THE “Road to A,” a campaign launched by the Duterte administration this year, has given the House of Representatives more impetus to immediately pass measures under the Comprehensive Tax Reform Program (CTRP). The government declared that it will shoot for an “A” credit rating in May, right after debt watcher Standard & Poor’s (S&P) upgraded the Philippines’s credit rating to “BBB+.”
This is because a good credit rating will reduce the cost of borrowing in the international capital markets for the Philippines and will promote the country as a viable investment destination.
Efforts are now under way in Congress to help boost the Philippines’s chances of getting another credit rating upgrade from international debt watchers. The legislative blueprint to make the economy more robust and the taxation system fairer has already been laid out and has advanced in the House of Representatives.
House Committee on Ways and Means Chairman Joey Sarte Salceda said previous administrations also pushed several tax reforms, but these were “not this far-reaching and not this comprehensive.” Salceda, an economist, said the CTRP is the “most significant” economic legislation after the 1987 Constitution with positive footprint on almost every sector of the economy.
With these reforms, Salceda said the Philippines will be in a position to secure an A credit rating by 2022 from S&P Global Ratings.
“The scale, scope and speed of the reform, given the fact that [the CTRP particularly] Corporate Income Tax and Incentives Reforms or Citira, and Passive Income and Financial Intermediary Act or Pifita, together. are possibly most significant legislations after the 1987 Constitution,” he said.
The Citira, Pifita, the bill providing additional excise taxes on alcohol products, heated tobacco and vapes products and the Real Property Valuation Reform bill are all part of the CTRP.
President’s blessing
“Without the presidential halo or the seal of approval and direct pronouncement in two consecutive State of the Nation Addresses [Sona] we would expect that these [measures] would have gone longer and less ambitious,” Salceda said.
The lawmaker said President Duterte’s “record-high popularity” has provided a big boost to the efforts of the administration to push the tax-reform measures.
“Without the presidential desire I think it is unthinkable to see such immediate, expeditious approval of tax measures,” he said.
“Popularity was a guide to many of us [lawmakers]…we will definitely give him the weapons to pursue the national goals of a safe and comfortable for all, A rating by 2022 and upper middle-income country next year probably,” Salceda added.
Rationalizing fiscal perks
Salceda said the House of Representatives already endorsed for Senate approval the proposed Citira, which seeks to boost the country’s GDP by 3.6 percent annually while adding only 0.9 percent to inflation.
The bill aims to ensure that the grant of fiscal incentives helps bring the “greatest benefits,” such as higher and more dispersed investments, more jobs and better technology.
It also seeks to ensure fairness and transparency in the grant of fiscal incentives while enhancing the accountability of taxpayers through more efficient tax administration.
“Citira is the most significant economic legislation in 34 years, saying the etymology of Citira is a gift from God, so let us make it work for everyone especially for the next generations,” he said.
‘Complicated’ tax code
House Committee on Economic Affairs Chairman Sharon Garin admitted that the Philippines has a very “complicated” tax code, making people who have little knowledge of it vulnerable to manipulations.
“It is then to no surprise that the Philippines has the highest corporate income tax rate among Asean countries. Cambodia, Thailand and Vietnam manage to give 20-percent corporate income tax [CIT] while the Singapore dares to give only 17 percent,” said Garin.
“Our neighboring countries Malaysia and Lao PDR [impose] 24 percent while giant countries like China and Indonesia have 25 percent, but still lower than our current 30-percent CIT. This means that we have been far behind our neighboring countries with respect to local and foreign investments,” she added.
Citira, or Package 2 of the CTRP, is targeting to slash the 30-percent CIT to 20 percent gradually by lowering the rate by 2 percent every two years.
House Deputy Speaker Luis Raymund Villafuerte said the passage of Citira supports the Duterte administration’s vision of financial inclusion as it will benefit some 90,000 small and medium enterprises.
The bill, he said, also supports the President’s goal of regional or countryside development as it encourages investments in underdeveloped areas, such as communities recovering from armed conflict or major disasters by offering additional tax deductions for companies incurring expenses for public infrastructure, utilities, irrigation, among others, on top of receiving tax incentives beyond the five-year limit.
