tobacco. Diyan nagkahirapan talaga kung sino ang tama, eh. Kontra-kontra yan, eh. Those on the high price, those on the low price cigarettes, those who want to come in who are not here anymore. Yung mga existing firms, Fortune Tobacco and Philip Morris, they're already paying P40 billion in taxes a year, in various forms of taxes. So conflict yung dalawang yan eh. Yung isa gusto nila papasok sila at the low end. Yung isa, papasok sila sa high end. Sabi naman ng DOH, "We're just discouraging smoking. Huwag nang magpapasok ng bago."

Pag sumobra ka naman ng tax rate, sales will drop and you might end up with less tax. Halimbawa, assume right now nasa 1% ang tax rate, kapag ginawa mong 2% tapos ang sales mo bumaba, ang collection mo nasaan na? After the 100% increase in tax rate, 50% drop in collection naman kasi the market can't afford yung presyo ng commodity, ayaw nang bumili. Papalakpak naman yung WHO. DOH is also happy, you save money on hospitalization, etc. Lahat ng mga sectors merong say diyan.

Anyway, it was in the SONA of the President, yun ang kanyang priority tax measures, eight of them! And on my lap fell the responsibility of getting it done. The Constitution provides that all tax measures can only emanate from the House. The Senate cannot act on taxes unless coming from the House. Magba-bicam eh, to pass the law, you can assume 50-50 credit in that. Pero pag hindi kumilos ang House, the Senate cannot start discussion on anything.

Because the House is not going to take anything from the Senate when it comes to budget, when it comes to taxes.

The House has the main power on taxation and the power of the purse. But in the end, of course, bicameral tayo, kaya kailangan approval of both Houses. And it got complicated because, kung hirap na hirap i-reconcile at ipasa yan, fireworks! Demolition job sa akin, personal. Pag malayong-malayo ang version ng Senate, naloko na. Pag nag-bicam kami, patigasan na yun.

Yung VAT naman: you can't mention just VAT. It's the whole package of tax reform measures. Nandiyan pa yung fiscal incentives, tax amnesty, and so on. Nalusot ko sa House pero up to this day, hindi pa nagiging batas. Kasi pag nag-end na yung Congress, ulit na naman sa susunod. Kung anu-ano ang suggestions na lumalabas. Yung gusto ng iba sa sigarilyo, ad valorem tax. Pag ad valorem, percent of price. Pag mataas ang presyo, malaki ang tax. Ang gusto naman ng iba, based on graduated rates, depende sa categories.

Alam mo ang ginawa ko, kasi urgent eh, these things can't take forever. Pwedeng strategy ng oppositors yan, 'i-delay na lang yan.' So you go to the speakers room, look at the calendar. Lalapitan na ng mga kumpanya yung mga congressman, labasan na lahat yung champions ng mga kumpanya. May champion yung oil companies, may champion yung mga utilities. Tapos yung mga militant, makakaliwa, meron silang "don't charge the customers".

Kasi VAT is a consumption tax, for the end-user. It's very tricky kasi you have to look at not penalizing the poor. That's why we exempted agricultural products in their raw form. Kung mamamalengke ka sa wet market, walang VAT-able diyan. Isda, gulay, karne, baboy – walang VAT yan. Sa statistics kasi, lumalabas na the poor, ang composition ng kanilang consumption basket where they spend their money, 65% or 70% is on food. They don't have a lot of money so halos lahat sa food.

Yung balance ng ginagastos nila, hindi naman sila nagpupunta sa malls. Tiangge, ukay-ukay, carinderia – underground economies, hindi nagva-VAT. Kaya yung mga pilosopo diyan, pagdating sa hearing, pagod na pagod na ako. Sa hearing, tapos debate pa sa floor, tapos ayaw pang tigilan ng media, tapos dedebate ka pa sa TV. Most of the anchors were negative kasi popular sa kanila yung kampi sa masa, walang tax, walang VAT.

Nagsisimula na ang horsetrading, nagba-backchanneling na sila, kung pwede raw ay palambutin mo yung isang side o kaya compromise. Pero expected na yun. Business will try to protect itself. They will take advantage if they can. Paglabas mo dun sa plenary, 2nd reading, 3rd reading, may manifesto yung senior principals against this. And the dynamics of the legislature, lobby groups, vested interests, all working against each other. Then you ask the President's help, kausapin yung mga private sector, unofficial meetings. Yung VAT talaga ang pinakamahirap.

Yung sa sin taxes, ang ginawa ko ay simple. Eto yung dating batas, pero may given schedule of prices. Bakit defective yung batas? Kasi it's based on those prices. Di naman timeless and there's no mechanism for adjusting to inflation. So sa ganun, ilalagay mo, this price is the law, but unless you amend that, the price even ten years later is the same.

Nagkaisa sila, CTRP. "Hindi tayo gagawa nuon, hindi tayo magkasundo-sundo. Bakit tayo gagawa ng bagong law? Yung dati na lang, i-inflate mo lang." So I put in a provision also: prices subject to review every two years. The price will be adjusted by the BIR based on market survey. They set that up and came up with a new list based on the old, same formula. I could not object because yun na yung in effect kaya lang luma na tayo ng presyo. So naglagay na lang ako ng percent, nag-agree kami, kasi usually sa inflation, consumer price index. So ang nilagay ko, let's adjust these prices based on the consumer price index at that time. Sa susunod may paragraph na ako dun, it should be adjusted based on consumer prices.

