Tax reform a boost to infra buildup plan

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

“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,” Nomura said in a note to clients yesterday, referring to House Bill No. 5636, which President Duterte certified as urgent last Monday.

“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,” it added.

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.

On 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’ 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, it said in the note.

“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.

Nomura said even the reduced estimated revenue impact was still relatively significant.

Finance Secretary Carlos G. Dominguez III earlier said the nonpassage 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 would be 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 that will possibly cost the government an extra P30 billion in annual debt servicing and P100 billion more in higher borrowing costs for the public,” Dominguez had said.

In 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 to 2022 while also jacking up to 75 from 55 the number of so-called flagship, “game-changing” projects that the administration aimed to start and complete before 2022.

About P8 trillion to P9 trillion will be spent by the 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 DOF computations showed that lowering the personal income tax rates coupled with reduction in donor and estate taxes would result in foregone revenue 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 revenue, on top of a P43.8-billion gain from tax administration measures.

The said tax administration measures, which were contained in HB 5636, were the 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, and the relaxation of bank secrecy law for tax fraud cases.