Concerns raised over tax reform revenues

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WHILE the Duterte administration expects to generate about P152 billion from the first year of implementation of additional packages under the Comprehensive Tax Reform Program (CTRP), local and international observers have their doubts.

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A first package involving the lowering of personal income taxes in exchange for higher sales and excise taxes is already set to be passed by Congress before the year ends, but officials have warned that legislators have significantly slashed expected revenues.

The second package, which seeks to lower the corporate income tax (CIT) rate to 28 percent from 30 percent by 2019 and to 25 percent by 2021 as well as to rationalize fiscal incentives to businesses, is expected to be revenue neutral. The “lower CIT must be offset by enough clawback of incentives,” a DoF document states.

Package 3 will focus on property taxation, with features as the implementation of the National Valuation Act and the rationalization of capital gains and property-related taxes and fees. This is expected to yield gains of P43.5 billion for the local governments and will be again be revenue-neutral for the national government. “This means the national government can devolve more functions subject to national government supervision,” the DoF has noted.

Package 4, meanwhile, will deals with capital income taxation. It seeks to reduce the tax on interest income earned on peso deposits and investments from 20 percent to 12 percent; increase capital income tax rates for dollar deposits and investments, dividends, equity, fixed income, and other investments to 12 percent; increase the tax on stocks traded in the stock market from 0.5 percent to 1 percent on gross selling prices; and rationalize documentary stamp taxes.

Package 5, which includes health, environment and luxury measures, offers potential net revenue of P109.4 billion, this includes measures like an increase in the alcohol and tobacco excise tax after a mandated review of the Sin Tax Law; an increase in the cola excise tax; introduction of a carbon tax/environment tax; increase in luxury tax; mining tax review and increase; and introduction of a gambling tax/entrance fees for locals.

On top of these measures, the DoF said the mining industry’s fiscal regime will also be part of tax reform packages after President Rodrigo Duterte reminded all extractive corporations and contractors to pay the right amount of taxes.

Finance Undersecretary Bayani Agabin, a member of the multistakeholder Mining Industry Coordinating Council (MICC), the body tasked to review the sector, said he fully supported efforts to review the mining laws. “And in that regard, the MICC has several technical working groups that will undertake the review of the fiscal regime,” he said. “In fact, we are looking at this to be part of one of the tax reform packages.”

A fiscal regime for the mining industry may be included in the succeeding packages of the CTRP, Agabin noted.

“Definitely not in Package 1,” he said. “There are schools of thought when it comes to sharing. Of course, the MICC agreed that the priority … is the protection of the environment, but we have to balance that with what the investors want to put their money into because it will take some capital.”

‘Fairy tale sans happy ending’
Justino Calaycay, Jr., senior research analyst at the Philstocks.ph, doubts all these assumptions, saying: “Honestly, if we simply trust these claims as stated, then it should be good as advertised. But the rub is that the pudding can’t yet be eaten as it isn’t out of the oven yet. Thus, nothing can yet be proved.” He also said that reform measures should veer toward being revenue positive, a result of both enhancing collection efficiencies and expanding the tax base.

“At this time, however, not one of the packages has passed the scrutiny of Congress. The closest we are to realizing any of these ‘benefits’ is through Package 1, which is pending before the Senate,” Calaycay said. Granting that the body can fast-track the measure and this can become an effective law by the fiscal year 2018, he added, the government, theoretically, reaps just one-fifth of the estimated benefits.

“I doubt it if that will be enough to support and bring to fruition the ‘Golden Age of Infrastructure’ under Duterte,” he stressed, adding that “rhetoric makes not an economy prosper.” He described plans as useless unless they are implemented, and “without such source of funds to support the infra-ambition, the promised high growth era would only be a fairy tale sans the happy ending.”

Under the “Build, Build, Build” program, the Duterte administration plans to spend between P8 trillion and P9 trillion on roads, railways, airports, seaports, and other big-ticket infrastructure projects until the end of its term in 2022. Also, government infrastructure spending will rise continuously from 4.5 percent of GDP or gross domestic product in 2016 to 7.3 percent in 2022.

Funding support is expected to come partly from proceeds of the CTRP, whose first package, TRAIN—Tax Reform for Acceleration and Inclusion Act—was passed by the House of Representatives in May. The Finance department had projected first year revenues of P157 billion but the House version has cut this to P119.4 billion. The measure pending at the Senate trims this even further to just P59.9 billion.

While Package 1 is still expected to make its way into law, Moody’s Investors Service has also warned that rising political uncertainties could derail the progress of tax reform.“[W]hile we expect strong economic and fiscal governance to remain, a prolonged focus on political matters could draw attention away from the government’s reform agenda, particularly economic and fiscal reforms including the CTRP,” it said.

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