WITH less than a year left, the Duterte administration is racing against time to pass the remaining packages under the Comprehensive Tax Reform Program (CTRP) and other pending economic reform bills to revive the pandemic-battered economy.
Passing the rest of the tax reforms is also crucial in overturning international credit watcher Fitch Ratings’ “negative” outlook of the Philippines, according to the Office of the Spokesperson of the Department of Finance (DOF).
While Fitch Ratings revised its outlook on the Philippines’s rating down to “negative” from “stable” as it cited the strong impact of the pandemic on the economy, it affirmed the country’s rating at “BBB.”
“We also emphasize that the credit bench markers are closely watching our progress with the tax reforms. However, in their latest report released this July, Fitch Ratings cited our progress in enacting the comprehensive tax reform program as a positive, which likely helped us keep our sovereign credit rating. Passing the rest of the tax reform will help us maintain our credit grade and reverse the negative outlook given by Fitch,” the DOF said in an e-mailed response to the BusinessMirror.
From the pre-pandemic level of 14.5 percent in 2019, the country’s tax effort also dropped to a low 13.9 percent in 2020 as the economy went into a recession due to the pandemic.
“This downtrend may continue given no change in tax policy,” the DOF said.
Under the CTRP, the government has yet to pass Package 3 or the Real Property Valuation and Assessment Reform Bill, as well as Package 4 or the Passive Income and Financial Intermediary Taxation Act (Pifita), both still pending at the committee level in the Senate.
The Real Property Valuation and Assessment Reform Bill aims to adopt internationally accepted standards and professionalize real property valuation to promote investor confidence. Meanwhile, Pifita simplifies the taxation of passive income, financial services and transactions to make the Philippines competitive in attracting capital and investments needed to finance large-scale infrastructure, create jobs and boost economic growth.
For economist and De La Salle University professor Maria Ella Oplas, however, it would be an uphill battle for the government to pass new fiscal and economic reforms, especially as election time draws near.
“I don’t think there will be anything new from now until election time because [my feeling is that] the focus [really] is the election time; the people’s mindset is on the election,” Oplas told the BusinessMirror, in a mix of English and Filipino.
While she agrees on the need to pass these two remaining tax reforms for the country to obtain a better outlook and credit grade from Fitch Ratings—as this will show the Philippines’s capacity to pay its debt—she said it would be better to delay the implementation of the Real Property Valuation Reform Bill.
Caution on property valuation
“This is something that is long overdue but may not be appropriate right after a pandemic when businesses badly need help to recover,” she explained.
She is concerned the bill may also negatively affect investments in the country, even as she acknowledged it can be a way for government to generate revenue.
“It will raise real property valuation, which can drive up rentals. As we know, rental is a primary factor for production. If rental goes up, it can discourage investment,” she said. “It can be an awesome way to generate revenue for the government but again if you drive away investments and kill businesses, where will they get their revenues?”
Given these concerns, Oplas said the government can signal the intent to pass the reform but implement it on a later date.
In the meantime, the government can go for the other packages and reforms that can bring revenues. Pifita, for one, will help financial intermediaries recover from the impact of the pandemic.
“Package 4 can help make financial, intermediary tax simpler, efficient and less prone to integrity issues. I go for it,” she said.
Apart from tax reform packages, the DOF also pushes the bill to correct the current corporate and military pension systems to ensure fiscal sustainability and avert the ballooning of the military and uniformed personnel (MUP) pension budget to “unsustainable levels”—something that could negatively impact economic growth in 2030.
“Without the reform, the Philippines could experience a contraction of the economy by as much as -12.3 percent in 2030, significantly worse than the growth impact of the 2008 financial crisis of -2 percent. Eventually, the national government will not be able to continue allocating a big portion of the annual budget for the MUP pensioners,” the DOF said.
The DOF also hopes to see passage of the Capital Market Development Act of 2021 to further deepen the domestic capital markets by building a sustainable corporate pension system; and the amendments to the Foreign Investment Act, Public Service Act, and Retail Trade Liberalization Act to further liberalize the economy.
“We intend to complete the remaining packages under the Comprehensive Tax Reform Program and the other economic reform programs previously mentioned. However, if these are not passed, we strongly urge the next administration to continue pushing for these reforms,” the DOF said.
Oplas also favors passing the amendments to the Retail Trade Liberalization Act and the Foreign Investment Act, saying these are needed amid globalization.
Good foundation
Nonetheless, she noted, the administration has already laid out the foundation for the succeeding fiscal reforms with its passage of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) and the Tax Reform for Acceleration and Inclusion (TRAIN) Act.
“In my view, they have laid a good foundation because …TRAIN is on the consumer side and the labor side, but at the same time…CREATE is really for the supply side,” she said, partly in Filipino.
The DOF has touted CREATE as the “largest fiscal stimulus for firms” in recent history by providing P1 trillion worth of tax relief over the next 10 years. It did not only reduce the corporate income tax (CIT) rate; it also paved the way for the rationalization of incentives for businesses.
CREATE cut the regular CIT rate from 30 percent to 20 percent for domestic corporations with taxable income of P5 million and below, and with total assets of not more than P100 million; while corporations that earn a taxable income above P5 million benefit from an immediate reduction of CIT rate from 30 percent to 25 percent.
Meanwhile, the TRAIN law provided a “robust and recurrent revenue flow that expanded social services and supported the country’s massive economic investments in modern infrastructure,” the DOF said.
For the first three years of TRAIN’s implementation, the DOF said the government raised P305 billion in incremental revenues. It also reduced personal income taxes for 99 percent of taxpayers.
Excise taxes
The Duterte government is also the only administration that increased excise taxes three times within one presidential term, according to DOF.
“The excise taxes on tobacco and alcohol products improved funding for the Universal Health Care Program—which is another landmark reform of this administration,” it said, noting that more than half or P93.57 billion of the total budget for health came from the 2019 “sin” tax collections.
“This is almost twice the sin tax revenues earmarked for health in 2016, at the start of this administration.”
The Tax Amnesty Act complemented the TRAIN law by letting errant taxpayers settle their outstanding tax liabilities, while providing the government with additional revenue for priority social and infrastructure programs.
“These reforms have helped us fund and enact our economic stimulus bills—Bayanihan 1 and 2—which put in place several emergency measures to help businesses, especially those in hard-hit sectors, continue to operate amid the pandemic,” the DOF pointed out.
To cushion the impact of the pandemic on banks, the Financial Institutions Strategic Transfer (FIST) Act was also enacted to allow banks to offload souring loans and assets, clean up their balance sheets, and extend more credit to more sectors in need.
RTL, Build, Build, Build
Oplas also commended the administration for passing the Rice Tariffication Law in a bid to ease the price of rice and also for pushing through with its Build, Build, Build program despite the pandemic, adding these programs would definitely help the country navigate the post-pandemic era.
“[That’s what’s] important [to me]: we are ready when we finally open up for business again,” she said.
For the country to thrive in the post-pandemic era, Oplas said the next administration should focus on reforming the revenue collection agencies to make them more efficient, which she deems a better move than imposing new taxes for the country to manage its ballooning debt. Although she understands the need for the government to borrow more money especially amid the pandemic, she said accountability is still important.
“Through the years our agencies have dealt with problems of collection; so it’s like, our revenue collection reforms have no teeth because they are not being implemented properly. So I am not pro any new tax but I believe there should be reforms in the revenue collection agencies,” she said.
She also hopes the next administration will continue the Build, Build, Build program, review the country’s intellectual property rights, replace the Department of Trade and Industry’s One Town, One Product program, and invest in human resource development.