DEPUTY USTR BHATIA'S MEETINGS IN MANILA:

UNCLAS SECTION 01 OF 02 MANILA 001222 SIPDIS SIPDIS SENSITIVE DEPT FOR EAP/MTS STATE PASS TO USTR FOR KBHATIA, RDEHAAN, BWEISEL/DKATZ USDOC FOR 4430/ITA/MAC/DBISBEE AND SBERLINGUETTE E.O. 12958: N/A TAGS: ETRD EAGR ETTC EINV KIPR RP SUBJECT: DEPUTY USTR BHATIA'S MEETINGS IN MANILA: FINANCE SECRETARY TEVES, MARCH 16 REF: 05 Manila 3778 MANILA 00001222 001.5 OF 002 SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION - PROTECT ACCORDINGLY -------------- SUMMARY -------------- ¶1. (SBU) In a March 16 meeting with Deputy USTR Ambassador Karan Bhatia, Finance Secretary Gary Teves highlighted fiscal reform measures such as the expanded value added tax and increased tax revenue collection. Teves, noting that the Philippines's GDP growth rate is lower than other countries in the region, said that the 2.7% deficit-to-GDP ratio must be reduced in order to encourage rapid economic growth. While tax collection results were below target in January 2006, February collections exceeded expectations. Teves reaffirmed the GRP's intent to submit its Millennium Challenge Account Threshold proposal, emphasizing good governance and anti- corruption, by its self-imposed April 1 deadline. On Clark tax incentives, Teves described interim solutions to be implemented until the issue can be permanently resolved by legislation. Teves also said he is working to resolve the issue of back taxes on foreign currency deposits (reftel). End Summary. -------------- PARTICIPANTS -------------- ¶2. (SBU) -- USG: Deputy USTR Ambassador Karan Bhatia, Assistant USTR Barbara Weisel, USTR Special Assistant Bob Dehaan, Charge d'Affaires Paul Jones, Economic Counselor Robert Ludan, and Economic Officer Michelle Hoyt. -- GRP: Finance Secretary Gary Teves, Under Secretary Gaudencio Mendoza, and Under Secretary Gil Beltran. -------------- REVENUE COLLECTION -------------- ¶3. (SBU) Ambassador Bhatia congratulated Secretary Teves on recent fiscal reform measures, including expanded value-added tax (EVAT),and encouraged him to find the right balance between deficit reduction and infrastructure investment. Teves said that the success of the EVAT has been supported by external factors including the active role of the media in communicating developments to the public. He said that if the RP can "get over the hurdle" of 2006, there will be increased momentum for continued progress in revenue administration in the coming years. He cited the need for debt reduction and referenced the high ratio of deficit-to- GDP, which was 2.7% at the end of 2005. Teves acknowledged that the RP, with a 5.1% GDP growth rate in 2005, is behind other countries in the region. He said that if the debt level decreases, the RP could grow at a faster rate than it has in the past. Teves said that the RP needs foreign investment in order to catch up with regional leaders such as China, India, and Vietnam. ¶4. (SBU) On tax collection, Teves reported that the Bureau of Internal Revenue (BIR) was 600 million pesos short of its collection target for January 2006. However, preliminary reports show over one 1 billion pesos collected beyond the target in February 2006, which more than makes up for the slow start. -------------- MILLENNIUM CHALLENGE ACCOUNT -------------- ¶5. (SBU) Bhatia said that he is delighted the RP has been selected as a Threshold Country and urged the GRP to more forward quickly to submit its proposal. Teves said that GRP wanted to meet the self-imposed April 1 deadline and is anxious to receive feedback on its plan. He noted that the MCC proposal would emphasize performance goals for good governance initiatives such as Run After Tax Evaders (RATE),Run After the Smugglers (RATS),and lifestyle checks. Teves cited the need for experts to provide technical assistance on the RATE and RATS MANILA 00001222 002.2 OF 002 programs. He said that the IRS has been very helpful with the RATE program and suggested something similar could benefit the Bureau of Customs (BOC). Mendoza added that the BOC has intensified its campaign against smugglers. He related how President Arroyo had been taking a very tough stance with agencies to make progress on tax and customs collection and anti-corruption initiatives. -------------- CLARK TAX INCENTIVES -------------- ¶6. (SBU) Bhatia underscored the importance of restoring permanent tax incentives for firms at Clark Special Economic Zone (SEZ) to reassure investors. Teves explained a three-pronged approach. The first step is deliberately to avoid collection of back tax obligations despite the Supreme Court ruling requiring that they be collected. Delaying collection, however, puts the government at risk for being found in contempt of the Supreme Court ruling. Second, the GRP is working on an interim solution to restore tax incentives to the Clark locators by Presidential Proclamation. The Philippine Export Zone Authority (PEZA) has prepared the necessary documents and submitted them to the Office of the President. Teves estimated that the Proclamation would be finalized within the month. The Presidential Proclamation would give the DOF "an excuse" not to collect the taxes. The final measure is to pass legislation that would restore Clark tax incentives on a permanent basis and eliminate the back taxes. President Arroyo designated the pending legislation "urgent." Teves said major businesses at Clark had been briefed on these plans. -------------- FOREIGN CURRENCY DEPOSIT UNITS -------------- ¶7. (SBU) On the long-standing issue of foreign currency deposit units (reftel),Teves noted that while a solution is sought, there are legal constraints to consider. He is working with the Congressional Oversight Committee to confirm whether the law intended to exempt banks from the taxes. Bhatia noted that progress such as removing the RP from the IPR Priority Watch List has given a vote of confidence to the RP investment climate. Resolution of issues such as the Clark tax incentives and the foreign currency deposit units could be seen as further examples of RP good will. -------------- WTO DOHA ROUND -------------- ¶8. (SBU) Bhatia urged the GRP to take a more active role in cutting tariffs on agricultural and industrial products. Teves said it is important that the rules of the game be applied fairly. He noted that not all countries are playing by the rules and there must be a level playing field in order to move forward with implementation. ¶9. (U) Ambassador Bhatia did not have an opportunity to clear this message. JONES