Tax reform to close infra gap, make PHL more competitive

Date Posted : January 30, 2017

Tax reform to close infra gap, make PHL more competitive

Date Posted : January 30, 2017

The Duterte administration’s proposed Comprehensive Tax Reform Program (CTRP) is crucial to strengthening the Philippines’ weak infrastructure backbone that constrains economic inclusion and prevents the country from catching up with the region’s economic powerhouses, Finance Secretary Carlos Dominguez III said.

In separate speeches before the Foundation for Economic Freedom (FEF) and the Up Close and Personal with Department of Finance Sec. Dominguez event, Dominguez said that raising an estimated P800 billion annually through tax reform for an unmatched infrastructure buildup under the Duterte administration will allow the Philippines to finally break the bonds of low growth and broad poverty.

“This is the moment to cut the knot that binds our country’s development,” Dominguez said at the Fellows Monthly Meeting of the FEF held in Manila Golf Club on Wednesday night.

“Our population is nearing a demographic ‘sweet spot’ where millions of young Filipinos will be joining the workforce. We need to train them in the high skills required for a 21st-century economy,” he said.

He said, “We need to close the infrastructure gap to bring isolated island economies to the mainstream of our growth. We need to modernize our digital backbone, our airports, and ports, our roads and bridges to take advantage of the opportunities offered by the large trends in our region.”

Dominguez stressed the urgency for the government to address the country’s poor infrastructure as he called on the FEF to help make this happen by supporting the Comprehensive Tax Reform Program (CTRP) that the Department of Finance (DOF) has crafted for congressional approval.

The FEF includes as its fellows former Prime Minister and Finance Secretary Cesar Virata and Gerardo Sicat, the first director general of the National Economic and Development Authority (NEDA).

FEF is chaired by former Finance Secretary Roberto de Ocampo, with Calixto Chikiamco as president and former Finance Undersecretary Romeo Bernardo as vice chairperson.

At the Up Close and Personal with DOF Sec. Dominguez event on Thursday afternoon at the World Trade Center in Pasay City Dominguez said that administrative reforms put in place in the BIR and BOC without the need for new legislation have significantly improved the collection efficiency of the two bureaus.

“In just seven months, the change has been palpable in our revenue agencies. There are now fewer complaints about misbehavior at the BIR [Bureau of Internal Revenue] and the BOC [Bureau of Customs]. We adopted more reasonable targets but warned our revenue personnel the Attrition Law will be applied with determination,” Dominguez said.

But even if the BIR and BOC were to hit 100 percent of their collection targets, the amounts they raise would still be not enough to fund the government’s ambitious infra program required to ensure high growth, create jobs, boost productivity and attract foreign direct investments, because the tax system has inherent flaws that need to be corrected through the CTRP, he said.

“Those resisting the tax reform package argue that improvements in tax administration should yield the necessary revenue to fund government programs. I wish that were true. It would make my life immensely easier,” Dominguez said.

Dominguez said he expects the “Congress to be a staunch partner in reinventing our tax system so that it becomes simpler, fairer and more efficient. Reforms in tax administration can only go so far. Reforms in tax policy will help complete our reforms in tax administration.”

A revised first package of the DOF-crafted CTRP was filed last week in the House of Representatives.

House Bill 4774 authored by Rep. Dakila Carlo Cua aims to lower personal income rates, while, at the same time, reducing the rate for estate and donor’s taxes, expand the value-added tax (VAT) base but retaining the exemptions enjoyed by senior citizens and persons with disabilities, adjust automobile and fuel excise taxes, introduce a sugar-sweetened beverage tax, index the motor vehicle user’s charge to inflation, and grant an amnesty to past estate tax cases.

Moreover, the revised plan also includes legislated administrative reforms in the BIR and BOC such as fuel marking and monitoring to prevent oil smuggling, the use of e-receipts, the mandatory connection of the point-of-sale system of all business establishments to the BIR, and the relaxation of bank secrecy laws for investigating and combating tax fraud.

Dominguez said at the FEF gathering that unless the government seizes the moment and mounts an unprecedented infrastructure program that would make our economy competitive, favorable economic trends sweeping the region will once again bypass the Philippines.

“Unless we produce new revenues, we cannot build the infra we need. That will cause us to miss all the other opportunities brought about by our solid credit ratings, our stable banking and finance sector and our demographic advantage over aging Asian economies such as Japan,” he said.

“We cannot, for instance, grow our tourism sector unless we build the necessary infra to feasibly move tourists to our prime destinations. We cannot compete for capital if we lack the power resources to support an enlarged industrial base. We cannot expand our BPO sector unless we bring in a cutting edge digital infrastructure,” Dominguez pointed out.

The Duterte administration’s medium-term goal is to reduce poverty incidence from 21.6 percent in 2015 to 14 percent by the end of the President’s term in 2022, and to bring the country to high-income status by 2040, when extreme poverty would have been eradicated and per capita gross national income is at least $11,000, which is where Malaysia is right now.

These lofty economic objectives, however, require increased investments in infrastructure, human capital and social protection for the poor, which will need an additional P366 billion annually over the next six year, Dominguez said.

He said the government cannot fully realize President Duterte’s 10-point socioeconomic agenda of high and inclusive growth if the country lacks efficient roads and bridges and ports and airports, remote islands remain isolated, industries and home lack power supply and our digital infrastructure lag behind other economies in the region.

Dominguez recalled that the FEF, which was formed two decades ago during the Ramos administration, had also pushed for a comprehensive tax reform plan that included the VAT and stood solidly behind such reforms that enabled the government to consolidate its fiscal position.

He cited the FEF for its intellectual courage and for investing its prestige in arguing for tax reform.

Now that the government is once more gearing up for a major push to further improve tax policy and administration in order to raise enough revenues for its unmatched public investment program, Dominguez called on the FEF to once again support tax reform.

He said the government aims to cut personal and corporate income taxes not just because it was a campaign promise of President Duterte, but also because it makes good economic sense.

“We cannot hope to attract investment flows into our economy if our tax rates are substantially higher than in neighboring economies,” he said.

Dominguez likewise noted that the country’s high tax rates not only discourage investments but also encourage tax evasion.

The Philippines and Thailand, Dominguez pointed out, collect about the same amount from the VAT system but with the latter imposing a rate of only 7 percent while ours is 12 percent.

“Clearly, there is a lot of inefficiency in this otherwise effective revenue source. We need to close the leakages in our VAT system by reducing exemptions created by populist legislation. By closing those leakages, we broaden the VAT base,” Dominguez said.

Lowering income taxes and broadening the VAT base, however, is “only revenue neutral,” Dominguez said. “In order to fund a massive infra program that will enable our economy to compete effectively as well as increase investments in human capital, we will have to introduce new revenue measures.”


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Date Posted January 30, 2017

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