Making sense of TRAIN
Tax reform is no small risk, as currently the country has been enjoying phenomenal economic growth over the past few years. Any disturbance significant enough might veer the forward momentum off- course at best, and at worst cause it to come to a sudden halt altogether.
THE IMPLEMENTATION of Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion, popularly known as the TRAIN law, brought with it considerable changes to how business is done in the Philippines. The tax reform package intends to lower income taxes for Filipinos while raising excise taxes on sweetened beverages, petroleum, automobiles, and tobacco among other changes to fund the country’s infrastructure development.
Tax reform is no small risk, as currently the country has been enjoying phenomenal economic growth over the past few years. Any disturbance significant enough might veer the forward momentum off- course at best, and at worst cause it to come to a sudden halt altogether.
“It must be noted that in addition to more affordable labor rates, one of the advantages of investing in the Philippines is the grant of tax incentives to foreign investors, whose proposed operations in the Philippines are prioritized. Under the TRAIN law some of the tax incentives currently granted to foreign investors will be rationalized. If in the process of rationalizing the incentive packages, certain specific incentives will be removed, some prospective foreign investors might perceive investing in the Philippines to be less attractive. This perception, while not necessarily fair, might lead to reduced employment opportunities. We are hopeful that this chain of events will not happen,” Atty. Rafael Ma. C. Vinzon, head of Tax Services at Reyes Tacandong & Co., told BusinessWorld.
Yet, remain complacent and the country risks its growth losing steam before making any progress towards actual development . A four th of the country’s needed funds for its ambit ious “Bu i ld, Bu i ld, Bu i ld” infrastructure program is expected to come from the new tax system, infrastructure that can drive further growth in the future. The decision by the Duterte administration to take the risks associated with tax reform was clearly an effort to preserve and protect its future development, and this decision was met with optimism from the broader business community.
But what will the effects be on the short term for consumers and businesses alike?
A double- edged sword awaits Filipinos earning an annual taxable income of P250,000 and below, for while they would be given complete exemption from income taxes among other benefits, the price hike induced by the increased excise taxes on coal and oil would raise the cost of living.
“Salaried workers are unhappy that government is giving them an income tax break while taking it away with tax hikes elsewhere,” Rafael M. Alunan III, former secretary of Tourism and Interior and Local Government, wrote in a column for BusinessWorld.
“Whi le they may have higher take- home pay, the cost of vehicles, electricity, transport fares, wet market and grocery bills will wipe it out and probably exceed the gains,” he wrote.
Mr. Alunan pointed out that small vendors are reporting soft drink sales, which account for 40% of their daily business, plummeting by as much as 50% due to the P12/ liter tax on drinks using high fructose corn syrup, and P6/ liter for drinks using sugar and artificial sweeteners.
“A domino effect is foreseen: a costprice squeeze will cause the consumer’s purchasing power to shrink,” he added. “Consumption will drop, affecting the entire supply chain. Manufacturers will produce less. Retrenchments will occur across-the-board. Less sales and profits mean higher unemployment and fewer taxes to pay, fuelling a vicious cycle. That’s a lose-lose situation right there.”
Coca- Cola FEMSA Philippines, Inc. recently made the news as one of the first companies to make restructures to their organization after the implementation of TRAIN. The franchise bottler of Coca- Cola products in the Philippines announced that an undisclosed number of workers were relieved of work as the result of an “exhaustive and conscientious assessment of the evolving regulatory environment, our operational efficiency, and consequent performance in the market”.
On the raised excise taxes on fuel, the Department of Energy ( DoE) has announced that it is working with distribution utilities to discuss “the effective and appropriate” implementation of the power-related provisions of the TRAIN law. Under the new tax law, the excise tax on coal is to be increased from P10 per metric ton to P100 in the first year, P200 in the second and P300 in succeeding years.
Meanwhile, fuel stations from those in the Caltex Philippines, Petron Corp., Shell Philippines, and Flying V networks are raising prices. DoE Assistant Secretary Leonido J. Pulido III had said that tax reform will add P2.97 per liter of gasoline, while diesel will go up by P2.80, kerosene by P3.36, while liquefied petroleum gas ( LPG) will increase by P1.12 per kilogram.
Car makers and dealers have already adjusted the prices of their lineups. Toyota Motor Philippines ( TMP), which accounts for a 43.2% share of the Philippine automobile industry’s market volume, has already changed the sticker price of the popular Vios model by an additional P12,000 in the price of its base model, while the top 1.5G A/ T variant saw a rise of P28,000, according to reports.
Automobile sales in January, after TRAIN took effect, grew 4% according to recent data released by the Chamber of Automot ive Manufacturers of the Phi lippines, Inc. and by the Truck Manufacturers Association, significantly slower than the 27% yearon-year growth rate posted in the same month last year.