Tax package approval seen credit positive

Global financial services giant Credit Suisse sees as positive for the country’s credit ratings the House approval of the first package of the Duterte administration’s comprehensive tax reform program which sought to ease the burden on personal income earners while slapping additional or new taxes on consumption.

“We believe what matters most from the credit rating agencies’ perspective is the revenue generated over time, and not just for one year. While the revised version of the bill implies that some revenue will be back-loaded, the total tax receipts generated by 2020 will be quite similar. We estimate that with the additional tax reform revenue, the government can raise spending by 1 percent of GDP [gross domestic product] while still lowering overall government debt metrics,” Credit Suisse research analyst Michael Wan said in a May 31 report titled “Philippines: Tax reform—impact and implications.”

“We see a good likelihood that Fitch will upgrade the Philippines to BBB, from BBB- (positive outlook), if the tax reform bill eventually passes as it is written,” Wan added.

In the meantime, the Department of Finance will seek the swift Senate approval of House Bill (HB) No. 5636, the first of at least four tax reform packages, when Congress resumes session in July, Finance Secretary Carlos G. Dominguez III told reporters on Friday.

Last week, 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.

Wan said Credit Suisse disagreed with the prevailing consensus view that the tax reform bill was negative for private consumption.

“First, the substitute bill looks more supportive of private consumption compared with the original tax bill filed in January, with tax hikes more spread out which means a lower inflation path. Second, the tax cuts and cash transfers should more than offset the negative impact of the tax hikes in 2018,” Wan said.

Also, Wan said tax reform would allow the government to have about 1 percent of GDP additional fiscal space this year and next year without raising government debt trajectory, hence will support the Duterte administration’s plan to ramp up spending on infrastructure.

In April, economic managers unveiled the “Dutertenomics” thrust of “build, build, build” that they claimed would usher in a “golden age of infrastructure” by spending up to P9 trillion on hard infrastructure in the next six years and raising the share of infrastructure expenditures in GDP from 5.3 percent this year to 7.4 percent in 2022.

However, Wan warned of “significant dilution” of revenue in the first tax package, which “could be negative for credit rating and infrastructure push.”

“The bill will now head to the Senate, where it could face more resistance. Our analysis rests on the assumption that there will not be significant dilution to long-term revenues from the latest approved version of the tax reform legislation,” he said.
Any dilution, he added, could be negative for the country’s credit rating prospects and could also eventually limit the government’s planned infrastructure drive.

Finance Undersecretary Karl Kendrick T. Chua told reporters last Friday that based on the latest preliminary DOF computations, the first tax reform package will generate about P130 billion in net revenue, up from the previous estimate of about P82 billion.

“It’s higher because they [the lower House] made the generic repeal on the VAT [value-added tax] exemptions stronger. The original [bill] was very weak,” Chua explained.