‘New normal’: Businesses seen shifting to digital as gov’t scour ways to tax them
MANILA, Philippines — How would the “new normal” amid the COVID-19 pandemic look like as far as the economy is concerned?
For the fiscal sector, it would mean the government borrowing more to finance over a trillion pesos in budget deficits during the next three years as higher spending, especially on healthcare and social welfare, will outpace expected weak tax and non-tax revenues.
As for businesses, the COVID-19 crisis would push them to change strategies and instead focus on food and medical equipment production while building their digital presence as more consumers increasingly turn to cashless transactions. This, while the government looks for ways to tax them.
These new normal scenarios were contained in the “We Recover as One” report released over the weekend by the state planning agency National Economic and Development Authority (Neda), as chair of the interagency task force technical working group for anticipatory and forward planning.
According to the report, “the projected decline in government revenues amid muted economic activities, together with increased government spending on COVID-19 response and mitigating measures, is expected to put pressure on the country’s fiscal position in 2020 and 2021.”
Separate Department of Budget and Management (DBM) projections showed the budget deficit will balloon to P1.563 trillion this year, P1.429 trillion next year, and P1.181 trillion in 2022, from P660.2 billion last year.
To finance these huge budget deficits, the government will have to borrow from multilateral lenders as well as issue bonds onshore and offshore, although the report warned that “increased risk aversion of investors can lead to an increase in borrowing costs” in the near term.
As such, even with a higher level of planned spending, the government must remain prudent and agencies should “realign expenditure priorities to facilitate the transition and adjustment to the ‘new normal’,” according to the report.
“For 2021, the list of ‘Build, Build, Build’ projects can be revisited to give priority to crucial and shovel-ready projects, to provide more space for relevant health-related expenditures, and to improve the digital infrastructure,” Neda said.
The Duterte administration’s infrastructure team was again reviewing the ambitious “Build, Build, Build” program in a bid to immediately resume the “most impactful” flagship projects—those with the biggest impact on gross domestic product (GDP) and jobs, according to Acting Socioeconomic Planning Secretary and Neda chief Karl Kendrick T. Chua.
Neda also warned of tighter domestic liquidity, as “the deterioration of balance sheets of firms and households may lead to tighter lending standards of banks” while “rising risk aversion of investors may cause an elevated outflow of capital.”
The COVID-19 crisis would also likely jack up contingent liabilities, while at the same time presenting opportunities for the government to put in place a digital taxation regime.
“With the expected shift of the private sector to online transactions, the government needs to establish a digital taxation framework. There is also a need to invest in digital taxation infrastructure,” Neda said.
Last week, Albay Rep. Joey Salceda filed a bill eyeing to impose tax administration measures on video and music streaming, online shopping sites, as well as advertisements on social media.
Finance Secretary Carlos G. Dominguez III said the Department of Finance (DOF) was studying Salceda’s bill “very carefully and looking into what parts of the digital economy should be taxed.”
“Salceda’s bill deals with how we might capture digital purchases into the value-added (VAT) base, and how to absorb profits generated by digital companies into our corporate income tax system. We are studying how best these goals can be achieved, considering the transnational nature of most of these transactions,” Dominguez said.
“There are no new taxes and no increases in existing tax rates in the bill, and Salceda has clarified that it is the tax base that he wants to expand. We are studying how the bill will fit in our tax administration system, and which enhancements in our revenue regulations would be necessary should the bill pass into law. Ultimately, having a clear and efficient tax regime for the digital economy will be critical, as more and more taxable transactions shift from traditional means of doing business to more virtual avenues, a trend accelerated by COVID-19,” Dominguez added.
Dominguez noted that “taxation in the digital economy is being seriously considered not just in the Philippines but in other countries as well.”
“Indonesia is already taking steps to bring the digital economy into its tax base, to boost revenues in light of COVID-19. Other countries in the region, such as Singapore and Malaysia, already cover some digital services in their sales tax bases,” Dominguez pointed out.
This will be done while micro, small and medium enterprises (MSMEs) were seen moving to digitalize transactions alongside retail services relying more on e-commerce.
“Under the new normal environment, there will be an increasing need for MSMEs to undertake business continuity planning and capacity building (such as digital skills, digitalizing operations, knowledge transfer, and information sharing, and mentoring) to strengthen resiliency to disruptions,” Neda said.
“With continuing policies and measures for physical distancing and the call to ‘stay at home,’ the increased preference for online transactions for both consumers and merchants will be a challenge. More supermarkets and restaurants will now engage in online shopping platforms or integrate delivery services into their operations. Further, an increase in demand for alternative modes to facilitate shopping through personal assistance such as pabili, pasa-BUY, or MyKuya services will be seen,” Neda added.
This will entail a shift to a cashless society, although Neda lamented that “a major challenge seen is the readiness of the country’s financial system to adopt digital currency, manage the influx of cashless payment systems, and possible deregulation of financial transactions.”
To address this, Neda urged financial institutions “to invest in digital infrastructure and implement better cybersecurity measures and regulations for consumers and merchants/establishments” while fast-tracking the implementation of the national ID system in order to possibly pursue “tie-ups with digital payment systems such as PayMaya and GCash, among others.”
Even the information technology-business process management (IT-BPM) sector would need to adjust as it “faces challenges in providing continuous services to its global clients with the current enhanced community quarantine (ECQ) situation, such as increasing the service capacity of its employees to at least 50 percent with the work-from-home (WFH) scheme,” Neda said.
Neda said “there is a need to allow up to 40 percent of its workforce to deliver work onsite, on a shifting basis, for IT-BPM services that cannot be delivered from home,” which can be addressed by “[adopting] last-mile connectivity for WFH, and/or possible alternative working arrangements in expanded areas of operations.”
With the COVID-19 disease expected to linger on without a vaccine, the healthcare and food sectors would also have to adapt to emerging challenges.
As such, the agriculture and fishery sector should focus more on food security; industries must redirect production to increase the supply of essential goods like chemicals for medicines and disinfectants, metal and wood for hospital beds, construction materials for hospitals and quarantine facilities, as well as paper, plastic, and rubber for protective personal equipment (PPE), among others.
Even funeral services were not spared from shifting to a “new normal”—“with the deaths caused by the pandemic, the increased demand for crematoriums will be prevalent, as cremation is the safest way to manage the remains of deceased persons who have died from infectious diseases such as COVID-19,” Neda noted.
For tourism establishments, there must be regular sanitation and disinfection of facilities and transport services moving forward,; for transport and logistics, striking a balance between a seamless supply chain and yet strict physical distancing measures should be pursued, Neda said.
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