The Department of Finance (DOF) completed in less than 90 days into the Duterte administration last year the first package of its proposed comprehensive tax reform program (CTRP) envisioned to be the “game-changing” tool to realize the government’s primary agenda of sustaining high growth and making its benefits felt by all sectors in all regions.
Tax reform had topped the economic agenda of President Rodrigo Duterte when he assumed office in July last year, with his Finance Secretary, Carlos Dominguez III, announcing that the new administration would work to fulfill the Chief Executive’s campaign pledge to make the tax system fairer, simpler and more efficient and, more importantly, less burdensome for low- and middle-income Filipinos.
‘In the medium-term, tax reform is expected to help reduce the poverty rate from 21.6 percent in 2015 to 14 percent by 2022,” Dominguez said.
The DOF began the process of fulfilling this poll campaign pledge by submitting to the Congress last September 26, or just short of three months since President Duterte assumed office, the first package of the CTRP.
The DOF also issued Administrative Order No. 1-2016 on the Rules and Regulations to Implement Republic Act No. 10708 or the Tax Incentives Management and Transparency Act (TIMTA).
This was issued by the DOF with the Department of Trade and Industry (DTI).
It likewise conducted the 2nd International Tax Forum (ITF) on October 27-28, with the theme “Fiscal Policy and Inclusive Growth.”
Package One of the CTRP aims to lower personal income taxes (PIT) from 32 percent to 25 percent over a two-year period, except for the “ultra-rich” to keep the rates progressive.
It also adjusts the tax brackets to correct “income creeping” by adjusting the rates to inflation and proposes a shift to a modified gross system to make tax payments simpler, fairer and more efficient.
The original DOF proposal, which is now being deliberated upon in the Ways and Means Committee of the House of Representatives, exempts 4.7 million taxpayers with a net taxable income of 250,000 and below from paying income taxes.
To offset the revenue loss from the lowering of the PIT rates, the DOF has proposed as part of Package One a corresponding set of revenue compensating measures that aim to expand the value-added tax (VAT) base and restructure the excise taxes on fuel and automobiles.
The proposal also includes earmarking a quarter to a third of the revenues generated from the fuel excise tax adjustments to targeted, direct transfer programs for senior citizens and other vulnerable sectors.
“The general rule in crafting the Duterte administration’s income tax reform plan is that the rich will have to pay more while poor and low-income Filipinos will pay less or none at all,” Dominguez said.
“At the same time, society’s vulnerable sectors will be protected through highly targeted subsidies such as the conditional cash transfer program. We will ensure that the ordinary workers and the bottom 50 percent of households will be fully protected through social protection programs,” he added.
World Bank Country Director for the Philippines Mara Warwick had described this tax reform package as a possible “game changer” that could improve transparency, tax administration efficiency and the expansion of the tax base.
The Action for Economic Reforms, a policy think tank backing the DOF-proposed tax reform plan, has also described it as a “game changer” that will not just raise revenues, but also generate funds to help address the backlog in physical and human capital investments.
When the tax reform package was first presented to members of the House ways and means committee chaired by Quirino Rep. Dakila Carlo Cua, his senior vice chairperson, Albay Rep. Joey Salceda, immediately voiced his support for the program, describing it as a “very good measure.”
Salceda, considered an expert in the field of economics, had even recommended a “catchier” name for the tax reform plan, suggesting that it be called the Tax Reform for Acceleration and Inclusion Act or TRAIN, which has since been adopted by the DOF.
Dominguez said tax reform would be the linchpin of a broader reform package envisioned by the new government to attack generational poverty, restore peace and order, curb armed insurgencies and transform the Philippines into a high middle-income state by the end of the Duterte presidency.
He has stressed that tax reform is indispensable to the government’s goal of investing some P1 trillion more each year on top of the current P1.3 trillion it plans to spend on infrastructure, education, health, social protection and other programs necessary to create enough decent-paying jobs for, and improve the living standards of, Filipinos and at the same time make the Philippines more globally competitive and attractive to foreign investments.
This additional P1 trillion annual investment, Dominguez said, would help realize the Duterte administration’s vision of transforming the country into a high middle-income economy by 2022, with a per capita gross national income of $4,126, which is where Thailand and China are today.
If this momentum is sustained, Dominguez said the country would be well on its way to becoming a high-income economy by 2040 with a per capita gross national income of at least $12,000, or where South Korea and Malaysia are right now.
The World Bank currently ranks the Philippines among lower-middle-income economies or those with gross national income per capita of between $1,046 and $4,125.
In crafting the tax reform plan, the DOF conducted extensive consultations with the business sector, civil society groups, former finance, and economic planning officials, members of the academe, economists and other stakeholders.
The tax reform plan has so far been endorsed by the Mindanao Business Council, the Tax Management Association of the Philippines, Philippine Institute of Certified Public Accountants (PICPA), and the Federation of Filipino-Chinese Chambers of Commerce and Industry Inc. (FFCCCII), among others.
While awaiting the congressional approval of the tax reform package, Dominguez said the DOF has started the process of expanding the Bureau of Internal Revenue (BIR)’s Large Taxpayer Service to cover the top 3,000 corporations that account for 75 percent of total tax revenues; simplifying tax payments, forms and procedures for small taxpayers; improving electronic payment systems; enforcing risk-based audits; and intensifying anti-corruption and anti-tax evasion efforts at the BIR and Bureau of Customs (BOC).
But Dominguez said these initial DOF efforts are not enough to sustain the high level of spending needed to fill the rural and urban infrastructure backlog left behind by the previous administrations, along with the increased investments necessary to develop human capital and protect the country’s vulnerable sectors.
He said that tax policy reforms spelled out in Package One of the CTRP, which only the Congress can deliver in the form of amendments to the Tax Code, need to be put in place at the soonest to realize the Duterte administration’s inclusive growth agenda.
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