By VG Cabuag, Bernadette D. Nicolas, Cai U. Ordinario & Elijah E. Rosales
ON a bright September day, Finance Assistant Secretary Antonio Joselito G. Lambino II sang with gusto his original composition “Munting Harana,” which some could take as his attempt to serenade those digging in their heels on the sand as the Department of Finance (DOF) tweaks the state’s fund-raising strategy.
“At ako ang ’yong [and I’m the] leading man,” Lambino sang while strumming a guitar: offering to be a leading man as the DOF seeks to have a Philippines tagged as a high-income country just like Japan and South Korea, with no extreme poverty, by 2040.
For that is the scene that Lambino and the DOF wants to remain in the minds of Filipinos as it pushed, and is still pushing for, the rest of the Comprehensive Tax Reform Program (CTRP).
He said at the BusinessMirror Coffee Club Forum that with higher growth, the Philippines is scheduled to become an upper-middle-income country (Umic) by 2021.
It was supposed to be 2020 but we moved it when the World Bank changed the upper-middle income threshold above the $3,988, according to Lambino.
He also noted that the latest poverty data is encouraging.
In the first semester of 2018, the Philippine Statistics Authority (PSA) reported that poverty incidence among the population was at 21 percent, lower than the 27.6 percent recorded in the first semester of 2015.
While many share Lambino’s Philippine economic growth story taking new heights, unfortunately not everybody is ready to welcome the reforms needed to realize the dream.
Thus, the serenade.
Vested interest
THE passage of the tax reform packages has since been touted as the way by which the government would be able to unlock this new chapter of economic growth and trickle down its effects to the poorest of the poor.
Speaking at the BusinessMirror Coffee Club Forum, Lambino admitted that pushing for a fairer and equitable tax system in the country is no easy feat.
Groups would easily welcome the proposed tax reform program as a whole but not those parts of which will affect them.
“If we add all the special adjustments that each vested interest group would like us to change, [there won’t be anything left in our] packages, naubos na po siya[These would be depleted],” Lambino said.
While the DOF was successful in passing several packages under CTRP, Lambino said they know that the journey to institutionalizing real and lasting change is far from over as there are still some packages that need to hurdle congressional approval.
The DOF is crossing its fingers that it can meet its “fighting target” of having the remaining tax reform packages passed within the year.
Implementing TRAIN
IN legislating the first tax package, the government had to face consumers who opposed hiking duties on basic goods, including fuel. Still, the state gained the upper hand and out came the Tax Reform for Acceleration and Inclusion (TRAIN) law.
After more than two decades of neglect, 90 percent of income taxpayers finally saw a reduction in their personal income taxes due to the passage of the TRAIN, the first package of CTRP. The TRAIN law exempted those earning a gross annual salary of P250,000 and below from paying personal income tax.
In exchange, it imposed excise taxes on fuel and petroleum products, as well as on sugar-sweetened beverages, coal, automobile, among others.
In effect, for the whole of 2018, inflation—or the general increase in commodity prices—rose month after month following the implementation of the TRAIN law. It peaked to a record high 6.7 percent in September and October before settling within manageable levels.
However, Action for Economic Reforms (AER) Coordinator Filomeno S. Sta. Ana III explained that the spike in inflation last year was not because of TRAIN but the mismanagement of the country’s rice policy.
Still, trade officials believe the impact of the TRAIN law turned out to be a warning for senators to go easy in passing the remaining packages of the CTRP.
Sta. Ana III, however, told the BusinessMirror that all the packages in the CTRP contain much-needed reforms, even the TRAIN.
He disputed claims that the tax reform program was anti-poor, given the improvement in the country’s poverty incidence in the first semester of 2018.
Like Poland, Korea
ENTER phase two of the CTRP: first dubbed TRAIN 2, then Tax Reform for Attracting Better and High-Quality Opportunities (Trabaho) bill and now the Corporate Income Tax and Incentives Rationalization Act (Citira) bill.
Package 2-plus, which sought an increase in tobacco excise taxes, was passed under the 17th Congress as a means of helping fill the financing gap for the Universal Health Care Law.
