BSP keeps eye on tax reform, braces for new US fiscal policies

The Bangko Sentral ng Pilipinas (BSP) is closely monitoring progress on the Department of Finance’s proposed comprehensive tax reform program while also bracing for new fiscal policies in the US, BSP Governor Amando M. Tetangco Jr. said Wednesday.

Following US Federal Reserve chair Janet Yellen’s testimony in the US Senate Wednesday morning Manila time, Tetangco noted that “the Fed has been consistent in stating that they are poised to raise rates and reduce accommodation.”

“The timing and magnitude, however, are what remain undetermined at this point,” Tetangco said in a text message to reporters.

Last December, the policy-setting Federal Open Market Committee unanimously voted to raise the key federal funds rate to a range of 0.5-0.75 percent, only the second time that US interest rates were increased during the last 10 years following a similar move in December 2015.

US Fed officials expect three more hikes next year to bring up the rate to 1.4 percent by end-2017, as US President Donald J. Trump’s promises to jack up infrastructure spending while slashing taxes are seen to grow inflation faster.

During Yellen’s Senate testimony, she “also flagged the need to discern the impact of the new fiscal policies of the Trump administration,” Tetangco added.

According to Tetangco, such was “not unlike our concern in the Philippines—we are watching out for the final form of the tax reform that will be approved by Congress.”

Last month, Deputy Governor Diwa C. Guinigundo told a Senate ways and means committee hearing that the BSP supports tax reform as it will add 0.6 percentage point to gross domestic product (GDP) growth this year on top of adding 0.2 percentage point in 2018. The government targets GDP growth of 6.5-7.5 percent this year before further expanding by 7-8 percent yearly starting next year until 2022.

“The lowering of income and corporate taxes will translate immediately to higher consumption, and [on] the part of the government, [higher spending] on infrastructure, human development and social protection for the poor. Tax reform will impact immediately on consumption and investment,” Guinigundo had said.

However, as the first package being pitched by the DOF will also entail slapping new or higher taxes on consumption, Guinigundo had said it will add 0.5 percentage point to the inflation rate this year as well as 0.7 percentage point in 2018.

But Guinigundo had said the impact of tax reform on inflation will still be “quite modest.”

“There are countervailing measures such that when the economy’s potential capacity is increased because of infrastructure and spending on social protection, inflation also slows in the sense that more people will be able to produce and there is more potential capacity to produce. So in the presence of better supply conditions, price movement will moderate,” Guinigundo had explained.

READ: Income tax cuts, tax reforms to boost economic growth – BSP

Last week, the Monetary Board raised its inflation forecasts for 2017 and 2018 to 3.5 percent and 3.1 percent, respectively, from 3.3 percent and 3 percent previously.

The Monetary Board, the BSP’s highest policy-setting body, attributed its higher forecasts to increasing fuel prices on top of a weaker peso since the fourth quarter of last year.

The adjusted projections nonetheless remained within the government’s 2-4 percent target for the next three years.

House Bill (HB) No. 4774, filed in the Lower House in January, contained the DOF’s proposal to lower personal income taxes, broaden the value-added tax base by cutting down on exemptions, increase excise taxes on petroleum and automobiles, as well as reduce the estate and donors’ tax rates.

Unlike the earlier version of the first package of the DOF’s tax policy reform program that was pitched to Congress last September, HB 4774 will no longer move to remove the value-added tax exemption being enjoyed by senior citizens as well as persons with disabilities.

Instead of the initial proposal of a one-time hike to P6, the excise tax slapped on fuel, HB 4774 instead proposed to implement it in three tranches of P3, P2 and P1 during the first three years, after which the government will implement annual 4-percent indexation of rates to account for inflation.

HB 4774 will also push for tax on lottery, while lowering the estate and donors’ taxes to a flat rate of 6 percent.

Also under the first package, the following tax administration measures were to be pursued: 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 Bureau of Internal Revenue; mandatory use of GPS locks when transporting cargo from ports to economic zones and free ports; and relaxation of bank secrecy for fraud cases.

The bill retained the key provisions of the original first package as proposed by the DOF, including adjusting personal income tax brackets to correct “income bracket creeping”; reducing  he 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. CDG