Government likely to speed up tax reforms

MANILA, Philippines — The government’s economic team is expected to expedite the passage of the remaining tax reforms to avert any further downgrade in the country’s credit rating, according to First Metro Investment Corp.

FMIC, the investment banking arm of the Metrobank Group, said the government would move to fast-track the third and fourth packages of the Comprehensive Tax Reform Program (CTRP) after New York-based Fitch Ratings downgraded the country’s credit outlook from stable to negative.

A negative outlook means the debt watcher could downgrade the Philippines’ credit rating in the next 12 to 18 months if the country fails to recover from the pandemic.

In its mid-year economic briefing yesterday, FMIC head of research Cristina Ulang said the government would hasten the enactment of the Real Property Valuation Reform and the Passive Income and Financial Intermediary Taxation Act (PIFITA), which are Packages 3 and 4 of the CTRP, respectively.

“There is going to be an urgency for the government to speed up and pass all these taxation because this is what’s gonna help our budget deficit and support spending if need be,” Ulang said.

“This is going to be closely watched by the rating agencies because these will help the efficiency of the taxation process and expand the tax base,” she said.

Package 3 has been passed on third and final reading by the House of Representatives, but is still pending in the Committees on Ways and Means, Local Government, and Finance in the Senate.

Package 4, meanwhile, is undergoing committee hearings at the Senate.

The Legislative-Executive Development Advisory Council (LEDAC) originally targeted to have Packages 3 and 4 passed by the end of last month as these are key priority measures, but the target did not materialize.

“PIFITA and property taxation are not all about increasing the tax rate, it’s about expanding the tax base, making tax administration efficient and making the tax structure more fair and equitable to all,” Ulang said.

“This is going to be encouraging to the foreign direct investors and that is going to help the economy,” she said.

FMIC president Jose Patricio Dumlao, for his part, said the Fitch outlook downgrade is more of a reminder than a negative warning that economic recovery requires hard work.

“We have 18 to 24 months to show how the economy will perform since this is just an outlook downgrade and we hope to see the country bounce back during that period,” he said.

In its outlook, FMIC expects the economy to grow by five to six percent, just below the government’s six to seven percent target.

Dumlao said this would be driven by faster global economic recovery, accelerated vaccine mobilization, sustained supportive fiscal and monetary policies, and the government’s commitment to push infrastructure projects.

Inflation, on the other hand, is seen to remain elevated at 4.2 percent due mainly to high crude oil prices and supply chain bottlenecks.

FMIC is projecting that the peso will depreciate slightly because of the stronger demand for imports. It is seen to trade within 49-50 to a dollar.

In the debt market, FMIC said longer tenors are opening up which means investors are willing to take on more risks for better returns. Positive investor sentiment is also seen in the equities market.

It added that the Philippine Stock Exchange index (PSEi) can potentially reach the range of 7,400-7,800 by end-2021 with a price earnings ratio of 17x.

“Still, the biggest risk to our outlook is the uncertain course of the pandemic. We should continue to be cautious and mindful and do our share in controlling the spread of the virus,” Dumlao said.