Villafuerte said that under the bill, companies can get multiyear incentives in the form of income tax holidays (ITH), and even lower CIT rates and for longer periods if they locate in the countryside.
Under the bill, investments in Metro Manila will now enjoy ITH for three years and additional incentives for two years. Those locating in areas adjacent to Metro Manila will have four years of tax break and three years of exemptions.
Investors who will set up shop in regions outside of Metro Manila will get to enjoy six years of ITH and four years of additional tax perks.
The bill also removes the perpetual 5 percent on gross income earned (GIE). Under the bill, investors and locators are encouraged to reapply after the five-year or seven-year period to qualify for another five years of incentives.
Package 4
Also ready for Senate approval is Pifita, or House Bill (HB) 304, which seeks to rationalize the taxation of the financial sector so that it becomes “simpler, fairer, more efficient and regionally competitive.”
The measure, or Package 4 of the CTRP, reviews the taxes imposed on financial intermediaries and the products they offer: on savings and investments; and debt and equity instruments.
Under the bill, interests, dividends and capital gains will be levied with a unified income-tax rate of 15 percent. Unifying and lowering the tax rates on interest income is expected to benefit 75 percent of deposit account holders who are mostly small savers.
Income from assets which only the rich have access to, such as long-term deposits, Foreign Currency Deposit Units, and dividends from stocks, are subject to lower rates from zero to 15 percent. The Pifita aims to generally harmonize all of these rates to a uniform 15 percent.
HB 304 aims to make insurance products more affordable by lowering the tax on insurance. It will fix the unequal treatment for insurance products with similar nature such as life, health, HMO, preneed and pension, and lower the documentary stamp taxes on nonlife insurance.
Under the measure, tax on savings will go down from 20 percent to 15 percent. The rich who invest in dividends will pay 5 percent more in taxes.
The bill seeks to reduce the current unique number of tax rates and bases from the current 80 to 36.
Government is expected to earn P4.2 billion from this measure.
Alcohol, vape taxes
Another Duterte administration priority bill, which will slap additional excise taxes on alcohol products, heated tobacco and vapes, is also pending before the Senate.
HB 1026, or Package 2 Plus B of the CTRP, seeks to amend Sections 141, 142 and 143 of the Republic Act 8424, as amended or the National Internal Revenue Code of 1997.
Garin said government projects and programs like Universal Health Care are made possible by taxes. She said HB 1026 seeks not only to increase the excise tax but also to address the inequality in the collection of taxes from “sin” products.
According to Salceda, HB 1026 will give the government P17 billion in revenues lower than the yield from the DOF-Department of Health version, which will generate P32.94 billion.
Without reform, Salceda said the Philippines will record 30,579 alcohol-related deaths in a year.
The bill seeks to increase the excise tax imposed on distilled spirits by P6.60, compared to what is implemented under RA 10351, or the Excise Tax Reform law on alcohol and tobacco. Currently, RA 10351 imposes a specific tax of P22.40 and ad valorem tax of 20 percent on distilled spirits.
Under the bill, starting January 2020, an ad valorem rate of 22 percent including specific tax rates per proof liter of P30, P35, P40, P45 from 2020 to 2023 will be imposed on distilled spirits. The rate will be increased by 7 percent annually starting 2024.
The committee also approved a shift to a unitary rate of P650 plus ad valorem of 15 percent for sparkling wines, compared to the two-tier system under RA 10351. It will go up by 7 percent annually starting 2024.
The bill said cooking wines with salt content of not less than 1.5 grams for every 100 milliliter (ml) will be exempted from excise tax.
The tax on still and carbonated wines with lower than 14 percent alcohol content was increased by P2.10 (from P37.90 to P40), while those with an alcohol content higher than 14 percent saw an increase of P4.10 effective January 2020. It will be increased by 7 percent every year thereafter.
Also, the approved tax rate on fermented liquors was P28, P2.60 higher than the P25.40 mandated by RA 10351. It will be increased by 7 percent every year thereafter.
