Dominguez: No new ‘sin’ taxes eyed despite recession

Despite rising budgetary needs for COVID-19 response and universal health care and a weak tax collection because of recession, the government is not resorting to higher excise on so-called sin products beyond rates already mandated by recent laws, according to the head of the Duterte administration’s economic team.

“No additional tax measures are being contemplated” as far as tobacco, e-cigarette and alcohol products were concerned, Finance Secretary Carlos G. Dominguez III said in a text message on Saturday (July 25).

Sources said Dominguez and other economic managers met online with cigarette firms last week to discuss how the industry was coping with the COVID-19 crisis.

Two laws that hiked “sin” tax rates took effect in January:

• Republic Act (RA) No. 11346 or the Tobacco Tax Law of 2019, under which cigarette excise tax increased to P45 per pack this year
• RA 11467, which jacked up excise on e-cigarettes and alcohol products to raise additional revenues and finance the universal health care law signed by President Rodrigo Duterte last year.

Despite higher taxes, a combination of rising illicit trade and production halt at the height of the COVID-19 lockdown had resulted in weak sin tax revenues to date—as of end-May, the combined take from tobacco and alcohol products fell 39 percent year-on-year to P63.1 billion.

But as more Filipinos transacted on the internet and digital marketplaces flourished amid the COVID-19 lockdown, the government wanted to collect value-added tax (VAT) from global platforms like Amazon, Facebook, Google, and Netflix, among other online sellers and service providers.

Last week, the Organization for Economic Cooperation and Development (OECD) said that the gains in increasing the share of taxes to economies across the Asia-Pacific region were “expected to take a hit as a result of the COVID-19 pandemic.”

While digital taxation would shore up government revenues during a recession, it may also deter the shift to digital operations of businesses from flourishing.

Asked by the Inquirer to comment on increasing moves in Asia-Pacific, including the Philippines, to tax online transactions, David Bradbury, head of tax policy and statistics at the OECD’s Center for Tax Policy and Administration, said the best way to implement digital taxation was through the multilateral inclusive framework on base erosion and profit shifting (Beps) being pushed by developed economies.

The Philippines had been invited to take part in the Beps project, but it backed out in 2016 due to subpar compliance with international tax standards during that time.

“The OECD through the inclusive framework on Beps, which has more than 130 jurisdictions that are members of that body, have been working over the last few years towards trying to come up with a consensus-based solution to these challenges,” Bradbury said.

“We are hopefully in the final stages of trying to reach a consensus around new rules to tax the digital economy,” Bradbury added.

“But in the current environment we also recognize that many countries find themselves under the pressure of trying to impose unilateral measures,” he said.

“From our perspective, obviously these are questions for sovereign nations to decide upon. But we clearly believe that the best outcome is for countries to commit and to renew their commitment to the multilateral process to secure a consensus-based solution to these issues,” Bradbury added.

Bradbury, however, noted that “the problem with any country wanting to introduce a unilateral measure at this stage is that we have seen that those countries that have done that have been the subject of trade retaliation, and the potential for unilateral action to escalate into trade conflicts is something that nobody wants to see with the global economy being in its current precarious state—escalation of trade disputes would only do further harm and jeopardize any prospects of recovery.”

For instance, the United States had threatened to retaliate and slap higher import duties on goods coming from countries deemed targeting US-based tech firms.

“I think that it was completely understandable as to why governments are committed to ensuring that there is fair taxation in this area—we support that,” said Bradbury.

“But I think it’s also fair to recognize that a multilateral process is the only way that this problem is really going to be addressed. There is one on foot, and we will continue to work hard towards achieving them,” he added.

TSB