Diluted tax reform still feasible — Credit Suisse

THE LATEST VERSION of the tax reform package approved by the House of Representatives last week remains workable despite some watered-down provisions, an analyst at Credit Suisse said, as it would still provide a fresh stream of government revenues that could even bag a credit rating upgrade for the Philippines.

In a research note, the Zurichbased bank said there should be not much worry despite some dilution in the first tranche of tax reform which the House approved on May 31 compared to the original proposal which the Department of Finance ( DoF) submitted to Congress in September last year.

House Bill ( HB) No. 5636 — an amended version of the Executive’s tax reform plan — was passed on third and final reading just before Congress adjourned the first regular session after it received a push from Malacañang as President Rodrigo R. Duterte certified the bill as urgent.

“We believe what matters most from the credit rating agencies’ perspective is the revenues generated over time, and not just one year’s revenues. While the revised version of the bill implies that some revenues will be backloaded, the total tax receipts generated by 2020 are actually quite similar,” bank economist Michael Wan said in a May 31 report released over the weekend.

Under the proposed law, personal income tax rates will be adjusted to shift some burden off lower income segments towards

the “ultra-rich,” with those earning P250,000 a year to be exempt from paying taxes. On the other hand, those earning at least P5 million annually will pay P1.45 million plus 35% of the amount beyond that threshold.

Lower income tax inflows will be offset by higher excise duties on fuel and cars, a P10-per-liter excise tax on sugar- sweetened drinks and the removal of valueadded tax ( VAT) exemptions for several sectors. However, the House made a last-minute decision to keep cooperatives’ VAT break, while the tax exemption threshold for bonuses and benefits was raised to P100,000 from P82,000.

A key difference between the House and the DoF versions are tweaks on automobile excise tax, with the Executive saying that the House’s latest proposal would yield about P10 billion less than the P24 billion that had otherwise been projected for 2018 under the original plan. Moreover, HB 5636 seeks to classify car tax rates under five brackets, to be implemented two years after the passage of the law. This is against the DoF’s proposal of four tiers effective 2018.

Despite these disparities, Credit Suisse views the passage of the tax reform plan as generally positive, noting that it will help raise public spending by one percent of gross domestic product (GDP). By 2019, the bank expects total state spending to be equivalent to 19.5% of GDP from an expected 18.1% by the end of this year.

At the same time, the passage of the first tax package does not assure the government can fully roll out its P8.4- trillion infrastructure spending plan towards 2022, with Credit Suisse noting that implementation “remains the main binding constraint” for state projects.

The government is looking to raise the share of infrastructure spending to 7.4% of GDP by 2022, which in turn is expected to bring overall economic growth to as much as 7-8%.

The bank said that the tax bill is unlikely to discourage household consumption — a key growth driver — despite the higher levies on fuel and cars.

“The tax reform as a whole package will likely be neutral to a slight positive for private consumption in 2018, after taking into account the targeted cash transfers and social support to lower income households built into the legislation,” the report explained.

Mr. Wan said the passage of the tax bill will likely merit a rating upgrade: “We see a good likelihood that the Philippines will get a credit rating upgrade by Fitch, if the revised tax reform bill passes as it is written.”

The Philippines currently holds a “BBB-” rating with a “positive” outlook from the debt watcher, which is the minimum investment grade. A higher credit rating means it would be cheaper for a country to borrow funds.

Still, Credit Suisse said fresh adjustments amid upcoming Senate deliberations that would “significantly reduce long-term revenues” could affect the country’s fiscal position.

The measure will be taken up by the Senate for a fresh round of discussions and approval, and needs to be harmonized with the House version before it can be endorsed for the President’s signing into law.

“Our analysis rests on the assumption that there will not be significant dilution to long-term revenues from the latest approved version of the tax reform legislation,” Credit Suisse said in its report.

“Any such dilution could be negative for the country’s credit rating prospects and could eventually also limit the government’s planned infrastructure drive.”

The Executive wants to implement the first tax reform package by January 2018. The DoF is preparing the second package, which includes a plan to reduce corporate income taxes and removal of fiscal perks of some industries. —