When President Duterte assumed office in July last year, his economic team bared 10 specific programs aimed at achieving inclusive growth and lifting millions of Filipinos out of poverty. The President’s men dubbed this as the 10-point socioeconomic development agenda.
To achieve its goals, the government would need to pour huge resources into public infrastructure projects, as well as health, education and social-protection programs.
Finance Undersecretary Karl Kendrick T. Chua said the Duterte administration would need an additional P2.2 trillion to ensure there will be healthier, better educated and more prosperous Filipinos by 2022.
From now until 2022, the government would need to raise and set aside more than P400 billion. Under the business-as-usual scenario, the Duterte administration believes this would not be possible. Tax collections have been below target owing to inefficiencies in the current system.
To address these inefficiencies, the Department of Finance came up with a proposed Comprehensive Tax Reform Program (CTRP). House Committee on Ways and Means and PDP-Laban Rep. Dakila Carlo Cua of Quirino said the CTRP will make the tax structure “more progressive” by rationalizing the internal revenue system.
“[The CTRP] seeks to ensure that the government is able to provide better infrastructure, health, education and social protection [through this program],” Cua said.
During the BM Coffee Club forum last Tuesday with the ALC Media Group and Action for Economic Reforms at the Sandari Batulao office in Makati City, Chua said half of the P2.2 trillion needed by the government will come from tax reforms, while the remaining amount will be sourced from sustainable borrowings and budget reforms.
“Package 1 of the CTRP covers around half of what we need [in terms of funds], because Packages 2 to 5 would yield lower revenues. It’s more about fixing inherent problems,” he said.
“So the estimate we have for Package 1 is around P157 billion per year, the House version that was passed is P133 billion. So our challenge is to make sure the Senate listens and passes the DOF version. Packages 2 to 5 will contribute the balance, which we will present in the coming months through December,” Chua added.
Finance Secretary Carlos G. Dominguez said now is an opportune time to reconfigure the tax system that is “crying out for reform” as a way to make Philippine communities safe and more prosperous.
Dominguez said the tax-reform program is necessary to realize the administration’s vision of inclusive growth, provide relief to wage earners, broaden the revenue base, raise spending on infrastructure and human capital, attract more investors and sustain the upward trajectory of the economy.
But while the government wants personal and corporate income-tax rates reduced, it also needs to generate more revenues by also doing away with the kind of public underspending in the past that has prevented the benefits of growth from being felt by the Filipino majority, according to Dominguez.
“We will pursue a tax-reform package that will enhance inclusive growth, bring relief to our wageworkers and bring more into the tax loop without courting a credit rating downgrade,” he said.
The CTRP is composed of five packages: Package 1 seeks to lower personal income-tax rate; Package 2 seeks to cut corporate tax rates to 25 percent while rationalizing fiscal incentives; Package 3 deals with property taxation; Package 4 focuses on capital income taxation; and Package 5 consists mainly of offsetting measures, such as slapping taxes on fatty food products, luxury items, mining operations, and winnings from the lottery and casinos.
The DOF’s goal is to generate P366 billion annually from these tax reforms. Chua said he is optimistic that the first package, pending in the Senate, will be passed by October.
Chua said the DOF will submit to Congress Package 2 of the CTRP by October. The remaining three packages will be submitted in the fourth quarter of 2017 or by early 2018. The DOF hopes that all the components of the CTRP will get Congressional approval before 2019.
Cua said the lower chamber is open to talking to the DOF about the details of the other packages under the CTRP. Under the 1987 Constitution, all tax measures must originate from the House of Representatives.
“I think it will be better if [the DOF] will speak with the legislators before coming up with these packages, because when you’re in a basketball team, you talk to all the players, not just the coach,” he added.
Package 1
Cua said the first package of the CTRP will provide “equitable relief” to taxpayers in order to improve their levels of disposable income and increase their economic activity. It also seeks to raise revenues through the expansion of the value-added tax (VAT) base, increase of the excise taxes on petroleum and automobiles, impose an excise tax on sugar-sweetened beverages and adopt measures to improve tax administration.
