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Duterte’s tax reform to support infrastructure buildup – Nomura

By: - Reporter / @bendeveraINQ
/ 03:45 PM June 01, 2017

Railway projects are among the biggest items on the government’s infrastructure list (JUAN ESCANDOR / INQUIRER SOUTHERN LUZON)

MANILA — The approval of the Duterte administration’s first tax reform package by the House of Representatives augurs well to financing the massive infrastructure projects to be undertaken by the government, according to Japanese financial giant Nomura.

“We maintain our base case that this package will be passed this year and take effect at the start of 2018, creating additional fiscal space to support the government’s medium-term infrastructure spending plans. Apart from the revenue impact from these measures, there are benefits from tax administration reforms to expand the tax base, including the VAT [value-added tax] changes,” Nomura said in a note to clients Thursday, referring to House Bill No. 5636, which President Duterte had certified as urgent last Monday.

HB 5636 contained the Department of Finance’s proposal to ease the tax burden on personal income earners while slapping new or additional taxes on consumption.

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Last Wednesday, the House of Representatives passed HB 5636 on third and final reading, with 246 votes for, nine against and one abstention, ahead of Congress’ sine die adjournment.

“The DOF has yet to announce an official estimate of the net revenue impact of the version that was passed, but it appears that there has been some dilution, with some reports suggesting a net revenue impact of about 0.5 percent of GDP [gross domestic product], lower than the 1 percent in the original DOF proposal. While key components were largely intact such as the personal income tax cuts and an increase in excise taxes on fuel, cars and sugar in beverages as offsets, the lifting of VAT exemptions excluded some key items such as those for cooperatives,” Nomura noted.

For Nomura, “we think a 0.5 percent of GDP revenue impact is still relatively significant.”

Finance Secretary Carlos G. Dominguez III earlier said that non-passage of HB 5636 “would disrupt the planned increase in public investments in infrastructure, education, health and social protection.”

Dominguez had warned of “dire consequences” if HB 5636’s passage was delayed “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.”

“Without the [first tax reform package], the government’s strategy to embark on an aggressive expenditure program by raising deficit spending to 3 percent of 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,” Dominguez had pointed out.

Last April, economic managers unveiled the administration’s “Dutertenomics” thrust of “build, build, build” that they claimed would usher in a “golden age of infrastructure.”

The government plans to roll out P7.125 trillion in public infrastructure projects from 2017 until 2022 while also jacking up to 75 from 55 previously the number of so-called flagship, “game-changing” projects that the administration aims to start and complete before 2022.

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A total of P8-9 trillion will be spent by the Duterte administration in the next six years to build vital infrastructure such that the share of infrastructure spending to GDP will rise from 5.3 percent this year to 7.4 percent in 2022.

The latest Department of Finance computations showed that lowering the personal income tax rates coupled with reduction in donor and estate taxes would result in foregone revenues of P140.1 billion when
implemented in 2018.

The VAT base expansion as well as higher automobile and petroleum excise taxes, meanwhile, would bring about a revenue gain of P187.7 billion next year. Complementary measures, including the P10 excise tax on sugar-sweetened drinks, would add P65.8 billion in revenues, on top of a P43.8-billion gain from tax administration measures.

The tax administration measures included in HB 5636 were mandatory use of fuel marking; mandatory issuance of e-receipts; mandatory interconnection of large and medium firms point of sale machines and accounting system with the BIR; as well as relaxation of bank secrecy for tax fraud cases.  SFM

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TAGS: Business, Carlos G. Dominguez III, Department of Finance, Duterte Administration, economic growth, economy, excise taxes, Finance, Government Revenues, Gross Domestic Product, House Bill 5636, House of Representatives, Infrastructure, infrastructure development, legislation, lower income tax rate, Nomura, Philippine president, removal of VAT exemptions, Rodrigo Duterte, tax, tax collection, tax reform, tax reform program, value-added tax
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