Tax reform in focus amid high PHL hopes
THE GOVERNMENT’S planned tax reforms have come into sharper focus after Fitch Ratings, Inc. on Wednesday tagged them as a linchpin in the Philippines’ bid to achieve faster, more inclusive growth in the next six years.
Fitch affirmed the Philippines’ minimum investment- grade credit rating with a positive outlook, signaling the possibility of an upgrade in the next two years.
But while it cited the Philippines’ strong gross domestic product (GDP) growth, the debt watcher flagged that low revenue collections — seen to grow to an equivalent of 22% of GDP against a 30% median among similarly rated economies — could stand in the way of the administration’s goal of shifting economic expansion to a faster lane in order to lift more Filipinos out of poverty.
Tax revenues rose nine percent to P1.98 trillion last year (13.7% of GDP) from 2015’s P1.816 trillion (13.6%), although they fell three percent short of a P2.044-trillion target for 2016.
Fitch cited the government’s tax reform plan for its potential to give revenues this boost.
“Given the positive outlook of Fitch Ratings and other institutions, the government has more reason to highlight the country’s growth story by moving ahead on such policy reforms as its Comprehensive Tax Reform Program to ensure the financial sustainability of its ambitious program to eradicate poverty and transform the Philippines into a high- income economy in one generation,” Finance Secretary Carlos G. Dominguez III said in a statement yesterday.
But the crucial first of four packages of that program — designed to shift the burden more on those who can afford higher levies while raising additional revenues — has stalled in the House of Representatives, with a leader of that chamber citing his own misgivings yesterday.
While the administration of President Rodrigo R. Duterte and both chambers of Congress have focused attention on the first package under House Bill No. 4774, the measure failed to bag even just committee approval when the House adjourned in the
middle of this month for a sixweek break.
Instead, the Finance departmentsponsored bill was returned to a committee technical working group for consolidation with other versions that were not drafted by the administration.
In its configuration as of Jan. 30, the first package was to result in P139.6 billion in foregone revenues from lower personal income tax, estate tax and donor tax rates as well as raise an additional P302.1 billion from reduced value added tax ( VAT) exemptions, as well as increased excise taxes on cars and oil products, yielding P162.5 billion in net revenues in the first year of implementation.
PROBLEMS
Yesterday, however, saw House Deputy Speaker Romero Federico “Miro” S. Quimbo of Marikina City’s second district spelling out his “problems” with the tax reform package, citing an inequitable tax rate for small selfemployed that wouldn’t “fulfill the entrepreneurial spirit” and insufficient safeguards to protect the poor from the impact of the planned petroleum excise tax hike.
Mr. Quimbo said the proposed eight percent rate for the selfemployed was “designed to fail,” arguing that it constitutes unjust taxation for small entrepreneurs and would discourage them from paying taxes.
“That sector is really the shallow tax base, meaning a great number of them don’t even register, don’t pay a single peso of tax. So you don’t solve that problem by imposing a flat rate of eight percent, because precisely they don’t want to pay taxes,” Mr. Quimbo told reporters on the sidelines of a Tax Management Association of the Philippines (TMAP) member’s meeting in Makati City.
Mr. Quimbo was referring to the proposed eight percent income tax rate, in lieu of VAT and percentage tax, for those selfemployed earning gross sales of up to P3 million a year.
He noted that about 70% of micro and small entrepreneurs — especially those who earn much less than P3 million a year — do not register with the Bureau of Internal Revenue.
Hence, the proposed tax rate would be unfair to the likes of street vendors, since minimum wage earners making roughly the same amount in a year are income tax-exempt.
“So there is inequity between them… Why should he (vendor) pay eight percent?” Mr. Quimbo asked.
“He has a higher risk than the minimum wage worker, he has investments, health risks, all the risks are shouldered. [ While the] employee only has the health risk, and it is the employer [who] shoulders the financial risk.”
Instead of subjecting this segment to a national tax, Mr. Quimbo suggested that local government units (LGUs) just impose a small fee on them in order to put them on the government’s radar screen.
“The problem there is just bringing them into the sunlight. So how do you do that is by coming up with a low fixed rate for them: relatively small, meaning P2,000, P5,000,” Mr. Quimbo said.
“Doon sila magbabayad as an advance payment for the year; tapos pag may kulang dahil mas malaki na kinikita mo, bayad ka ulit (They will make an advanced payment for the year with LGUs, and if it turns out they earned more, they can just pay again),” he explained.
The lawmaker also raised concern over the proposed P6 per liter excise tax on diesel — used by public utility vehicles — due to its impact on low-income households.
“I’m not entirely against excise tax on fuel; all I’m saying is that we have to lessen the impact on the poor,” said Mr. Quimbo.
“If you want to impose excise tax on diesel because the rich use it, then let’s just impose a higher registration fee for higher [-priced] vehicles that use diesel,” he said, referring to sport utility vehicles.
The lawmaker also hoped that products like kerosene and liquefied petroleum gas — widely used by low-income households — would be exempted from an excise tax hike.
SUSTAINABLE
Overall, however, the Philippines’ strong growth should be “sustainable” over the long term, the country’s central bank chief said separately yesterday, with current conditions and ongoing reforms seen supportive of further economic expansion despite risks ahead.
“The country’s economic gains have been built from deeply rooted structural and sound policy reforms implemented over the years. Economic gains are the results of years of disciplined macroeconomic policy making,” Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. said in a statement sent by the government’s Investor Relations Office (IRO).
“These conditions are sustainable in the long run.”
Mr. Tetangco’s statement comes after Fitch affirmed the country’s minimum investment grade rating at “BBB-” with a “positive” outlook late Wednesday. Fitch said the country’s “consistent” economic performance merits keeping its current credit rating and could serve as a push for an upgrade.
The global debt watcher said that the economy has proven to be resilient despite persistent political noise generated by the administration’s deadly war on the narcotics trade.
Fitch expects GDP to expand by 6.8% this year, matching the pace clocked in 2016. If realized, this would hit the government’s own 6.5-7.5% growth goal for 2017, before slightly slowing to a 6.7% climb in 2018 for which a 7-8% pace has been penciled.
In comparison, Moody’s Investors Service expects growth at 6.5%, while S&P Global Ratings sees a 6.6% expansion this year.
Mr. Tetangco said the country’s “broad-based” economic growth is supported by stable inflation, a strong external payments position, and a sound banking system, with “well- grounded” policies able to support future gains.
The BSP expects yearly inflation to remain within the 2-4% target band until 2020, averaging 3.4% this year in the wake of 2016’s actual 1.8% print.
Mr. Tetangco said this would help protect purchasing power and continue to boost consumption by both households and businesses — key drivers of economic expansion.
On the other hand, Fitch sees lower- than- average tax collections and lagging income levels among Filipinos as credit weaknesses.
However, it cited possible gains should Congress approve the Finance department’s tax reform plan.
For its part, the IRO believes that the Philippines already deserves a rating upgrade from Fitch, saying it was already “long overdue.”
The ratings were last adjusted to a “positive” outlook from “stable” in September 2015.
The Philippines holds a “Baa2” rating from Moody’s and a “BBB” rating from S&P — both a notch above minimum investment grade — with “stable” outlooks.
These scores signal a country’s creditworthiness, with higher ratings helping to bring down borrowing costs. — T. Lopez and Tubayan