Following a request from the Department of Finance (DOF), President Duterte certified on Monday as an urgent measure for congressional approval the eight-month-old Tax Reform for Acceleration and Inclusion Act (TRAIN), which is crucial to the financial sustainability of the government’s ambitious agenda to sustain the country’s growth momentum and accelerate poverty reduction via a massive spending on infrastructure, human capital and social protection for the poor and vulnerable sectors.
“We are transmitting this letter of President Rodrigo Roa Duterte certifying to the necessity of the immediate enactment of House Bill No 5636 (the proposed Tax Reform for Acceleration and Inclusion Act…” Executive Secretary Salvador Medialdea said in his letter to Speaker Pantaleon Alvarez dated May 29.
“The benefits to be derived from this tax reform measure will sustainably finance the Government’s envisioned massive investments in infrastructure thereby encouraging economic activity and job creation, as well as fund the desired increase in the public budget for health, education and social programs to alleviate poverty,” President Duterte said in a separate letter sent to Senate President Aquilino Pimentel III.
Presidential Legislative Liaison Office head Adelino Sitoy has also furnished copies of the letter.
Finance Secretary Carlos Dominguez III made this appeal in a memorandum to the Chief Executive, in the hope that the House of Representatives, from where all tax and budget laws originate, could pass the TRAIN, which is the first package of the Comprehensive Tax Reform Program (CTRP), before Congress goes on its sine die adjournment on June 2.
Both the House and the Senate will reopen for the Second Regular Session of the 17th Congress on July 24, when President Duterte is to deliver his second State of the Nation Address (SONA).
“We believe that the President’s certification of the tax reform bill as an urgent legislative measure can help ensure timely and full passage of the tax reform package before the close of the session on June 2, 2017, so that the benefits of the reform can be felt sooner,” said Dominguez in his memo to the President.
TRAIN aims to make the country’s antiquated tax system simpler, fairer and more efficient, especially for the poor and low-income families, by making sizable cuts in personal income tax (PIT) rates—and to make up for the projected revenue loss, and at the same time raise funds for the Duterte administration’s massive expenditure program, by expanding the Value Added Tax (VAT) base and adjusting excise taxes on oil, automobiles and other products.
Dominguez pointed out in his memo the “dire consequences” of the Congress’ failure to pass soon enough this TRAIN bill, given its design to help guarantee a steady revenue flow for the Duterte administration’s unmatched public investments over the next half-decade to support its envisioned “Golden Age of Infrastructure,” attract investments and create jobs, cut the poverty rate from 21.6 percent to 14 percent, and transform the Philippines into an upper middle-income economy by the time the President leaves office in 2022.
The finance secretary said that without the TRAIN bill, the government’s strategy to embark on an aggressive expenditure program by raising deficit spending to three percent of the Gross Domestic Product (GDP) would lead to an “unsustainable fiscal position,” which, in turn, could trigger a credit rating downgrade possibly costing the government an extra P30 billion in annual debt servicing and P100 billion more in higher borrowing costs for the public.
Such a scenario, he said, could leave the government “more vulnerable to fiscal risk” because it would adversely affect the funding source for increasing state liabilities such as the pension of uniformed personnel and indigent senior citizens. With many countries including China already being downgraded, this tax reform bill serves as our country’s immunization from such threat.
More importantly, he said, the non-passage of the TRAIN bill by the Congress would “disrupt” the planned increase in public investments in infrastructure, education, health and social protection, which the government seeks to undertake to make sure that the country’s continued high growth truly leads to the economic inclusion of all Filipinos.
“To achieve these objectives, the Administration plans to increase the budget for infrastructure from P795 billion in 2016 to P1.832 billion in 2022 to support the Golden Age of Infrastructure, the budget for education from P551 billion to P1.269 billion, the budget for health from P133 billion to P272 billion, and the budget for social protection, welfare and employment from P240 billion to P509 billion,” he said.
Dominguez said that “To sustainably finance these massive investments in infrastructure and in the people, tax policy reform will be crucial alongside tax administration and budget reforms.”
“Given the significance of the tax reform in funding the priority programs of the President that will uplift the lives of the poor, in particular, the Golden Age of Infrastructure, and in maintaining strong macroeconomic fundamentals, we request the President’s full endorsement and support for the tax reform,” Dominguez said.
