Sweeping reforms at the Bureaus of Internal Revenue (BIR) and of Customs (BOC) are underway to improve taxpayer satisfaction, arrest official corruption and restore public trust in the government’s main revenue-generating agencies, according to the Department of Finance (DOF).
Finance Secretary Carlos Dominguez III said both the BIR and BOC can carry out these reforms from their end without any need for prior congressional approval, which is why both agencies had begun putting them in place within the first six months of the Duterte presidency.
But he noted that this slew of tax administration reforms at the BOC and BIR are not sufficient to overhaul the country’s outdated tax system and raise enough revenues necessary to fund the Duterte administration’s massive infrastructure program and record investments in human capital and social protection for the country’s poor and vulnerable sectors.
“The BOC and BIR have started putting in place the necessary reforms to upgrade tax administration, but these alone will not be sufficient to generate the high level of revenues needed for the infrastructure buildup and other priority programs to keep the growth momentum and transform the economy into a truly inclusive one,” Dominguez said.
Hence, the finance secretary welcomes the recent statement by Rep. Dakila Carlo Cua that the House ways and means committee, which he chairs, will likely pass this January the first package of the Comprehensive Tax Reform Program (CTRP) that the DOF submitted last September for congressional approval.
Cua said that following his committee’s passage of this first CTRP package this month, the chamber will likely act on it by mid-2017, which, according to Dominguez, will put this bill on course on the government target to start implementing the proposed tax reforms by 2018.
In the BIR, Dominguez said the agency has started expanding its Large Taxpayers Service to cover the top 3,000 corporations accounting for 75 percent of total tax revenues.
Also, the BIR has started simplifying forms and procedures for small taxpayers to encourage tax compliance and ease payments, along with improving its electronic payment systems and enforcing risk-based audits “to make the tax process more transparent and easier for taxpayers to comply with, Dominguez said.
“At the same time, we are intensifying the anti-corruption and tax evasion effort, recruiting 12,000 young people of integrity and competence to fill the BIR’s large vacancy,” he said.
The BOC, for its part, is now completing the implementing rules and regulations (IRR) of the Customs Modernization and Tariff Act (CMTA), he said, to further step up both its anti-corruption and anti-smuggling operations, while improving the facilitation of trade.
Electronic systems at the BOC are also being upgraded to pave the way for paperless transactions that will, in turn, reduce opportunities for corruption, Dominguez said.
“Administrative reforms will be supplemented with more intensive border patrols and other measures to curb technical smuggling, including the use of fuel marking,” he said.
As in the BIR, Dominguez said the customs bureau is also eyeing the recruitment “of about 3,000 young and talented people willing to work in a corruption-free BOC.”
Dominguez said the approval of the CTRP is crucial to the financial viability of the Duterte administration’s higher public spending policy because it aims to correct our tax system’s “inherent flaws, such as non-indexation to inflation of rates and large scope of exemptions and special treatments that complicates tax administration” that have for long prevented the BIR and BOC from consistently meeting, much less surpassing, their annual revenue targets.
“This is why tax policy reforms are needed,” Dominguez said.
Infrastructure spending, according to the National Economic and Development Authority, should be increased from 5.4 percent of GDP in 2017 to 7 percent of the GDP in the following years to achieve the country’s vision of reducing poverty and close to becoming an upper middle-income economy by 2022 and a high-income one by 2040.
“This means there will be no letup in the Duterte administration’s commitment to spending on urban and rural infrastructure as a growth driver, to guarantee sustained high and inclusive growth,” Dominguez said.
Dominguez traced the country’s infrastructure backlog—a deficiency that has blunted the Philippines’ competitiveness in the region as an investment destination—to the sad reality that while the Philippine government has been spending on average just 2.7 percent of our gross domestic product (GDP), our Southeast Asian peers have devoted at least 5 percent of their respective GDPs to infrastructure investments.
He said reforms in tax policy, which require congressional approval, will raise additional revenues of P163 billion in 2018 to help bankroll the government’s ambitious infra program.
In the medium-term, tax reform is expected to help reduce the poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,550 in 2015 to at least $4,900 by 2022, close to where Thailand is today.
If this momentum is sustained, the country would be well on its way to becoming a high-income economy by 2040 with a per capita gross national income of a least $11,000, which is where Malaysia is right now, he added.
Package One proposes to lower personal income tax rates, broaden the Value Added Tax (VAT) base, and increase the excise taxes on oil products and automobiles.
The lowering of personal income tax rates, a promise that President Duterte made during the 2016 poll campaign, will increase the take-home pay of workers and make our tax rates more competitive, according to Finance Undersecretary Karl Kendrick Chua said.
A broader VAT base will level the playing field and reduce massive leakages, while higher excise taxes on oil products and automobiles will improve the progressivity of the tax system as richer households consume far more of these products, he said.
“Meanwhile, to protect the poor and vulnerable sectors, highly targeted transfers, and subsidies will be provided as part of the ramp-up of social spending from 37.3 percent of the 2016 budget to 40.1 percent of the 2017 budget,” Chua said.
According to a report quoting BMI Research, sustaining the country’s high growth path is dependent on the Duterte administration’s ability to roll out big-ticket infrastructure projects.
Also, the Oxford Business Group has cited a November report of rating agency Standard & Poor’s that said the Philippines was a top performer in Southeast Asia in 2016 partly because of an expansionary fiscal policy that emphasizes public infrastructure.
Other institutions have also said the Philippines can sustain its high growth of above 6 percent and its status as one of Asia’s fastest-growing economies, provided that the Duterte administration delivers on its commitment to accelerate spending on infrastructure.
These private and multilateral institutions include the International Monetary Fund, World Bank, Asian Development Bank, Fitch Ratings, S&P Global Ratings, Nomura, First Metro Investment Corp. (FMIC), Colliers International, Nordic Business Council of the Philippines (NBCP), Philippine Chamber of Commerce and Industry (PCCI), Employers’ Confederation of the Philippines (ECOP), Goldman Sachs, Bank of the Philippine Islands (BPI), Standard Chartered Bank, Hong Kong and Shanghai Banking Corp. (HSBC), Sun Life Asset Management Co., AB Capital Securities, Lamudi PHL and the Management Association of the Philippines.
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