Questions on TRAIN 2 a.k.a. TRABAHO

When the inflation rate of 6.4% for August was finally announced by the Philippine Statistics Authority (PSA) last week, there was a storm of fears that lashed stronger than the most powerful typhoon of the season (Signal No. 4), “Ompong” that trashed northern Philippines and rained heavily the whole weekend on the rest of Luzon.
Without believing the rumor of unsure inflation data, the perception still persists that inflation is very high — the highest in nine years (Ibid.), as it can be felt in the undeniable increase in prices of the basic needs of Filipinos, mainly in food and fuel/power costs. And then there is the rice shortage that the National Food (NFA) Administrator Jason Aquino admitted in February (CNN Philippines, Feb. 7, 2018).
Sen. Francis Pangilinan is worried that the NFA buffer stock is good only for two days and said that Jason Aquino should also be prosecuted for graft and made to explain the missing P20 billion worth of rice, amidst persistent reports of tons of NFA rice being sold to private traders, who rebag the grain and sell the same as commercial rice.(philstar.com Sept. 13, 2018).
And agriculturists and rice farmers are perplexed why the manipulating private traders and smugglers should be rewarded and given even freer rein by the lifting of the quantitate restrictions “QR” (agreed World Trade Organization limits to the volume of rice imports) amidst the inflation and the rice shortage. The rice tariffication law that imposes a 35% tariff on unlimited importation is being rushed by the Legislature on the urgent request of the Executive (philstar.com, July 31, 2018). With the legitimized flooding of the market with imported rice, and the abolition of the NFA regulations, how can the local farmers compete with the cheaper-produced, lower-priced, better-quality Vietnamese and Thai rice? Is rice agriculture dead, and rice self-sufficiency a lost dream in the country that consumes roughly 11.7 million tons of rice every year?
The Bangko Sentral ng Pilipinas (BSP) says allowing cheap rice imports with tariffs will immediately lower the inflation rate by 0.4 percentage points and the price of rice by as much as P7 per kilo — but it will not bring the 2018 full-year inflation rate back to the 2% to 4% target inflation range. Agriculture groups like Samahang Industriya ng Agrikultura (Sinag) said the more foreign exporters would have access to the Philippines, they could, theoretically, manipulate supply to bring prices up.
Inflation has to be addressed, yet it seems to have swung from yes to no that the BSP will announce an early interest rate hike after its last rate hike of 50 basis points (of 100 basis points since May, its largest in a decade) to help ease the 6.4% August inflation (Bloomberg, Sept. 14, 2018). The peso gasped in sympathetic panic to P53.88 against the dollar last week, then the lowest in 13 years (BusinessWorld, Sept. 10, 2018) and even lower to P54.004 as of Sept. 14 (BSP). Analysts say the peso is getting pummeled by rising oil prices, faster inflation, fiscal and current-account deficits and the broader investor turn against emerging markets vis-à-vis the strengthening of the dollar (Bloomberg.com, Sept. 10, 2018). Goldman Sachs Group, Inc. sees the Philippines’ current account deficit continuing to deteriorate as infrastructure spending ticks up and other analysts think the peso may fall past P55 per dollar (Ibid.).
The falling peso and rising inflation: this situation seems hardly the time to be gung-ho on giant tax reforms which will change the lives for Filipinos. “Less than 10% of the population has a per capita income above the global middle-income level,” the World Bank says (ABS-CBN News, April 19, 2018). These days, an accelerating pace of inflation, triggered in large part by the government’s imposition of new taxes on a myriad of products and services, can only be expected to hit the poor most (Ibid.). The reference is to the Tax Reform for Acceleration and Inclusion program, TRAIN 1, which removed the personal income taxes for those earning below P250,000 but increased excise and value-added taxes to many goods and food consumed by all income and even no-income levels.
And TRAIN 2, second phase of the controversial tax reform has been “promised” by Pres. Duterte in his most recent State of the Nation (SONA) July 2018. Reportedly due to public backlash against TRAIN 1, the name for TRAIN 2 has been changed to “Tax Reform for Attracting Better and High Quality Opportunities” or TRABAHO. The second package proposed to cut corporate income tax from 30% to 25%and take away fiscal incentives, including tax exemption, from hundreds of businesses in export processing zones (The Philippine Star, Aug. 8, 2018).
Senate ways and means committee chairman Sonny Angara has said 0.9% or less than one percent was the highest inflation rate the DoF told lawmakers when it was badgering them to approve the TRAIN law (Ibid.). In time of 6.4% inflation (and still rising), precisely faulted by critics to be mostly because of the higher end-user taxes under TRAIN 1, how should TRAIN 2 be institutionalized, if ever?
Why reward corporations with a reduction in corporate income tax, when the highest-ranked Filipino companies in the Forbes list earn double-digit profit over sales, or well-covering inflation? Examples are Banco de Oro, with 21.19% P/S, which rough-estimated corporate tax reduction would be around PHP 7+ billion at PHP 54 to USD 1.00 at the 5% reduction by TRAIN 2 (computed flat, not yet refined to cumulative savings up to 2029 span of corporate tax reduction). Ayala Corp., which enjoys about 19% return on sales can save around PHP 38+ billion or so in corporate taxes, while San Miguel Corp. with its USD 14 billion sales will enjoy some PHP 38+ billion corporate tax reduction, assuming constant sales figures (roughly computed from 2017 Forbes Global 2000 list data).
It is not clear whether the 25% corporate income tax proposed under TRAIN 2 will be stratified according to income levels, but it would seem not, because of the government’s eagerness to cut subsidies to small businesses and those located in export processing zones — all subsidies will end in two years. These subsidized companies pay only 6% to 13% income tax, while 95% of all businesses pay the present 30% corporate income tax, the highest rate in the region, according to the Department of Finance.
It would not justify the proffered largesse to corporations, just to do what the “big boys” in the region, even if this is supposedly to increase business activity and draw foreign investments. Will the businesses who enjoy savings from reduced corporate income taxes really hire more workers and expand activities because of this (thereby increasing the tax basis, and offsetting the tax reduction)? What about workers made redundant by exiting erstwhile-subsidized companies? “TRABAHO” can be an embarrassing misnomer.
It is like taking money from the poor to give to the rich, when tax reforms based on rosy assumptions are insisted upon, in the critical Now of inflation and increasing personal tax burdens on the citizenry. Can the government be humble enough to please hold off hurried approvals for drastic economic changes, and “Study, study, study” programs and projects with true and sincere concern for the welfare and survival of the Filipino?
Moratorium on the “Go, go, go,” and do the urgent relief-and-rehabilitation for today’s inflation and peso crises, like the 100% focus of all departments and agencies on the torments of the recent super-typhoon “Ompong.” Congratulations and thank you from the Filipino people for speedy response to disaster and calamities.
 
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com