Amid a resurgence of protectionism across economies, possibly including in the United States once Donald Trump assumes presidency in the economic giant, the head of President Rodrigo Duterte’s economic team is pushing for tax reform to protect the domestic economy from external shocks.
“The new government is advancing a three-pronged strategy focused on improving budget efficiency and transparency, strengthening tax administration, and reforming tax policy, precisely to shield Filipinos from the market volatility spawned by this emerging pattern of resurgent protectionism across the globe,” Finance Secretary Carlos G. Dominguez III said in a statement Friday.
“We should seize the ‘Cinderella moment’ we now have to quickly move the fiscal reform package and create a buffer for the most vulnerable among our people,” Dominguez said, adding that “this strategy will vastly improve our fiscal base, especially when global prospects are becoming more uncertain.”
According to Dominguez, Trump’s victory in the US presidential polls “could signal the beginning of trade wars and weak growth, if Trump pushes through with his pledge to implement protectionist policies to keep jobs in America.”
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“The uncertainty created by this revival of protectionism will likely lead to volatility and a risk-averse attitude among many of the Philippines’ trading partners, and result in slowing global trade and weaker global growth,” the Finance chief added.
In a Nov. 17 report titled “Trump’s Election Raises Global Uncertainties; Trade, Foreign Policy Switches Could Have a Sizeable Impact,” debt watcher Fitch Ratings said “a major shift toward trade protectionism in the US could have a significant impact on Asian economies.”
“Trump has threatened to label China a currency manipulator and place large tariffs on Chinese imports, and has criticized the US-South Korea free trade agreement. Asian exporters have become less directly dependent on the US over the last two decades, as China has become the largest trade partner of most of the region’s economies. But the US remains the largest market for China itself, accounting for almost one-fifth of its exports. Disruption to trade between China and the US would have ramifications for the region. Countries including South Korea, Singapore, the Philippines and Thailand are significant suppliers of intermediate goods—such as electronic and automotive components—to China,” Fitch explained.
Given such scenario, Dominguez said “a fiscal program that encompasses budget reforms as well as reforms in tax policy and administration needs to be implemented now.”
The Department of Finance’s tax policy reform program was aimed at augmenting the P1 trillion in priority investments needed by the administration in the next six years to sustain at least 7-percent economic growth until 2040 as well as slash the poverty incidence to 13-15 percent by 2022 from 21.6 percent last year.
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The proposed policy packages, all constituting a bill that balances trade-offs, will allow the government to raise P600 billion or 3 percent of the gross domestic product (GDP) in 2019 prices, of which P400 billion or 2 percent of GDP will come from tax policy reform measures.
The remaining P200 billion will be generated through tax administration reforms to be implemented at the bureaus of Customs as well as Internal Revenue, including combatting smuggling and reducing compliance costs to increase taxpayer satisfaction, respectively.
The Duterte administration’s tax policy reform program would have six packages, the first of which would adjust tax brackets to correct “income creeping”; reduce the maximum personal income tax rate to 25 percent over time, save for the “ultra-rich” who would be slapped a higher 35 percent; and shift to a simpler modified gross system.
As lower personal income taxes would result into foregone revenues estimated at P180.3 billion by 2019, the DOF plans to offset and gain P377.3 billion by expanding the value-added tax (VAT) base by limiting exemptions to raw food, education and health products and services; increasing the excise slapped on all oil products and indexing them to inflation; as well as jacking up excise on automobiles.
The government stands to generate a net revenue gain of P197 billion from the first package by 2019.
The first package of the tax policy reform program would also include tax administration reform measures, including legislation to relax the bank secrecy laws for tax fraud cases, as well as including tax evasion as a predicate crime to money laundering.
However, a number of legislators have already expressed opposition against the proposed removal of the exemption from 12-percent value-added tax of senior citizens’ non-essential purchases, as well as the plan to hike petroleum excise taxes.
The second package, which would likely be introduced in 2018 or after the Sin Tax Reform Law matures next year, would levy taxes indexed to inflation on sweetened drinks, as well as further hike the excise tax slapped on alcohol and tobacco products.
The “health tax” package would generate P120.4 billion in revenues for the government by 2019—P71.7 billion from alcohol and tobacco, on top of P48.7 billion from sweetened beverages.
The four other tax packages include those on corporate income tax and incentives; property tax; capital income tax; and other taxes (carbon tax, “fatty” food tax, lottery and casino tax, as well as mining tax), eyed for passage in the next two years.
By 2019, these six tax policy reform packages would result into losses of P219.6 billion to be offset by P589.5 billion in gains, bringing the net revenue impact at a gain of P375.2 billion.