He stressed in his memo to the President that, “The tax reform seeks to achieve a simpler, fairer, and more efficient tax system characterized by lower rates and a broader base, to encourage investment, job creation, and poverty reduction.”
The DOF submitted CTRP’s first package to the Congress last Sept. 26 and was filed as HB 4774 in January 2017 by Quirino Rep. Dakila Carlo Cua, the chairman of the House ways and means committee that is in charge of writing tax laws.
Following 13 public hearings in the course of four months, the House ways and means committee approved last May 8 a substitute measure—HB 5636—that had consolidated HB 4774 with 54 other tax-related bills. HB 5636 has moderate changes from the original measure (HB 4774) endorsed last year by the DOF to the Congress.
HB 5636, which had over a hundred co-authors by the time the Cua-chaired panel formally submitted it for plenary deliberations last May 23, was also taken up and approved by the House committee on appropriations, to which it was referred earlier this month to go over the bill’s fund earmarking provisions. The House appropriations panel is chaired by Davao City Rep. Karlo Alexei Nograles.
Senate President Aquilino Pimentel III filed the Senate version of the measure—Senate Bill No. 1408—last March, and the chamber’s Committee on Ways and Means chaired by Juan Edgardo Angara has thus far conducted six (6) public hearings on it.
Under the 1987 Constitution, all revenue measures must originate from the House of Representatives, which means that the Senate can start plenary discussions on tax and appropriations or budget bills only after the House has passed its versions of these measures.
The House of Representatives can only vote on third and final reading on any bill that it has already passed on second reading after copies of this measure are given to lawmakers at least three days before the date of final voting. This rule can be dispensed with, however, for bills certified as urgent by the President.
According to Dominguez in his memo, this TRAIN bill 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 $3,500 in 2015 to at least $4,100 by 2022.”
Dominguez told the President in his memo that the “Non-passage of Package 1 will be fiscally irresponsible and will have dire consequences on both the macro-fiscal position of the country and more importantly on the lives of the poor and vulnerable.”
“From a macro-fiscal perspective, the deficit of three percent of GDP will be breached, leaving the country susceptible to an unsustainable fiscal position and undermining hard-fought plans in improving macroeconomic fundamentals,” he said.
“A deficit above three percent of GDP can lead to a credit rating downgrade to below investment grade.,” he said. “This can cost the government around P30 billion more in debt servicing and the public up to P100 billion higher borrowing costs. It can also leave the government more vulnerable to fiscal risk as increasing liabilities, such as pension of uniformed personnel, will lack funding source.”
He concluded in his memo that, “More importantly, non-passage of Package 1 will disrupt the much-needed increase in spending on infrastructure, education, health and social protection that can help improve the lives of the poor and vulnerable.”
Minus the TRAIN bill, there will be less or partial funding for, among others, the construction and rehabilitation of school buildings, farm-to-market roads, hospitals, and other health facilities; conditional cash transfer programs for the poorest households; and the social pension for indigent senior citizens, he said.
The key features of the substitute bill include the following:
• Lower PIT rates as proposed by the DOF but indexed to cumulative Consumer Price Index (CPI) inflation every three years;
• A flat rate of six percent for the estate and donor’s taxes;
• Broadening the tax base by removing special laws on VAT exemptions, including those for cooperatives, housing and leasing, but retaining exemptions for senior citizens and persons with disabilities;
• Staggered “3-2-1” excise tax increase for petroleum products from 2018 to 2020 but with no indexation to inflation, and liquefied petroleum gas (LPG) used as feedstock to be exempted from the hike;
• A five-bracket excise tax structure for automobiles with a two-year phase-in period for the tax increases;
• A tax on sugar-sweetened beverages or SSBs equivalent to P10 per liter; and
• Earmarking of 40 percent of the proceeds from the fuel excise tax increase for social protection programs for the first three years of the tax reform measure’s implementation.
HB 5636 also includes tax administration reforms such as the fuel marking and monitoring system to curb oil smuggling, the use of electronic receipts, and the mandatory connection of the point-of-sale (POS) system of all establishments to the BIR, and the relaxation of bank secrecy laws for investigating and combating tax fraud.
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