Mas maganda na, nag-joint venture na yung Philip Morris at Fortune. Sasabihin ng mga foreign brands, pinoprotektahan ko raw ang local manufacturers. Nakalagay kasi sa dating batas, yung indigenous raw materials, mababa ang rate nuon. Gusto nila, sama-sama under the same rate kahit imported. Lumapit ang WTO sa atin, ang sabi, "Protective ka, kailangan papasukin niyo yung imported, at saka, parehas lang ang laban."

Anyway napasa natin lahat ng priority tax measures ni PGMA. You know how many meetings my House Committee had in forty days? Thirty three (33) grueling committee hearings in forty days. That should be a record of sorts.

I consider EVAT and the other tax reforms to be my lifetime achievement. Di ko lang ma-broadcast….1998 pa eh, president ako ng Landbank. Pagkatapos nuon, FVR wanted me for the Senate. I had very high awareness rate, ngayon I still have the highest. However, while we may know in our hearts that VAT was the greatest thing under the circumstances in 2005, unfortunately it has been successfully demonized. Mas simple at madali sa opposition ang mag-atake. Every time, I have to explain the rationale, in five minutes. Tough!

But itong VAT, obvious na obvious, the World Bank has called it the best thing that ever happened. Ang nangyari, nung mapasa natin yung VAT, the opposite happened, our declining trends reversed. Our credit rating went up, our interest rate went down, ang ating percent of interest payment to total budget went down from 33 to 17%. The difference between 33 and 17 is already 100 billion! Pangalawa, lumaki na nga yung pie, what about yung new taxes? Pasado na iyan, collection na lang. Pagbutihin na lang ninyo.

Ang IRA, bakit lumaki? Bakit haping-hapi, loyal yung mga Mayor at saka Congressman? Ang benefit ay ganito: by law, out of the whole national taxes, 40% of it must go to IRA. We are only trying to solve the budget deficit of the national government, pero yang mga LGU, nasa surplus. That was not the intention. But the law says, 40% of the incremental VAT goes to the IRA. In other words, while we are trying to solve the fiscal deficit in the national budget, out of every peso we raise in new taxes, only 60% or 60 centavos goes to the national budget.

Kaya ang ginawa ko, nilagay ko sa batas, the 40% windfall increment that goes to the LGU can only be spent as follows: number one, for education, followed by agriculture, health, environment. Nasa batas na iyon, implementation at monitoring na lang sana since 2009.

Recently tinanong ko sa DBM, what did you do last year? How did we ascertain that it was spent the way the law says? Baka isinama lang sa lump sum releases nila. Hindi makasagot ang DBM sa akin. Sabi ko nga, nung 2006, may 3-year delay sa IRA, ang basis ng computation ng IRA, the revenues 3 years ago. So nag-kick in yung incremental VAT as IRA 3 years later, during 2009 at the height of recession. So ngayon, sabi ng Presidente, tama si Sec. Jesli.

When word got out that I was rejoining the Cabinet (I have served under two previous Presidents, Aquino and Ramos), people thought my priority will be finance, or DTI, but I surprised them all. I don't think that's the most important. I think what's most important is human resource quality, education. It's 1/3 of the entire bureaucracy, but it's not 1/3 of the entire budget, it's just 12%. Again the rule of thumb, 20% of the budget or 6% of the GDP should be for education.

At DepEd, if you don't give us any extra money, you just pay us our salaries, we're already the biggest budgeted. Our payroll is 137 billion. Nobody is bigger than 137 billion, yet we would be paralyzed. There's not a single classroom, not even chalk. You're talking big bucks here. Five hundred pesos chalk allowance per year per teacher is still inadequate but that's already 300 million pesos. One-third of our population are in the schools, formal or alternative, so where else should you put your money? Where the people are.

So, yung sa VAT, yung human aspect ng history nito: nung napasa na sa House at pumunta sa Senate, nagpakahirap din si Ralph Recto. Pero siyempre ako rin, lumapit din sa mga kaibigan ko sa Senado. In the Senate they still have their own priorities – whether they like the President or not.

It took a lot of missionary work at the Senate. Kalimutan na natin yung partido. Lumabas ang mga versions nila. Ang ganda. Pero unpredictable pa rin ang outcome, you don't know. Yung bicam, subject to schedule. Pangalawa, you don't know kung sasabihin nila na tapusin na natin ng dalawang meeting. This is about strategy of conflict. This is parang bargaining table ng CBA – powerplay, backroom, cooling-off, employed lahat ng strategies ng both sides.

My only daughter who is studying in Manchester, was about to give birth to my first granddaughter. May plane ticket na ako three months before, April 2005. Deadlocked kami sa Senado. Biglang humingi sila ng meeting, eh ako ang promoter, ako ang may gusto talaga na pumasa ito, at baka magbago pa ang isip ng mga iyan. Kaya change of travel plans. My first grandchild is a girl and treasure sa family namin yung girl kasi puro kami boys. I joked that I was supposed to name her Evita, I changed it into Evata in memory of the EVAT.

Pero nadali din natin, natapos. Another episode: ang laban ni Manny Pacquiao sa Vegas, nakabili na ako ng ticket. Diehard boxing fan kasi ako. Ang sabi sa akin, tutuloy ka ba sa laban? Ako naman ang naka-deadlock, manood muna ako ng boxing ng dalawang araw.

And then everybody praised the VAT - everybody who mattered anyway. We made the hard decisions, we swallowed the bitter pill. Yun nga lang, sino ba talaga ang gumawa niyan? Pero binanggit ni Pangulo minsan, at a meeting of foreign economists sa Dusit Hotel, nuong makita niya ako, "…And by the way, the present Secretary of Education spearheaded, is responsible for the fiscal measures which kept us afloat and growing." Nakakataba talaga ng puso kahit walang "Medal of Valor."