CTRP’s Package 1B on tax amnesty was partially passed. The tax amnesty on estate and delinquencies was signed into law but the general tax amnesty provision was vetoed because of the removal of the provision lifting absolute bank secrecy.
As the Duterte administration is down to its last three years, the economic managers are now more than ever eager to reduce poverty rate to 14 percent by 2022 and for the Philippines to reach upper middle-income country status in two years where Thailand and China are today.
Once the country achieves these goals, this would mean the national government is just one step closer to its ultimate goal in 2040.
From decades of stabilizing the economy, the country’s economic team is now more focused on achieving shared prosperity, according to Lambino.
“Poland for instance was able to graduate from upper middle-income to high-income country status within 12 years to 15 years and so did South Korea; so that is the vision for the country and that is the context why we are doing this CTRP,” the finance official said.
Years remaining
FOR the next three years, the government will focus on achieving the entire 10-point socioeconomic agenda of the Duterte administration.
While the government pursues the remaining tax reform packages over the next three years, it will also prioritize pursuing economic reforms to increase foreign direct investments and job creation and accelerating the implementation of its Build, Build, Build program.
In emphasizing the need for the CTRP, Lambino said existing taxes are not yet indexed to inflation, leading to revenue erosion. Second, there are many special treatments and exemptions given by the government to vested interests.
“The effects of those problems are that our tax rates are high in general and our tax bases are narrow. Fewer taxpayers pay at higher rates which is not fair, so that is the main issue that we would like to address and the outcome of these problems is that the tax system is not fair and there is lack of equity,” Lambino said. “It is very complex because there are so many special treatments and it is inefficient as well.”
Since the Philippines is seen to be at a disadvantage for having the highest corporate income tax (CIT) rate in the Association of Southeast Asian Nations (Asean) against its neighbors on domestic and foreign investment, the government seeks to lower CIT to improve the competitiveness of business, especially the micro, small, medium enterprises and encourage robust business activity, investment and tax compliance.
Benefitting business
SHOULD Package 2 of CTRP, aka Citira bill, be passed by both Houses and signed into law by the President, this is seen to benefit 98 percent of all corporations, composed mostly of small-medium enterprises, since CIT will be gradually reduced from the present 30 percent to 20 percent over 10 years.
It also aims to rationalize incentives in such a way that the incentives are limited to firms that actually need them and perform well.
Corporations registered for incentives will also provide additional tax deductions for labor cost, training cost, purchases from local suppliers, infrastructure development and accelerated depreciation allowance.
Registered corporations will also be encouraged to generate more and better jobs, be more efficient and competitive, to locate in the countryside, introduce innovation and invest in agribusinesses.
“What we want is a performance-based, targeted, time-bound and transparent [incentive] system. We would like to give incentives for the right reasons. We think incentives are very important,” Lambino said. “And we know that maybe half of those who have enjoyed incentives deserve those incentives because they created good jobs, they invested in the right things such as research and development and training and the like. We would like to encourage more of that behavior.”
Anti-Citira?
HOWEVER, there is strong opposition to the second tax package; and it’s coming from the government’s Philippine Economic Zone Authority (Peza) and its registered enterprises. The Peza and its constituent locators warn that the government will commit a grave mistake in passing the second tax package, claiming this will lead to capital flight and, consequently, job losses.
According to Peza’s interpretation, in exchange of the reduction in corporate income tax (CIT)—one of the main features of the Trabaho bill—firms operating in economic zones will need to give up their fiscal incentives in a span of five years as part of the government’s rationalization plan.
Locators admitted they cannot lose their incentives, particularly the 5-percent tax on gross income earned (GIE) paid in lieu of all local and national taxes. Locators pay this tax instead of the 30-percent CIT after enjoying up to eight years of income tax holiday (ITH) if belonging to a pioneer activity and up to six years of ITH if nonpioneer activity.
They warned that if their incentives are taken away, they will consider moving out of the Philippines and relocate to another Southeast Asian economy.
