VZCZCXRO7244
PP RUEHZC
DE RUEHML #1222/01 0761030
ZNR UUUUU ZZH
P 171030Z MAR 06 PER YOU ZDK
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC PRIORITY 0045
INFO RUEHZS/ASEAN COLLECTIVE
RUEHGV/USMISSION GENEVA 2152
RUCPDOC/USDOC WASHDC

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