Tax reform remains top priority

With the country’s income tax rates among the highest in the region, tax reform became a hot campaign issue among voters, such that almost all who ran for the presidency during the May 2016 elections committed to ease the Filipinos’ tax burden.

Before the Duterte administration came into office in July, then outgoing Finance Secretary Cesar V. Purisima turned over to his successor, Carlos G. Dominguez III, a comprehensive tax reform proposal, which the former had pitched to the previous administration, but to no avail.

Last year, President Aquino turned down the DOF’s tax reform proposal, as he was not too keen on moves aimed at reducing income taxes while increasing the value-added tax (VAT) slapped on goods and services.

Purisima’s proposal included an all-in tax exemption for those earning P1 million and below yearly, lower tax rates for individuals and firms, an increase in the VAT rate to 14 percent and the expansion of its coverage.

Also, the tax reform package that Purisima turned over to Dominguez was comprehensive, not piecemeal, as well as revenue-positive, as the former Finance chief cited that “eroding revenue without making up for lost ground in fiscal space is unsustainable, threatening our ability to deliver public goods and services in pursuit of inclusive growth.”

For his part, Dominguez pledged to work on the Duterte administration’s tax reform package, and committed to submit to Congress the new DOF proposal in September.

As promised, the DOF submitted to both houses of Congress a bill containing the first package of its tax policy reform program last September; however, a number of provisions were frowned upon by legislators, including the removal of the VAT exemption on senior citizens’ non-essential purchases.

Tax reform is high on the DOF’s priority list, such that Dominguez designated a top-ranking official as a point person in pushing for the passage of the first package in Congress by the middle of this year.

Undersecretary Karl Kendrick T. Chua was made in charge of ensuring that the government would be able to foster a simpler, fairer and more efficient system for taxpayers, while also generating additional revenue to fund the huge investments needed yearly to slash poverty incidence and sustain robust economic growth.

The former World Bank senior economist for the Philippines is no stranger to tax reforms, as during his stint at the multilateral lender, he had pitched the adjustment of excise tax on oil products, citing sizable foregone revenue from the low rates that had remained unadjusted for almost two decades.

Excise taxes

In its October 2016 Philippine Economic Update, the World Bank reiterated its push for higher excise taxes on fuel. Excise refers to the tax slapped on the consumption, production or sale of commodities whether locally made or imported. Excise taxes may be either ad valorem (based on selling price or specified value of the product), or specific (based on volume capacity or weight or other unit of measurement).

“Current excise taxes on premium unleaded gasoline and diesel account for 9 percent and zero percent of pump price, respectively, which are among the lowest in a group of developed and developing oil-importing countries,” according to the multilateral lender.

Also, “primarily as a result of unadjusted excise tax rates, excise tax revenues from petroleum products have plummeted since 1997,” the World Bank said.

“Petroleum excises collected by the Bureau of Internal Revenue were equivalent to 1.2 percent of GDP (gross domestic product) in 1997. Together with collection from the Bureau of Customs, total petroleum excise tax revenues fell from 0.8 percent of GDP in 2001 to just 0.2 percent of GDP in 2013,” it added.

It does not help that “smuggling of oil products is allegedly substantial,” the World Bank said, citing data placing at an estimated P3.2 billion the annual excise revenue leakage from 2006 to 2013, equivalent to 13.9 percent of potential petroleum excise revenues during the said eight-year period.

“Non-indexation of the country’s oil excise tax rates to inflation has significantly eroded the de facto progressivity of the tax since excise tax rates have not increased between 1997 and 2014 even as income of richer households almost tripled. Thus, petroleum excise taxes have become less equitable over time since these rates were not adjusted to inflation while income has more than doubled. While petroleum retail prices have risen significantly since 1997, petroleum excise rates have fallen sharply in real terms. This means that the intended redistributive effect of the tax has grossly diminished over time,” the World Bank said.

Improve efficiency

In this regard, the World Bank said “excise tax rates would need to increase to improve the efficiency and equity of petroleum taxes, raise revenues, and reduce negative externalities brought about by pollution.”

“The best solution would be to raise excise tax rates to achieve a target excise to retail sales price ratio following international good practice and automatically indexing this to inflation annually thereafter to keep the excise burden from falling over time. If one-time excise adjustments are not politically feasible, then a second best solution that allows asymmetric adjustment in excise taxes depending on petroleum prices can be considered,” it said.

First package

Before Congress went on Christmas break, the DOF pitched a revised version of the first package of its comprehensive tax reform proposal, which will now include mandatory marking of oil products as well as the grant of absolute amnesty on estate tax deficiency.

A copy of the revised draft bill obtained by the Inquirer showed that the first package “seeks to lower personal income taxes, broaden the VAT base, adjust excise taxes on petroleum and automobiles, reduce the estate and donors tax, and provide an amnesty to past estate tax cases.”

Under the first package, the following tax administration measures were to be pursued: Mandatory use of fuel marking; recognition of e-receipts; mandatory interconnection of large and medium firms point of sale machines and accounting system with the BIR; mandatory use of GPS locks when transporting cargo from ports to economic zones and free ports; shift to quarterly VAT and percentage tax filing to improve compliance; and relaxation of bank secrecy for fraud cases.

While it was initially supposed to be included in the succeeding tax reform packages, the DOF is now moving to include in the first package the reduction of estate and donors tax to 6 percent, while also providing absolute amnesty on past estate taxes that had been unpaid.

The bill retained the salient provisions of the original first package as proposed by the DOF, including adjusting tax brackets to correct “income bracket creeping”; reducing 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 shifting to a simpler modified gross system.

As lower personal income taxes will result into foregone revenues estimated at P127.4 billion by 2018, the DOF plans to offset and gain P301.6 billion by expanding the VAT base by limiting exemptions to necessities such as 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 P174.2 billion from the first package by 2018, the first year of implementation being eyed by the DOF as the bill was targeted enacted into law in 2017.

Recognizing that the upward tax adjustments will impact on the poor, the bill also proposed earmarking for social protection.

Sustain growth

The Duterte administration’s tax policy reform program, 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 rate to 14 percent by 2022 from 21.6 percent in 2015, will come in six packages.

The second package, which will likely be introduced in 2018 or after the Sin Tax Reform Law matures, will levy taxes indexed to inflation on sweetened drinks, as well as further hike the excise tax slapped on alcohol and tobacco products.

Based on earlier DOF estimates, the “health tax” package will 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 to three years.

According to the Cabinet-level, interagency Development Budget Coordination Committee (DBCC), the proposed 2018 national budget, pegged at a record-high of P3.84 trillion, will be contingent on Congress’ approval of the proposed first tax reform package, as government revenues are projected to hit P2.913 trillion with the help of additional taxes to be introduced to offset the planned lowering of personal income tax rates.

“The projected proceeds of the tax reform package—around P206.8 billion—will fund the government’s big-ticket development projects, particularly the infrastructure program,” the DBCC said in a recent report.