Under HB 1026, heated tobacco products or the so-called e-cigarettes, will be levied P45 per pack of 20 beginning January 1, 2020, P50 in 2021, P55 in 2022 and P60 in 2023, and a 5-percent yearly increase effective January 1, 2024.
Vapor products, individual cartridge, refill, pod or container of its liquid solutions or gel will be taxed P10 per 10 ml. If the product is more than 50 ml, it will be charged P50 excise tax plus P10 per additional 10 ml.
The rates imposed on vapor products shall rise by 5 percent every year effective January 1, 2024.
The measure also provides excise taxes on nicotine salt and classic nicotine from P30 to P45 from 2020 to 2023, respectively, and an additional 5 percent after 2024.
The bill carries stiffer penalties for illicit tobacco trade, with cash fines.
Of the taxes that will be collected, 80 percent will be used exclusively for the implementation of the Universal Health Care (UHC) law and health programs to be determined by the Department of Health.
The DOF said the government needs P257 billion for the first year of the implementation of the UHC law in 2020.
Portions of the revenues collected shall also be allocated and divided among the tobacco-producing provinces and used exclusively for programs to promote economically viable alternatives for tobacco farmers and workers.
Property valuation
The chairman of the House Committee on Government Reorganization, Rep. Mario Vittorio Mariño, sponsored HB 4664, or the real property valuation reform bill. He said the proposal is a legislative initiative to institute reforms in the country’s real property valuation.
The measure, which represents Package 3 of the CTRP, was first filed in the 14th Congress and was approved on second reading on January 19, 2010. It was refiled in the 15th Congress, and was approved on second reading on March 21, 2012, and on third reading on May 21, 2012. It was then transmitted and received by the Senate on May 23, 2012.
In the 16th Congress, it was refiled and approved on second reading on December 11, 2014, and on third reading on December 15, 2014. It was transmitted and received by the Senate on December 17, 2014.
Last 17th Congress, it was refiled and the House approved the measure on November 12, 2018. It was transmitted to the Senate the following day, November 13, 2018.
Currently, the bill is awaiting second reading approval.
Mariño said the bill aims to promote the development of a “just, equitable and efficient” real property valuation system.
“The reform will broaden the tax base for local and national property and property-related taxes, and expedite valuation-based government activities, such as right-of-way acquisition and administration of land transfer taxes. This will neither impose new taxes nor current tax rates since the local government units [LGUs] will continue to set, adjust, and regulate tax rates and assessment levels,” he said.
The Local Government Code (LGC) of 1991 grants LGUs the power to create their own sources of revenue, and enjoy genuine and meaningful local autonomy.
“This is to enable LGUs to attain their fullest development as self-reliant communities and make them more effective partners in nation building.
However, the progressive dependence on internal revenue allotment [IRA] still manifests despite the devolved responsibilities, powers and functions provided under the LGC,” he added. While real property is considered the most important natural resource and the biggest financial asset of a country’s wealth, Mariño said LGUs fail to maximize the possible financial contribution that real properties may provide.
“What used to be a major contributor to own-source revenues of LGUs, real property tax is now contributing only 29 percent, on the average. And there are a number of reasons why this is the case,” he said. The bill aims to harmonize the real property valuation for taxation purposes, which releases the BIR from promulgating the Schedule of Zonal Values. The national government also stands to save millions by preventing cost overruns due to delayed project completion.
To ensure that there is no undue expansion in the bureaucracy, the Real Property Valuation Service within the Bureau of Local Government Finance will be established as indicated in the bill. The RPVS will oversee and manage valuation related concerns of local governments.
The bill also aims to develop a comprehensive and up-to-date electronic database of real property transactions that will provide greater transparency in land transactions and translate to higher confidence in the real-estate market.
Salceda said this Real Property Valuation Reform Act (RPVRA) is expected to boost the country’s GDP, and encourage both private and public investment.
“The RPVRA is a boon to the economy. In the short term, it will immediately expand the economy. In the medium term, it will create a stable environment for investment in the property market. In the long term, it will boost the economy further by enabling more public investment in education and infrastructure,” he said.
Image credits: Bernard Testa, Nonoy Lacza