Done transparently
UNIVERSITY of Asia and the Pacific (UA&P) School of Economics Dean Cid Terosa told the BusinessMirror that just like any policy, the succeeding tax packages will have negative effects. However, these will only be for the short term.
“I believe, in the short run, negative effects will prompt adaptations and adjustments among Filipinos,” Terosa said. “In the long run, and assuming, greater efficiency in tax administration, collection, and use, we will be better off.”
Unionbank Chief Economist Ruben Carlo Asuncion believes there will be winners and losers in the tax reform packages. But the national government must ensure that everything is done transparently, especially in the rationalization of tax incentives.
Asuncion said that one of the tax reforms that will have the biggest impact on the lives of Filipinos is the Citira, but claimed it will help level the playing field for businesses.
This will particularly have an impact on micro, small and medium enterprises (MSMEs) because, Asuncion said, they will benefit from lower corporate income taxes. Due to their number, the MSMEs are the country’s largest taxpayers.
“However, Congress and government must be able to protect current wins in the employment space, careful to protect its wins,” Asuncion said. “More and targeted investments should be encouraged and not the other way around.”
Enjoys incentives
APART from this, Bank of the Philippine Islands (BPI) lead economist Emilio S. Neri Jr. told the BusinessMirror that firms affected by the tax reform packages may need to relocate their businesses and employees.
This is especially the case for business-process outsourcing (BPO) firms affected by the Citira. These firms, Neri said, need to consider relocating to provinces to bring down their costs.
Apart from these firms, Neri said companies that continue to enjoy “perpetual incentives” may close shop. Currently, the Philippines is the only country that provides perpetual tax incentives.
Based on estimates from the DOF, there are around 1,169 firms that have enjoyed tax incentives for over 10 years and majority of them were granted by the Peza.
There are also firms that have been granted these kinds of incentives by the Subic Bay Metropolitan Authority (SBMA), Board of Investments (BOI), and Clark Development Corp. (CDC).
“Some of the unprofitable firms enjoying perpetual incentives may close down but there should be enough new ones to expand or put up new businesses to offset,” Neri said, however.
National Economic and Development Authority (Neda) Undersecretary for Planning and Policy Rosemarie G. Edillon said the remaining tax reform packages are really focused on increasing investments.
Edillon added that other reforms contained in the CTRP aim to make the Philippines more attractive for investments that will “generate more employment, be engaged in more R&D, locate outside NCR [National Capital Region], among others.”
Tax incentives
ECONOMIC zone firms are asking lawmakers to make drastic changes to the Citira bill. They demand that they be excluded from the coverage of the measure, as well as remove the cap on the grant of incentives.
Echoing the Peza’s demand, locators said the Citira bill should be applied to domestic enterprises only, and not to firms operating in economic zones. They argued that restricting the grant of tax perks to local firms will compel them to raise their competitiveness.
Under the Citira bill, locators will need to relinquish all of their incentives, including the 5-percent tax on GIE. They will be provided with up to five years to do this.
For firms registered with the Peza, the Citira bill limited the period for enjoying ITH at three years and additional incentives at five years. Under the status quo, economic zone firms are allowed to enjoy ITH for up to eight years for pioneer activities and six years for nonpioneer activities.
Tax breaks
UPON the expiry of their tax break, they can perpetually pay 5-percent tax on GIE. They will also be exempted from all local and national taxes, enjoy duty-free importation of raw materials, capital gear and spare parts, among others.
Finance officials and lawmakers said this perpetual availment of incentives is what they want to stop in pushing for the passage of the Citira bill.
Salceda, for his part, said the measure will not discriminate between domestic enterprises and locators, rejecting the Peza’s plea to exempt its registered firms from the coverage of the second tax package.
Peza Director General Charito B. Plaza had essentially conceded the Citira bill will make it through the House of Representatives. However, she expressed hope senators will do a repeat of their judgment on the Trabaho bill, and will reject the Citira bill once it is transmitted to them for their deliberation.
According to Sta. Ana, however, “the remaining reforms that are part of the comprehensive reform agenda are likewise necessary.”
