TRAIN: A second look

The government’s Tax Reform for Acceleration and Inclusion (TRAIN) program has become highly controversial and TRAIN 2 is now facing strong opposition. While the program needs to be reviewed and amended, the objectives are laudable and deserve public support. There is a serious need to reform Philippine tax laws and compliance practices. There are several issues in the present and proposed TRAIN packages including consequential issues that need to be addressed.

Inflationary  effects

Rightly or wrongly, the TRAIN has been accused of increasing inflationary pressures. At the end of the last administration, the inflation rate was 1.3 percent. It is now running at 4.5 percent. Government spokesmen have said that the real causes of inflation have been the dramatic increase of oil prices, weakening of the peso and increase in alcohol and tobacco prices as a result of higher taxes and stricter enforcement of collection of these taxes.

While these statements may be true, the perception is that the increase in taxes, especially on fuel, has exacerbated the increase in consumer prices as producers and sellers will simply pass on the burden of higher costs to the consumer costs. 

TRAIN 2

There are suggestions that the next phase of the tax reform program be renamed. Since TRAIN 1 has become controversial, the next phase should be renamed as the Fiscal Incentives Program. This has some merits because this is really more directed at the removal and rationalization of the country’s fiscal incentives program. 

According to the Management Association of the Philippines (MAP), there is clearly a need to rationalize and modernize the tax incentive system to make incentives time-bound, performance-based and not necessarily complex with far too many different, even overlapping laws, rules and regulations. However, the debates again focus on the specific incentives to be removed and the proper timing. 

The removal of incentives may not have directly inflationary effects. But if foreign investors transfer to other countries or again pass on the costs of higher taxes to consumers, the end result will be inflationary. For example, manufacturers located in the Export Processing Zones (EPZA) are charged with a five percent Gross Earned Tax (GIE) in lieu of all local and national taxes. This five percent gross tax is divided between the national and local governments. The proposal is to replace this GIE with a reduced corporate income tax rate of 15 percent based on net taxable income. The unintended consequence is that EPZA locators will now be subject to local taxes. One of the main problems of foreign investors is corruption at the level of local government units. The five percent GIE has shielded investors from the corruption and political vagaries of local politicians. This fiscal incentive proposal may, in fact, lead to higher taxes as local governments will now be free to impose all  sorts of local taxes and “fees”. 

In a proposed draft for discussion on TRAIN 2, released by the Department of Finance, there is a table that purportedly shows that “... the lack of incentives is not a leading problem for doing business in the Philippines.” The top four problems are inefficient government bureaucracy, inadequate supply of infrastructure, corruption and regulations. The next four problems are tax rates, policy instability, access to financing and government instability. 

Referring to the timing issue, the proposal is that  the government should first tackle the top four problems – bureaucracy, infrastructure, corruption, regulations – before planning to reduce fiscal incentives.

The same DOF draft for discussion shows there is an urgent need to make the Philippines more competitive and to attract more foreign investors. Overall exports has dropped as a share of GDP and the Philippines has one of the lowest exports as share  of GDP among five ASEAN countries – Philippines, Thailand, Indonesia, Vietnam, Malaysia.

Minimum wage

The increase in inflation rate has raised public calls for an increase in minimum wage. Many in the business sector have said this will increase cost of labor. But, wage level is not the logical way to compute cost of labor. Productivity is the more scientific method for labor cost computation. 

In general, labor productivity is equal to the ratio between a measure of output volume (gross value added) and a measure of input use (total number of hours worked or total employment). According to a report  by the National Productivity Commission, Philippine Statistics Authority and Department of Finance, from 2001 to 2016, the real labor productivity or real output per worker has risen  by approximately 60 percent. However, real minimum and average wages have not increased over the same 16-year period. Based on this figure, an increase in minimum wage can be justified.

The Philippines must also accept the reality that we cannot become competitive in the low wage manufacturing sector like textile, footwear and toys. We need to follow the example of countries like Thailand, Malaysia, Taiwan and now even China that continue to have a vibrant manufacturing sector without resorting to competing with low wage countries like Bangladesh, Cambodia and the African countries.

Bank secrecy

In its position paper, MAP has also pointed out that it is necessary to widen the tax base and enforce better compliance. The relaxation of our bank secrecy laws, coupled with proper safeguards against abuse, is an essential tool in doing that. This will also encourage more people to support a general tax amnesty which MAP supports. 

Again, I support the government’s objectives of a more transparent rational tax system that promotes social justice and poverty alleviation. But, I also believe that the two TRAIN packages need a second look. 

Creative writing classes for kids/teens and adults

Young Writers’ Hangout on June 2 and 23, July 7 and 21 (1:30 pm-3 pm; stand-alone sessions). Online Writing for Adults with Tarie Sabido on June 30 (1:30 pm-4:30pm).  All classes at Fully Booked BGC.  For details and registration contact 0945-2273216 or [email protected].

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