DOF pitches comprehensive tax reform plan

The Department of Finance has come up with a comprehensive tax reform study for incoming Secretary Carlos G. Dominguez III’s consideration.

The proposed tax reform package includes an all-in tax exemption for those earning P1 million and below yearly, lower tax rates for individuals and firms, an increase in the value-added tax or VAT rate to 14 percent and the expansion of the VAT coverage.

“Tax reform is an area of prime opportunity for the next administration, which if done holistically has immense potential to re-engineer our economy toward a more equitable, dynamic and competitive one. The DOF has been making rigorous studies with our multilateral partners like the World Bank and the International Monetary Fund on how to go about a holistic, revenue-positive, and equitable package,” Finance Secretary Cesar V. Purisima said recently.

In a statement Thursday, the DOF said the proposed tax reform package was comprehensive, not piecemeal. It said it was revenue-positive, citing that “eroding revenue without making up for lost ground in fiscal space was unsustainable, threatening our ability to deliver public goods and services in pursuit of inclusive growth.”

Also, the tax reform package was aimed at “[empowering] our revenue-generating agencies and streamlining tax compliance for our people, making it easier for our people to pay taxes and for our tax agencies to administer the tax system” especially amid the Asean economic integration.

The latest DOF data showed that as the gross domestic product expanded at a faster rate of 6.9 percent in the first quarter, the share of taxes collected to GDP slid to 13 percent compared to a tax effort of 13.3 percent a year ago. This meant tax collection did not increase as fast as it should to better finance a growing economy.

Under the comprehensive tax reform package that the DOF was pitching, the income tax rate would be brought down on a staggered basis to 25 percent for both individuals and corporations from 32 percent and 30 percent, respectively, within the next five to six years.

The all-in income tax exemption for those earning P1 million and below a year would benefit about 11 million taxpayers.

The lowering of the individual and corporate tax rates coupled with the income tax exemption would cost the government up to P224 billion in the first year of implementation, based on the DOF’s estimates.

Despite the projected foregone revenues, Purisima said the tax rate reductions would impact the country’s competitiveness as an investment destination.

“Lowering corporate income tax rates from 32 percent to 25 percent will reduce P9 billion from our revenues, but it will make the Philippines more competitive in Asean,” the outgoing Finance chief said.

To compensate for the first two revenue-eroding proposals, Purisima said the DOF was also proposing a number of measures that would shore up collections.

“Perhaps equalizing the tax treatment of self-employed professionals with corporate taxpayers will help compensate, with an expected gain of P2 billion. Increasing the excise taxes on gas, diesel, and other oil products will generate P132 billion. It will also fulfill our environmental objectives given the existential threats climate change poses to our world. Expanding the VAT base and increasing the tax rate from 12 percent to 14 percent will result in revenue gain,” he said.

In particular, the DOF was pushing for the removal of all VAT exemptions, except on agriculture, health, banks and education.

“For sectors that are affected, removed VAT exemptions may be replaced by a direct subsidy mechanism that will pass through the budget process, so that relief is given to those who need them, and expenditures made more directed and transparent. For example, VAT exemptions for senior citizens or persons with disabilities can be transformed into budgetary support or subsidies such as conditional cash transfer programs, where the impact of programs is more targeted and direct. Removing all zero-rating for VAT except direct exports is also ideal. This VAT reform will generate P162 billion: expanding the VAT base by removing exemptions will generate P80 billion, while increasing the VAT rate will generate P82 billion,” the DOF said.

The DOF was also pushing for the rationalization of tax perks given to investors, which would let the government keep about P5 billion yearly.

Tighter rules that clamp down on tax evaders would also result in more revenue collections, Purisima said.

“Making tax evasion a predicate crime to money laundering and repealing bank secrecy for the Bureau of Internal Revenue (BIR) should add up to P210 billion, but I think we should make a one-time tax amnesty part of the package to make it feasible,” he said.

“We are one of only two countries in the entire world where tax evasion is not a predicate crime to money laundering. The current anti-money laundering law even has an explicit provision that prohibits the Anti-Money Laundering Council from intervening in BIR operations. This is a scenario that ties both hands behind our backs as we race to plug revenue leakages draining resources away from our people,” the DOF noted.

Other tax administration reforms pitched by the DOF include removing the BIR as well as the Bureau of Customs—the two biggest tax-collection agencies—from civil service and salary standardization, while also allowing then to retain 1 percent of their revenues as budget for modernization and also fund personnel enhancement measures.

“The next administration may also choose to pursue administrative measures that do not require legislation: tripling the number of companies in the Large Taxpayers Service to further stabilize the revenue base, including BOC top importers in the said segment, creating a High Net Worth Individuals Unit, and continuing to simplify tax forms, and automate the tax payment system for ease of compliance, given that 97 percent of total BIR collections come from voluntary compliance,” the DOF said.

If the package is implemented as a whole, the DOF estimated total revenue gains would reach up to P511 billion during the first year, resulting in a net revenue gain of up to P351 billion.