Although worries over inflation pressures surfaced after the signing of the first tranche of the tax-reform package, international think tank Capital Economics said the impact of the so-called TRAIN, or the Tax Reform for Acceleration and Inclusion, is not likely to derail inflation from its projected path next year.
In Capital Economics’s most recent review of Philippine economic dynamics, the research firm said the signed tax-reform package—which will lower income taxes but increase a host of indirect taxes—will have minimal effect on the overall inflation direction, as the introduction of new taxes will be gradual.
ON Tuesday President Duterte signed into law the first tranche of the country’s tax-program overhaul, with its most salient feature being the exemption from income tax of all annual salaries worth P250,000 and below.
Despite the lower personal taxes, the government still sees the tax package as “revenue building” for project funding, as it also raised levies on some sectors—including automobiles, sugary drinks, cosmetic procedures, coal and petroleum products.
Capital Economics said Duterte’s move to encourage the speedy approval of the bill, as well as his signing of the bill into law, marked “his most important legislative achievement since coming to office 17 months ago.”
“The changes include reductions in income tax alongside hikes in indirect taxes on items such as fuel, automobiles and cigarettes. The increases in indirect taxes are likely to push up inflation. That said, the overall impact is likely to be relatively small, given that the changes are set to be phased in over several years,” Capital Economics said.
The Department of Finance (DOF) has estimated that the tax hikes will only add 0.4 percentage points to the headline rate next year.
The Bangko Sentral ng Pilipinas (BSP), meanwhile, retained its 3.4-percent inflation forecast for 2018, saying that the projection already includes the potential effect of the higher tax rates brought about by TRAIN.
The BSP also regards the tax-related pressure as “transitory,” thus, bringing their inflation projection for 2019 back to 3.2 percent.
Both forecasts are within the government’s target range of 2 percent to 4 percent from 2017 to 2019.
“While there may be potential transitory effects on consumer prices from the tax-reform program, various mitigation measures and the resulting improvement in output and productivity are also expected to temper the impact on inflation over the medium term,” the BSP said in its most recent monetary-policy meeting.
“Meanwhile, the proposed reforms in the rice industry involving the replacement of quantitative restrictions with tariffs and the deregulation of rice imports could serve to reduce inflation,” it added.
The DOF also said earlier this week that reforms in the process of rice importation could bring down rice prices by as much as P7 per kilo.
Rice is one of the major drivers of inflation in the country, being the staple food of every Filipino household, as it weighs heavily on the local consumer price index basket.
The current administration’s ability to deliver the tax-reform program into actuality has received acclaim from several researchers and analysts outside of the country, the latest of which is international credit watcher Fitch Ratings. The passage of the TRAIN, Fitch said, has been one of the considerations behind its latest upgrade on the Philippine sovereign rating to “BBB.”
“Fitch expects the Philippines’s fiscal profile to improve as a result of the government’s tax-reform initiative…. We estimate the bill to be net revenue positive, reflecting an expansion of the VAT [value-added tax] base and higher taxes on petroleum products, automobiles and on sugar-sweetened beverages, which would more than offset a lowering of personal income taxes,” Fitch Ratings said.
“Passage of the first part of the tax package would bode well for progress on the rest of the package over the next couple of years. The government previously estimated that a full set of tax-reform packages would boost revenue by 2 percent of GDP by 2019, with administrative measures to add another 1 percent of GDP over this period,” it added.
‘Hot’ money inflow
Foreign investors have also expressed optimism in the passage of the tax-reform program in the country, which translated to higher “hot” money inflows in recent months.
In November this year, for example, foreign portfolio investments (FPI) to the country yielded a net inflow of $108 million, a reversal from the net outflows recorded in October 2017 of $563 million.
The BSP said the development may be attributed to positive investor reaction, particularly to three recent developments, including the then Senate’s approval of a higher personal income-tax exemption of P250,000 annually, as part of the Senate version of the government’s tax-reform program.
FPI are more popularly known as hot or “speculative” money because they are easily pulled in and out of the local platforms, depending on the winds of global and local sentiment.
Image credits: AP/Aaron Favila
Thank you Monsieur PDong du Terte for signing the TRAIN into law and vetoing five line rider items.
May we remind our DBCC that future TRAIN tax measures should include a focus to boost labor productivity which is the most important driver of economic improvement, by boosting wages and improve the standard of living for all workers.
And this can be done through taxation by making it fairer, simpler, efficient, effectgive, equitable, equal and uniform in the application of the burden of taxation .
It is an integrated process which has its objective the growth of the economy — of which the majority is small and medium size businesses, as follows;
1) Accelrated depreciation of equipment. By allowing businesses to immediately deduct the cost of new equipment. By making labor more effective, this then translates to better pay. By investing in technology and machinery, this are the elements most crucial in boosting overall labor productivity. Investments in advance modern technology and machinery are the elements most crucial in boosting overall labor productivity. By making labor more valuable, employers can pay employees more and in this manner keep them. But in order for employers to do so, employees have to be more productive by having tools of productivity.”
2) Interest on debt. By making net interest deduction 100% of Ebitda, which makes borrowing money easier for small and medium size business and entrepreneurs – innovators.
This issue also integrates to the accelerated depreciation equipment. Because without the ability to borrow money and making interest payment 100% deductible easy, small businesses will have a tougher time purchasing the machinery that could enhance labor productivity.
3) Corporate tax cut. Small and medium size businesses need to be on equal footing with large corporations, which can be done by creating a Level Playing Field for all business, whether small, medum or large corporate businesses. This can done by a favorable and competitive tax rate which will provides more money to invest into labor productivity enhancing capital expenditures. And that reinvestment in new and improved equipment will then improves labor productivity, which then allows a business to rationalize paying higher wages to its employees.
Trivia. For the curious, we address our Philippine President as “Monsieur PDong du Terte”, because the du Tertes were French immigrants who settled in Cebu and then moved to Davao.