Government made history in 2019 when on its watch, excise taxes on tobacco products were raised twice under one administration, and a new set of ‘sin’ taxes on electronic cigarettes (e-cigarettes) were introduced to deter smoking while augmenting funds for the cash-intensive Universal Health Care (UHC) program that will primarily benefit low-income families.
Before the close of 2019, a bill imposing higher excise taxes on alcohol products, and an increase in the tax rates for e-cigarettes, such as heated tobacco products (HTPs) and vapor (vaping) products was approved by the Congress and is now up for President Duterte’s signature.
These new ‘sin’ tax measures comprise Package 2-plus of the Duterte administration’s comprehensive tax reform program (CTRP), which seeks to make Philippine taxation fair and transparent even as it provides a steady revenue stream for the government’s accelerated spending on infrastructure and human capital development, in keeping with the President’s ultimate goal of improving the life of every Filipino.
Tobacco excise taxes were first raised under the Duterte administration through the Tax Reform for Acceleration and Inclusion Act (TRAIN), the first CTRP package, which, on top of benefiting 99 percent of wage earners in the form of substantial personal income tax (PIT) cuts, also mandated a fuel marking program to curb oil smuggling, and imposed a tax on sweetened beverages as a health measure.
“All the hard work we put in to reform our policies and build an inclusive economy have resulted in a palpable improvement in the lives of our people,” Dominguez said.
TRAIN, which has so far raised P91.3 billion in revenues in the first nine months of 2019, also exempted medicines to manage hypertension, diabetes and high cholesterol from the value-added tax (VAT).
The tobacco tax hikes under TRAIN from the then-P30 per pack unitary rate to an increase of only P2.50 per year, however, was too little to make a dent in funding UHC.
Thus, the DOF worked with lawmakers to legislate a new law that would significantly increase tobacco excise taxes anew.
Last July 25, President Duterte signed into LAW Republic Act (RA) 11346, which raised the excise tax on tobacco products to P45 per pack beginning in 2020, followed by a series of P5-per-pack increases until the rate reaches P60 in 2023. Thereafter, the tax rate will increase by 5 percent every year.
RA 11346 also includes a provision taxing e-cigarettes by at least P10 per millimeter for e-juices with high nicotine concentrations, also known as nicotine salt. Under the bill up for the President’s signature, this minimal rate has since increased to be closer to that of cigarettes based on comparative consumption patterns.
“We are the only administration that actually cleaned up the cigarette industry and raised tobacco excise taxes twice. This has never happened in any past administration,” Dominguez said.
Dominguez, who led the Department of Finance (DOF) in closely engaging the Congress to work on the swift approval of higher ‘sin’ taxes for UHC, was referring to the time when the DOF “cleaned up” the cigarette business by collecting from an errant cigarette manufacturer–Mighty Corp.–more than P30 billion for non-payment of excise taxes and for use of counterfeit tax stamps.
This marked the biggest sum on record raised by the government from a tax settlement with a single corporate taxpayer.
The Finance chief has constantly reminded the public of this feat to show that the Duterte government is serious in improving tax administration and running after tax evaders.
Raising tobacco excise taxes twice under a single administration was no easy feat. The administration of former President Benigno Aquino III considered the passage of the first ‘Sin’ Tax Reform Law on his watch as a landmark measure, given that the government then had to overcome a strong industry lobby and tedious congressional debates to be able to sign it into law.
Revenues from RA 11346 and the ‘sin’ tax bill pending in Malacañang will help fill the funding requirement for UHC of P257 billion in 2020, which will grow by an average of around P11 billion to P12 billion per year, or a five-year total of around P1.44 trillion by 2024.
The government can cover funding for UHC at around P200 billion yearly in the national budget, but needs to raise the gap through sin taxes and other means.
The Duterte administration wants to implement the UHC program as a “first-class law at par with the world’s best healthcare systems,” while discouraging vices such as smoking and binge drinking, Dominguez said, which is why the DOF had tried to push the Congress to approve substantial increases in ‘sin’ taxes.
While raising funds for human capital development through higher ‘sin’ taxes took centerstage in 2019, significant progress was also made in the rest of the CTRP packages.
While Package 1 or TRAIN is now generating revenues to help sustain funding for the “Build, Build, Build” infrastructure modernization program and human capital investments, most of the remaining tax reforms are revenue-neutral, and aim to correct the country’s outdated tax system to make it simpler, fairer, more efficient and aligned with global standards.
Package 2, or the Corporate Income Tax and Incentive Rationalization Act (CITIRA), aims to lower the corporate income tax (CIT) from 30 percent to 20 percent over ten years to bring it closer to the ASEAN average while redesigning the current convoluted fiscal incentives system to make it performance-based, time-bound, specifically targeted and more transparent.
This tax reform will attract more investments and help propel the country to an “A” credit rating from its current improved ‘BBB plus’ while creating a better level playing field for businesses and entice new players to come in and compete, Dominguez said.
The House of Representatives, through the capable chairmanship by Albay Rep. Joey Salceda of the Committee on ways and means, approved the CITIRA last Sept. 13, and transmitted the bill to the Senate on Sept.16. The measure is now pending in the counterpart Senate panel chaired by the equally hardworking Sen. Pia Cayetano.
Package 3, aims to adopt globally benchmarked valuation standards and a higher degree of professionalism in real property valuation, which will, in turn, promote investor confidence.
This reform will enhance the revenue-generating capacity of local government units (LGUs) without adopting a new tax measure. The measure will help address right-of-way (ROW) issues that have long hobbled infrastructure projects by harmonizing real property appraisals.
The bill on this package was approved by the House in November and is pending at the committee level in the Senate.
Package 4 or the Passive Income and Financial Intermediary Taxation Act (PIFITA), meanwhile, aims to make the country more competitive in attracting capital and investments, which are urgently needed to finance large-scale infrastructure, projects including those under “Build, Build, Build.”
It aims to rationalize the tax system in the financial sector to further boost economic growth and create more jobs. The House has approved its version of the bill last Sept. 9 and transmitted it a day later to the Senate, which has no counterpart bill filed on the measure and is considering using the transmitted version for deliberation.
With these CTRP packages and other reforms being put in place, Dominguez said the Duterte administration is well on track in achieving what had seemed at first as an ambitious goal of bringing poverty incidence to 14 percent by 2022 down from 23.3 percent in 2015, as evidenced by official data showing that 5.9 million Filipinos were lifted out of poverty in three years.
This means poverty incidence dropped to 16.6 percent in 2018 from the previous rate of 23.3% in 2015.
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Dominguez said the task of pursuing game-changing reforms is a long and arduous one, as the DOF has to “deal with the vagaries of our politics, the inertia of the bureaucracy, and the resistance of those who would rather have things stay as they are.”
But he remains confident the pending CTRP packages will be approved by the Congress in 2020.
“Completing the reform measures will guarantee the revenue flow and the equitable sharing of the contributions to underwrite our social and infrastructure programs. It will also ensure fiscal stability long into the future,” he said.
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