Before adjourning in May, the lower chamber approved House Bill (HB) 5636, or the Tax Reform for Acceleration and Inclusion Act (TRAIN), which seeks to lower personal income-tax rates, expand the value-added tax base, adjust excise taxes on petroleum and automobiles, impose excise tax on sugar-sweetened beverages and ease the rates of estate and donor’s taxes.
The bill, which was certified as urgent by the Palace, is now pending before the Senate Ways and Means Committee, headed by Sen. Juan Edgardo M. Angara.
Under HB 5636, workers earning P250,000 will be exempted from paying personal income taxes, while the “ultra-rich,” or those earning more than P5 million, would be taxed 35 percent. Also, an 8-percent tax on self-employed and professionals will be imposed on gross receipts in excess of P250,000.
The measure provides automatic adjustment of taxable income levels and their corresponding base every three years beginning 2022 based on a three-year cumulative consumer price index inflation rate.
The bill raised the tax exemption for 13th-month pay and other benefits to P100,000 from P82,000 and a unitary rate of 6 percent for estate and donor’s taxes.
The proposed measure includes a P6 tax on petroleum products that could cause prices of basic goods to rise. The P6-per-liter excise-tax increase will come in three tranches of P3, P2 and P1, respectively, in three years starting 2018.
It provides new schedules and brackets for auto excise tax in the package. The DOF is pushing for the excise on vehicles to address traffic in the country.
Under the proposal the excise will be implemented in two schedules. For the lower bracket, if the net manufacturer’s price/importer’s selling price is P600,000, the excise tax will be 3 percent by 2018 and will increase to 4 percent by 2019.
For the higher bracket, if the net manufacturer’s price/importer’s selling price is over P3.1 million, the excise will be P1,468,000 plus 90 percent of the value in excess of P3.1 million in 2018. For 2019, if the net manufacturer’s price/importer’s selling price is over P3.1 million, the excise will be P1,824,000 plus 120 percent of the value in excess of P3.1 million.
Also, sugar-sweetened beverages will be levied an excise tax of P10 per liter of volume capacity, subject to a yearly 4-percent rate increase after the effectivity date of January 1, 2018.
The bill said the lease of a residential unit with a monthly rental not exceeding P10,000 shall no longer be subjected to VAT exemptions.
The measure, however, imposed conditional removal of VAT exemption for socialized housing. Under the bill, the removal of VAT exemption for socialized housing will depend upon the establishment of a housing voucher system which should benefit buyers of socialized housing.
As for reforms in tax administration, the proposed TRAIN has provisions on e-receipts issuance and transmission, fuel marking, point-of-sales machines linkage to the Bureau of Internal Revenue (BIR) and linkage between the BIR and other government agencies, bureaus and offices.
Cua said these tax administrations will address perennial tax-administration problems, such as sales underdeclaration, among others. Penalties are also prescribed and/or made more effective for infractions related to fuel marking, nonissuance of receipts, and underdeclaration of sales through sales suppression devices.
Other packages
Package 2 of the DOF-proposed CTRP is focused on cutting corporate taxes to 25 percent from 30 percent and rationalizing fiscal incentives. This includes limiting VAT-zero rating to direct exporters, the provision of full VAT refund in cash to abolish the grant of tax credit certificates, and replacing the 5-percent gross income earned tax rate to a reduced corporate income tax rate of 15 percent.
From the initial proposal submitted by the DOF in Congress last September, the revenues expected to be generated from its second package is estimated at P33.8 billion by 2019 and a loss of P34.8 billion.
Package 3 also seeks to lower the rate of transaction taxes on land. The offsetting measures include the rationalization of valuation of properties, meaning increasing valuation closer to market prices. The estimated revenues from the third package amount to P43.5 billion and a loss of P3.5 billion.
