Spend tax windfall well, IMF says

THE IMPLEMENTATION of the tax reform law bodes well for boosting investor confidence in the Philippines, the International Monetary Fund (IMF) said, not- ing the need for “well-targeted” spending of fresh revenues generated from higher excise taxes.

IMF country representative Yongzheng Yang said the newly signed Tax Reform for Acceleration and Inclusion (TRAIN) law which took effect this month would provide ample support to the spending needs of the Duterte administration despite some changes to the original proposal from the Executive.

The additional revenue stream generated from the higher excise taxes on select goods would be a net plus for the economy, despite some price pressures which will emerge from adopting the tax reforms.

“We very much welcome the TRAIN Law, which is the first of a series of planned tax reform packages initiated by the government,” Mr. Yang said in an e-mail interview with BusinessWorld.

“Revenue generated by this package, estimated at P90 billion, will help boost resources for the government’s infrastructure and social programs, which will contribute to reducing supply bottlenecks and alleviating poverty.”

The measure signed as Republic Act 10963 reduces personal income taxes for those earning below P2 million, alongside a simpler system for computing donor and estate taxes.

Foregone revenues will be offset by the removal of some exemptions to value-added tax; increased tax rates for fuel, automobiles, tobacco, coal, minerals, documentary stamps, foreign currency deposit units, capital gains for stocks not listed on the stock exchange, and stock transactions; and new taxes for sugar-sweetened drinks and cosmetic enhancements.

Mr. Yang previously described the TRAIN program and the government’s infrastructure spending plans as “rightfully aggressive” in seeking reforms that would address critical gaps in the Philippines.

The multilateral lender also dubbed tax reform as a crucial element in maintaining the country’s fiscal balance during its annual health check of the Philippine economy.

The IMF has remained upbeat about the prospects of the Philippines as it expects a 6.7% growth in gross domestic product this year, faster than the 6.6% estimate for 2017.

TARGETED

The government should likewise ensure that additional revenues collected from the TRAIN bill — which are pegged at P82.3 billion this year — will go to productive uses, the IMF said.

“Well-targeted spending with the increased revenue — focusing on building critical infrastructure and helping the most vulnerable segments of society — will amplify the poverty-reducing impact of the tax reforms,” Mr. Yang added.

The Finance department said the 10 million poorest families in the country will receive cash transfers worth P200 a month to help them cope with rising commodity prices due to the TRAIN, as they will not get a bigger take-home pay despite the adjustment in income tax brackets.

Those social safety nets will eat up 30% of the additional revenues generated from the tax law, while the remainder will be spent on infrastructure, the Department of Finance (DoF) earlier said.

The Duterte government plans to spend P1.1 trillion on infrastructure this year, forming part of a massive P8.4trillion program which runs until 2022.

NEXT PACKAGE

However, attention shifts back to the DoF and Congress as succeeding tranches of the tax reform package are proposed, which include the lowering of corporate income taxes against possible removal of tax breaks and other incentives, among others.

“The tax reform is particularly important in strengthening the government’s reform credentials and sends a positive signal to investors,” Mr. Yang added, as he acknowledged that the passage of the TRAIN law will “boost confidence” toward the Philippines.

Critics of the tax reform have flagged that the higher duties imposed on fuel and other commodities will push the prices of basic goods higher. However, central bank officials have assured that the inflationary impact will be “transitory” and would not overshoot the 2-4% target range set for the year.

In a report released last Thursday, analysts at Nomura Global Research dubbed the TRAIN law as “highly growth-positive,” as they reiterate their 2018 growth forecast of 6.9% for the Philippine economy.

“We emphasize that this major milestone in tax reforms should be viewed unambiguously in a positive light, providing a key catalyst for local financial markets and reinforcing further our bullish outlook on the Philippine economy,” the economists said in a Jan. 4 report.