S&P sees gradual tax reform benefits

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By Melissa Luz T. Lopez
Senior Reporter

NEWLY ENACTED tax reforms are unlikely to yield significant benefits for the Philippine economy this year as higher levies will likely barely offset foregone collections from lower personal income tax rates, analysts at S&P Global Ratings said, while flagging concerns on changes in the corporate tax scheme now pending in Congress.

“I think tax reforms in the Philippines are still in the early stages. What we’ve seen is the first package… the impact on the economy is likely to be really modest because of the size of the new taxes collected and tax relief are relatively small anyway,” Kim Eng Tan, senior director for sovereign ratings at S&P, said in a webcast yesterday.

Starting Jan. 1, Republic Act No. 10963 or Tax Reform for Acceleration and Inclusion (TRAIN) law reduced personal income tax rates for those earning P2 million annually. Revenue losses — pegged at roughly P10 billion a month — are expected to be offset by the removal of some value-added tax breaks; higher fuel, automobile, mineral and coal excise tax rates, as well as new levies on sugar-sweetened drinks and cosmetic surgery.

On balance, the Department of Finance expects around P82.3 billion in net revenue gains from the new tax scheme within the first year of implementation.

The projected additional collections will fund increased infrastructure spending under the “Build, Build, Build” initiative of the Duterte administration, as well as cash transfers to the country’s 10 million poorest households to help them cope with rising costs of basic goods.

“At least for 2018, we don’t expect tax reform measures to have any impact,” Mr. Tan said when asked about the impact of the new law on overall economic growth.

“We are now looking at a second package in terms of corporate tax reforms, but we are likely to see that implemented as early as next year.

The credit rater expects Philippine gross domestic product (GDP) to expand by 6.5% this year.

If realized, this pace will be slower than the 6.7% growth recorded in 2017 and will fall short of the government’s 7-8% annual target until 2022, when President Rodrigo R. Duterte ends his six-year term.

S&P economist Vishrut Rana clarified that the TRAIN will likely boost long-term prospects, even as he flagged that adjustments in corporate taxes and fiscal perks could initially jolt sentiment especially of foreign investors counting on generous tax exemptions.

“In terms of the impact on growth, in the longer term these (tax reforms) are likely to be positive for the economy and of course, some of the revenue-absorbing pockets that are still available in the economy,” Mr. Rana said.

“In the shorter term, it could lead to some sort of impact especially in the foreign investment firms that operate in the Philippines.”

A measure that seeks to gradually cut corporate income tax rates to 25% by 2022 from 30% currently is pending before the House of Representatives, representing the second of up to five tax packages proposed by the Department of Finance (DoF).

Under the initial DoF scheme that was submitted to the House last Jan. 16, foregone revenues will be offset by increased collections from reduction of redundant tax holidays and other fiscal perks granted by 14 investment promotion agencies.

DoF warned on Tuesday, however, that the House bill filed to legislate the department’s proposal risks yielding net foregone revenues when the initial intention was for the second package to be revenue-neutral.

House Bill No. 7458 filed on March 21 by Reps. Dakila Carlo E. Cua of Quirino; Aurelio D. Gonzales, Jr. of Pampanga’s third district and Raneo E. Abu of Batangas’ second district provides for a percentage point cut yearly without DoF’s condition that each cut be premised on a corresponding revenue increase from clipped perks.

Still, the Philippines will remain a “strong performer” across Asia-Pacific as it is expected to sustain an annual expansion of above six percent, S&P’s Mr. Rana said.

“Overall, I think the consumption engine is strong and will likely keep growth momentum in the Philippines keep really strong,” the credit analyst explained.

S&P also sees minimal impact on the Philippines and other Asia-Pacific countries of a possible trade war between China and the United States, noting that economies in the region “remain fairly resilient” and able to weather immediate fallout from the face-off.

US and China have been exchanging higher tariffs on each other’s imports as US President Donald J. Trump tries to pressure Beijing to honor intellectual property rights. Chinese authorities, however, vowed to retaliate in kind.

Mr. Trump last month imposed higher taxes on steel and aluminum imports, to which China responded with $3 billion worth of tariffs on US fruits, nuts, pork and wine, Reuters reported.

Still, the debt watcher flagged that further retaliatory action between these economic powers “could erode global confidence and cut GDP growth.”