Claims holding the Tax Reform for Acceleration and Inclusion (TRAIN) law hostage for allegedly causing inflation to spike in recent months are a canard and should be dismissed by supporting Package 2 of the Comprehensive Tax Reform Program, the Department of Finance (DOF) said on Tuesday. Package 2 seeks to cut the corporate tax rate while rationalizing the fiscal incentives to sustain the gains posted in the first few months of the year.
Thus, Finance Secretary Carlos G. Dominguez III urged lawmakers to approve Package 2 so as “not to stop the train from moving forward,” and that the TRAIN provided the government the funds to support aggressive spending on infrastructure, education, health and social-protection programs.
“The success we have so far achieved with the first tax-reform package is encouraging, but we cannot and should not stop the train from moving forward,” Dominguez said.
He argued the TRAIN accounted for only four-tenths of a percent of the 4.5-percent inflation rate in April, which means that, for each peso increase in prices, only 9 centavos can be attributed to the TRAIN. This runs counter to reports that the implementation of the TRAIN was the major cause for higher inflation over the past several months.
“TRAIN has been unfairly blamed for the elevated inflation rate we are currently experiencing. By our estimates, fully two-thirds of April’s 4.5-percent inflation rate was typical of a rapidly expanding economy. The remaining was due mainly to sharp increases in key imported commodities, specifically oil, the realignment of currency exchange rates and a robust increase in domestic demand,” Dominguez said.
According to him, the TRAIN’s biggest impact was not on basic commodities but on nonessential items like tobacco and sugar-sweetened beverages.
Of the 4.5-percent inflation in April, only 3 percentage points was due to increased demand across the economy, 0.2 percentage points to higher cigarette prices after the Mighty Corp. buyout, 0.4 percentage points due to the TRAIN and 0.7 percentage points from profiteering or unwarranted price increases.
Dominguez lauded the leadership and members of the House of Representatives for passing the TRAIN, which increased the purchasing power of 99 percent of the country’s salaried workers in the form of personal-income tax cuts and allowed the Bureaus of Internal Revenue and of Customs to exceed their collection targets in the first quarter
of this year.
House Bill 7458, representing Package 2 of the tax-reform program, aims to lower the corporate-income tax (CIT) and reform the investment incentives system.
Dominguez said the overhaul of the corporate-tax structure, particularly the granting of investment incentives, is necessary given the defects that prevent the Philippines from attracting foreign direct investments.
A total of P301 billion-worth of potential revenues have been given away by the government in the form of generous incentives as exemptions from the CIT, the value-added tax and customs duties in 2015 alone.
He said Package 2 will continue to grant incentives to businesses, but the government must now ensure “that every peso given up as an incentive must benefit the society in the form of better jobs, faster innovation and countryside development.”
Dominguez also said some of the business incentives under the current tax regime are “entirely unnecessary given the inherent attractiveness of our market size, our natural and human advantages and our freshly gained competitiveness.”
Finance Undersecretary Karl Kendrick T. Chua told reporters there is a need to rationalize the fiscal incentives system to achieve a balance in the corporate-taxation system.
“We have to rationalize the incentives. The details are something we can discuss if there’s a better suggestion. How long, what rate, what industry…that is the meat of the report. We can discuss if there’s a better proposal, but [it should be] performance-based, targeted, time-bound and transparent,” Chua said.
He also said the DOF is open to comments from Congress, as well as from stakeholders, and expected more suggestions for Package 2.
“This is just the first hearing, I’m sure there will be many brilliant ideas. We have a cost-benefit analysis, which we promised to present at the next hearing. Any tax increase, of course, will affect the industry. But that is a narrow way of looking at the story. What about the infrastructure, the [ease of] doing business, the corruption, the credit rating, the investor confidence, all these are important factors that should be properly alluded to also,” he said rhetorically.
The fiscal reform group Action for Economic Reforms (AER) echoed the sentiments of the DOF, stressing that, with enhanced targeting, design and administration, the fiscal incentives regime will work better for industries, the economy and the country.
“A proactive approach is imperative. The adjustment might be temporarily painful, but eluding change is even more detrimental, maybe not for the few companies afraid of losing their current privileges but for the many more that could finally enjoy them and the economy in general,” AER Senior Economist Jo-ann L. Diosana said.
The AER said incentives data should be made publicly accessible, and that the investment-promotion agencies and the Fiscal Incentives Regulatory Board should include in its mandatory disclosure, the name and nature of activity/enterprise, as well as the type and amount of incentives received.