The fourth package focuses on capital income taxation and aims to reduce taxes imposed on interest income earned on peso deposit and investments to 10 percent from 20 percent. Its offsetting measures include the harmonization of capital income-tax rates for dollar deposits and investments, dividends, equity and fixed income rates to 10 percent. And it also includes increasing tax on stocks traded in the stock market from 0.5 percent to 1 percent on its gross selling price.
Under the initial proposal of the DOF, an estimated P1 billion in losses will stem from this package with no gains. But this is expected to be offset by the fifth package, which could generate additional revenues of P129.4 billion.
“There are actually two ways to generate the funds: policy and administration. In the tax policy side our goal is to reach P366 billion, of which Package 1 will contribute P157 billion, and then Packages 2 to 5 will contribute the balance,” Chua said.
He added that the growth in revenues under the CTRP will not be a fixed figure since the economy grows on a daily basis. Revenues are projected to grow by 10 percent to 15 percent annually. But the government is prepared to resort to official development assistance (ODA) and borrowings to ensure the continuity of its social programs.
Citing as an example Thailand, Chua said the Philippines will need to generate P1.7 trillion in revenues just to match the growth of its Southeast Asian neighbor. He noted that Thailand has invested heavily in infrastructure, education and health.
“If the entire CTRP is implemented by 2019, our GDP is P17 trillion, so 10 percent of that is P1.7 trillion. I will get P366 billion from tax policy, P433 billion from BIR, P208 billion from customs administration, P188 billion from nonunderspending, with a remaining balance of P478 billion still,” Chua said.
“That is why we have ODAs. So that is the big picture, a combination of sources to achieve development like Thailand,” he added.
Pros and cons
The proposed TRAIN provided that 40 percent of the annual incremental revenue generated from the proposed petroleum excise tax would be allocated to social benefits programs and the grant of fuel vouchers to qualified transport franchise holders for four years.
It also indicated that for the same period, the remaining yearly incremental revenues will go to infrastructure, health, education and social-protection expenditures.
For taxes collected from sugar-sweetened beverages, 85 percent will be allocated to government priority programs. The remaining amount will be channeled to programs aiming to benefit sugar farmers.
According to the local makers of electronics products, the proposal to impose VAT on local input for exports under the CTRP will be disadvantageous to small businesses that supply materials to exporters.
The Philippine Economic Zone Authority (Peza) agreed with the Semiconductors and Electronics Industries in the Philippines Inc. (Seipi) that the VAT on local input for exports would serve as a “major deterrent” to foreign investments.
“We computed this and saw that if we removed the exemption on VAT and started collecting 12 percent, our locator-industries may just as well import everything, because that’ll now become a cheaper option. This will be a big loss to our local suppliers, or our indirect exporters,” Peza Director General Charito B. Plaza told reporters on Wednesday.
Annual local purchases of inputs by Peza-registered locators are estimated to amount to P24 billion, which could be wiped out if the VAT exemption is removed, according to Plaza.
The TRAIN approved by the House seeks to impose VAT on sale, barter, or exchange of goods or properties equivalent to 12 percent of the product or property sold.
The measure, however, indicated that suppliers will get a VAT refund within 90 days, but they have expressed concern that this may not be observed given the government’s record in processing paperwork.
While the Peza said it supports the DOF’s aim to plug revenue leaks, they prefer a status quo on Peza’s incentive package offered to foreign locators.
“Efficient tax collection should be the top priority, and whatever incentives we give, especially to foreign investments, should be retained because this is exactly the attraction why they’re here,” the government official added.
Seipi President Dan C. Lachica expressed concern about the impact of the measure on the local suppliers. “This tax-reform bill is really very critical, what we’re concerned about is the levying of VAT on local suppliers to exporters or multinational companies in the Peza zone.”
“That will kill our local suppliers and small-medium enterprises. The concern with the VAT refund system is if it will be efficient,” Lachica told reporters during the 14th Philippine Semiconductor and Electronics Convention and Exhibition.
The Seipi chief said of the $28.8-billion electronics products exported by the Philippines, $22 billion consists of imports.
Image credits: Nonie Reyes