THE Asean Economic Community 2015 (AEC 2015), established by the 10 member-countries of the Association of Southeast Asian Nations, aims to eliminate trade barriers and facilitate trade of both goods and services within the region. With a population of 631 million people, total trade amounting to $2.82 trillion and total current GDP of $2.53 trillion as of 2015, the Asean Free Trade Agreement will expand the region’s consumer base and promote economic growth.
As shown in the table below, 21.7 percent of the Philippines’s total trade is with the Asean, making the region our biggest trading partner. This means that, if the region will totally abolish tariffs, goods traded within the region will be cheaper for Asean citizens, consequently improving their buying power. Moreover, free trade promotes competition among firms operating within the bloc, inducing them to produce better products and find more efficient processes in doing business as to cut costs and maintain their margins.
Additionally, AEC 2015 can induce the growth of tourism within the region. The number of international tourist arrivals in the Philippines posted a CAGR of 5.49 percent from 1996 to 2016, with the industry accounting for 8.6 percent of the country’s 2016 GDP.
The promises of the Asean economic integration based on trade and tourism are encouraging. However, the Philippines has not been able to fully benefit from the integration due to various internal challenges, such as ownership limitations, lack of infrastructure development and differences in trade processing among others. Currently, the infrastructure component is being addressed through the Comprehensive Tax Reform Program. Upon its passage, it will aid the government in its “Build, Build, Build” program that can address the infrastructure-related issues. Beyond infrastructure financing, the need for the government to improve revenue generation is paramount in order to realize the possible gains from the Asean economic integration. This is because full integration would mean that revenue generation will shift fully to the Bureau of Internal Revenue (BIR). About 90 percent of the government revenues come from taxes, of this the BIR accounts for 80 percent, while the Bureau of Customs (BOC) accounts for 20 percent of the total tax collection. Under full integration, the 20-percent contribution of the BOC is supposed to decline, with the Asean accounting for 26.4 percent of our imports.
To give a broader perspective of what we are trying to argue, Table 2 shows the amount of customs tax collected by other Asean members since 2001.
As of 2015 the Philippines still has the biggest customs and import duties contribution to total tax revenue (20.2 percent), followed by Cambodia with 16.8 percent. The rest, however, are already on the single-digit levels, with Malaysia and Singapore posting 1.7 percent and 0.07 percent, respectively. The shift in tax collection toward internal revenue will prove to be strategic for Asean countries, because once the lists of items that are still currently protected by tariffs are abolished through the integration, countries will lose their customs revenues from the bloc. It is evident that the Philippines’s contribution of customs and import duties to total tax revenue has not changed, as shown by rather constant values in the table. This could not remain the same, so revenue collection from BOC will definitely go down and this would have negative effects on our national budget. Currently, the government is already experiencing a widening of the deficit due to infrastructure requirements.
It is, therefore, necessary for Congress to also consider this challenge before they pass the final version of the tax reform. In the end, the promises of full benefits from Asean integration is that each country must also do its homework. A critical component is how to ensure revenue sustainability in the light of free trade and integrated market systems. After all, there is no such thing as free fruits, err, lunch.
Justin Jerome G. Valle is a graduate student at the Ateneo de Manila University Economics Department.