He told the BusinessMirror, “The attraction of new FDIs [foreign direct investments] depends on the quick resolution of the fiscal incentive rationalization combined with the reduction of corporate income tax.”
Prolonging passage of this reform “because of the opposition of vested interests led by Peza is the cause of investor uncertainty,” he asserted.
Eliminate disparities
WHILE Package 2 is said to be revenue-neutral, Package 3 seeks to introduce reforms to broaden the tax base used for property and property-related taxes of the national and local governments.
With the use of a single valuation base, this will eliminate wide disparities and achieve consistency in real property valuation.
“We have a lot of unrealized revenues especially at the local government level because the valuations were not adjusted regularly as mandated by the Local Government Code,” Lambino said.
“This is not done because it [the measure] is not popular; and if you are a local government official the disincentive to adjust valuation is huge because this may cause your defeat in the next election. So it doesn’t really happen as much as it should,” he added. “Some LGUs [local government units] are 20 years delayed in their valuation adjustment.”
Due to conflicting appraisals that may lead to court litigations, project details and cost overruns, unnecessary expenses also occur, Lambino explained.
Thus, Package 3 on the Real Property Valuation is needed for the government to reduce these expenses, according to Lambino.
Capacity increase
WITHOUT increasing tax rates or devising new taxes, both the national and local governments can increase their revenues through the adoption of market-based values for taxation purposes.
This will result in an increase in revenue-generating capacity of real property through real property tax (RPT), national government’s real property transfer taxes and others.
The increase in real property tax collection could improve the RPT-to-GDP ratio from 0.36 percent, according to Lambino. Its share to local income will increase to 23 percent, he added.
In addition, strengthening the collection of RPT will boost collections of the special education fund. From an average of P760 per public student, this could increase to P1,040 per student through Package 3, the DOF believes.
AER’s Sta. Ana supports Lambino’s view, adding that the rationalization of land valuation simplifies structure, updates values and “provides illumination” to LGUs in applying their power of taxation.
Aiding the market
COMPLEMENTING the TRAIN, the passage of Package 4 will make passive income and financial intermediary taxes simpler, fairer, more efficient and more competitive regionally, Lambino explained.
This could also pave the way for attaining inclusive growth as it provides a window of opportunity for tax reform in the financial sector, directing the movement of capital to where they are most needed.
The reforms under Package 4 will also enable the country to be more competitive in attracting capital and investments needed to finance the country’s Build, Build, Build program, create more jobs and boost economic growth.
The current number of tax rates is 80, and Package 4 seeks to reduce these by half.
“We want to reduce these to around 40. It is still a lot but we are going to make a lot of progress so that the basis of investing is not because of special treatment but the risk and reward of the instrument, of the product that is being offered to us,” he said.
Some of these reforms include the reduction in the number of final withholding tax rates to 15 percent regardless of currency, maturity, issuer, and other factors; unification of tax rates or the imposition of 15-percent single rate on passive income and harmonization of business taxes on financial intermediaries by imposing a single gross receipt tax rate of 5 percent will be imposed on banks, quasi banks and certain nonbank financial intermediaries.
Moreover, a uniform tax rate of 2 percent of the premium will also be imposed on preneed, pension, life and health maintenance organization insurance; while nonlife insurance will be subjected to value-added tax.
Interest tax reduction
LUIS Limlingan, managing director at Regina Capital Development Corp., said the proposed Personal Income and Financial Intermediary Taxation Act (Pifita) will greatly benefit the financial market as a whole.
“What is helpful will be the reduction of tax on interest for passive investors. That means a lot for those who park their money into high-interest paying instruments,” he said, adding that a “20 percent to 15 percent reduction” in tax payment on interest “is substantial for those tied to passive investments.”
Justino B. Calaycay Jr., head of research for broker Philstocks Financial Inc., meanwhile, said anything that reduces friction cost in investing is a welcome development.
“In essence, anything that will reduce friction cost, whether front-end like commission or back-end like eventual taxes, anything that reduces that amount will have an impact on trade,” he said.
