Duterte’s tax reform plan raises concerns
Prinz Magtulis (The Philippine Star) - August 1, 2016 - 12:00am

MANILA, Philippines - For the first time since former president Fidel Ramos, budget problems did not take center stage in a leader’s first State of the Nation Address (SONA) when President Duterte delivered his piece last week.

While figures are still being tabulated, economists have expressed concerns over the possible impact of the new administration’s planned tax reform program on the country’s fiscal health.

“The wider deficit should come from higher spending, not lower revenues,” said Emilio Neri Jr., lead economist at Bank of the Philippine Islands.

The first month of the Duterte administration saw the declaration of higher spending plans coupled with the President’s support to lower personal and corporate income taxes mentioned during the SONA.

“There is really no problem on spending with deficit programmed to hit three percent of gross domestic product,” Neri said. The previous administration had persistently underspent over the last six years.

Last year, the deficit only accounted for 0.9 percent of gross domestic product.

The story, however, is different on the revenue side. Aside from lowering the maximum personal income tax rate to 25 percent from 32 percent, Department of Finance  spokesperson Paola Alvarez said there are also plans to exempt those earning P25,000 or less a month from personal income tax.

This will coincide with a scheduled implementation of the Personal Equity and Retirement Account, a levy-free state-led retirement program that previous DOF estimates showed will cost P12 billion a year.

“The P25,000 mark is just a benchmark because previously, the NEDA said that in order for a family of four to have a decent living, they need to earn at least P25,000 to P27,000 a month,” Alvarez said in a text message.

To offset this, Finance Secretary Carlos Dominguez earlier said excise tax rates in oil, cigarettes, liquor and luxury items would be increased. But there would be no hike in value-added tax (VAT) rate currently at 12 percent.

“I don’t think that’s enough,” Neri said.

What data show

At 14.7 percent of GDP, the Philippines has “one of the lowest revenue-to-GDP ratios among investment grade countries,” said Christian de Guzman, vice-president at Moody’s Investors Service.

“A higher deficit due to a downturn in revenue collection would be credit negative,” he said in a recent e-mail.

Revenue-to-GDP measures the amount of revenues government collects as the economy expands. Ideally, revenues should increase faster as the economy grows the same rate.

Data showed the government’s revenue ratio has been on a downtrend from 2007 to 2013. It was only in 2014 that it started recovering, but is still far from its peak in 1994 when it hit 17.9 percent.

“We are just starting to recover what was lost during Ramos’ time. We cannot afford drastic revenue losses,” Neri said.

State revenues are necessary to finance growing economic and social needs.

ASEAN-5

The main argument for income tax reform is that the Philippines has one of the highest tax rates in Southeast Asia. While this is true, countries with low income taxes also have other sources of income which the country do not have.

In Thailand, for instance, the government’s budget this year included a projected 20 billion baht (roughly P14 billion) from sale of state assets. From 2012 to 2014, the Philippines earned P2 billion each year doing the same.

In Singapore, where the top rate is 20 percent, money laundering laws were considered one of the tightest and the government earned around P700 billion from tourist receipts alone last year. The country earned only P230 billion, according to the Department of Tourism.

Indonesia, on the other hand, have mineral reserves. The latter earned $33.59 billion in mining revenues in 2013, according to the Extractive Industries Transparency Initiative.

During the same period, the Philippines earned less than $2 billion and this is bound to get lower as the Duterte administration takes steps to crack down on irresponsible mining.

Malaysia, meanwhile, is an oil exporter and has sourced the bulk of its requirement from petroleum. Due to the plunge in oil prices recently though, Malaysia was forced to increase maximum income tax rates to 28 percent from 25 percent.

“I suppose it is not really prudent to have an outright (income tax) exemption considering you will lower them already,” Neri said. “It’s too rapid, too strong and it will definitely impact revenues,” he added.

Assurance

When former vice-president Jejomar Binay suggested during the election campaign that he would like to exempt those earning P30,000 and below from income taxes, the DOF under the previous administration said this could result in P70 billion in annual losses.

This means that at a lower benchmark of P25,000, more revenues could be lost, although Alvarez said estimates are still being computed.

But Benedict Tugonon, president of industry group Tax Management Association of the Philippines, is unperturbed. He said aside from higher excise taxes, the proposal to relax the bank secrecy law could urge more taxpayers to pay more.

“(This) as well as the simplification and improvement of the efficiency of tax system are reforms to increase voluntary compliance..., increase the tax base, and consequently, increase tax collection,” he said in a text message.

Emmanuel Lopez, economics department chair at the University of Santo Tomas, agreed.

“Lowering income taxes is positive for investors so we could expect that this will get a boost. More investment means more demand. More demand means higher revenues,” Lopez said in a phone interview.

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