“For retail traders, it may, however, have a minimal impact. But for institutional investors, that is a big impact,” he added.
Calaycay noted, though, how the first tranches of the Train Law raised the sales tax in the stock market to 0.6 percent from 0.5 percent. The bourse was concerned then it will dampen stock trading.
“But it didn’t happen in the stock market and people still traded. It’s dependent on the interest of the people still to trade,” he said.
Calaycay said as a rule of thumb, any changes introduced in the market will have a short-term impact but “at the end of the day, the market will adjust.”
Jumpstart investments
LIMLINGAN believes that in the near term, “the new Pifita bill should partially incentivize current investors to re-enter or increase position in the financial sector, while jumpstarting investments for new entrants.”
He continued: “Long term, the Philippines remains a largely financially underpenetrated country, and government incentives such as this should speed up improvements over time.”
For Claro P. Bonilla, Insular Life Assurance Co. Ltd. chief strategy and financial officer, the proposed Pifita is an incentive for the public to appreciate financial products anew.
“I see it as a boon to the insurance industry because policyholders pay for this tax,” Bonilla said. “Thus, if tax will be reduced, it should work as an incentive.”
With Package 4, the tax on initial public offering (IPO) will also be removed.
The effect of this? Not only will the taxes imposed on the country’s stock exchange be simplified, but this will also allow the Bureau of Internal Revenue to concentrate its collection efforts on more significant sources of revenue, according to Lambino.
This will also rationalize the Documentary Stamp Tax (DST) to promote capital mobility.
Additional taxes
IF there is still time, Lambino said the DOF is also eyeing passage of a legislation to adjust the motor vehicle users’ charge “so that it’s fairer based on the weight of the vehicle.”
The DOF would also like to see the passage of general amnesty together with the lifting of absolute bank secrecy as well as adjustments to the mining tax regime.
“But they are great to have if we are able to pass all of the other tax packages,” he said.
Despite the struggle of passing these economic reforms, the DOF remains optimistic the country can reach high-income country status by 2040 through passing the remaining tax reform packages.
“This will not happen in an equitable way if we will not fix the fairness, the equity and simplicity of our tax system. That is why it is included on our 0-to-10 point agenda,” Lambino said.
But beyond achieving the government’s ultimate goal for 2040, Lambino said what matters most is that people take part in building the steps for those who were not fortunate enough to have the advantages that others have.
“We want to adjust our tax system to contribute to making this fairer,” he said. “It’s really based on a vision of a Philippines that is high-income with zero extreme poverty within one generation.”
High hopes
FINANCE Undersecretary and DOF chief economist Gil Beltran said in a recent statement that for 2020, revenue collections are projected to reach P3.5 trillion, of which P187.1 billion will come from tax reform.
These include P153.8 billion from the first CTRP package (the TRAIN Law); P15.7 billion from Republic Act 11346, which raised excise taxes on tobacco products; and an estimated P20 billion to be collected from Package 2 Plus, which aims to increase excise taxes on alcohol and e-cigarette products.
Package 2 Plus was already approved by the 18th Congress’s Lower House on third and final reading on August 20.
Expenditures for 2020 are expected to reach P4.2 trillion or 19.8 percent of GDP, which translates into a deficit target of P677.6 billion or 3.2 percent of GDP that “is well within the norm for deficit spending,” Beltran said at a briefing by the Development Budget Coordination Committee (DBCC) for senators last Thursday.
Beltran, likewise, pointed out that the passage and implementation of the remaining tax packages and the rest of the fiscal reform agenda will help bring the country to “A” rating territory “within the next couple of years.”
He said the Philippines’ elevation from lower- to upper-middle income country status ahead of schedule next year is proof that the government can accomplish its goal of beating extreme poverty within a generation, “if we stay on course and continue to invest in the right things.”
Image credits: NINLAWAN DONLAKKHAM | DREAMSTIME.COM, Roy Domingo
1 comment
I am exploring the possible business areas and taxes of the Philippines. Thanks for the informative article.