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Finance chief flags ‘hostile environment’ for tax reform legislation

Posted on April 13, 2017

TAX REFORM -- which the government, multilateral lenders and credit raters regard as indispensable support for efforts to spur state spending -- currently faces “a pretty hostile environment” due to populist pressures lawmakers could succumb to, the Finance department said in a statement on Wednesday.

The department quoted Finance Secretary Carlos G. Dominguez III as saying that while “the tax reform program is strongly supported by the business community, foreign chambers of commerce, the community of economists and foreign policy experts and by all our multilateral development partners”, it is being pushed in “a biosphere inhabited by politicians who find political profit in giving away tax exemptions of every imaginable variety, populist groups that equate every revenue measure as a form of oppression and highly talented accountants skilled in the dark arts of tax avoidance”.

“It is never easy to navigate through this hostile environment.”

Hence, Mr. Dominguez cited the “greater task” of winning public support for planned tax reforms if resistance from lawmakers is to lessen.

Leaders of both chambers of Congress did not promptly respond to requests for comment.

The latest economic blueprint -- under the Philippine Development Plan 2017-2022 -- approved last Feb. 20 by the National Economic and Development Authority Board, chaired by President Rodrigo R. Duterte, is designed to fire up economic growth to a faster pace while lifting more Filipinos out of poverty. Among others, that plan aims to spur gross domestic product (GDP) growth to an annual average of 7-8% in that period from the 6.2% average in the six years under the preceding government of former president Benigno S. C. Aquino III. The Duterte administration believes such pace of economic expansion is needed to slash unemployment rate to 3-5% by 2022 -- when the current government steps down -- from 5.5% last year and achieve its bottom line of cutting the national poverty rate to 14% also by then from 21.6% in 2015.

In order to help achieve those goals, however, the government needs to hike spending by some P800 billion for infrastructure and social services, the Finance chief estimated.

The current administration plans to increase spending on infrastructure to an equivalent of 7.1% of GDP by 2022 from a programmed 4.3% of GDP in 2015 and from 1.8% in 2010. This year’s P3.35-trillion national budget targets spending on public infrastructure to increase 13.79% to P860.7 billion equivalent to 5.4% of GDP from a programmed P756.4 billion, or 5.1% of GDP, in 2016. The Department of Budget and Management last Monday reported that infrastructure spending hit P493 billion in 2016, missing the program but still 42.8% up from 2015.

Plans for increased spending now hinges on a four-package tax reform program, whose first tranche is now being processed in the House of Representatives.

In its configuration as of Jan. 30, the first package was to result in P139.6 billion in foregone revenues from lower personal income tax, estate tax and donor tax rates as well as raise an additional P302.1 billion from reduced value added tax exemptions, as well as increased excise taxes on cars and oil products, yielding P162.5 billion in net revenues in the first year of implementation.

The House Ways and Means committee was widely expected to have approved the first package before Congress adjourned for a six-week recess in mid-March, but the body instead formed a technical working group in order to harmonize House Bill No. 4774 -- the version endorsed by the Finance department -- with a host of other related bills.

For Mr. Dominguez, however, lawmakers at least did not give in to the temptation of approving only tax reductions to the exclusion of other provisions meant to offset projected foregone collections.

“The usual excuse of legislators for not supporting tax legislation is that the amount to be collected could be raised by tightening tax administration,” he noted.

“Anticipating that, we have tightened tax administration early on. As much as we can -- within the framework of prevailing laws -- we have simplified processes and improved discipline in our main revenue agencies,” he explained, noting that “as a result, both the BIR (Bureau of Internal Revenue) and the BoC (Bureau of Customs) have performed well...”

The BIR has set a P1.829-trillion full-year target for 2017 that is 12.9% more than its downward-adjusted P1.62-trillion goal for 2016 which it missed by three percent, actually raking in P1.567 trillion.

The BoC has been entrusted with a P467.896-billion collection this year, 14.4% more than its P409-billion 2016 target which it narrowly missed by three percent at P396.365 billion.

Mr. Dominguez said the administration is pushing tax reform amid the country’s inherent investment lures of a low interest rate environment, a young skilled work force and robust domestic consumption.

“There is no other way to state the urgency of passing the tax reform package at the soonest than to say we are at a Cinderella moment today,” he said in the statement.

“If we do not seize this rare opportunity to break the old cycle of high poverty, poor infrastructure and low growth, we will condemn the next generations to the past we want to leave behind.”

Credit raters have constantly cited relatively low revenues as a chronic weakness of the Philippine economy.

Tax revenues grew nine percent to P1.98 trillion (13.7% of GDP) last year from 2015’s P1.816 trillion (13.6%), although they fell three percent short of a P2.044-trillion (14.1%) target for 2016. The government hopes to collect P2.313 trillion (14.5%) this year, P2.821.3 trillion (16.1%) in 2018 and P3.156 trillion (16.3%) in 2019.

And just last Tuesday, the World Bank -- while retaining a “positive” outlook on Philippine economic growth prospects -- cautioned that “the government’s planned expansionary fiscal strategy could lead to fiscal sustainability challenges” amid uncertainty over the final configuration of tax reform and since “[t]he administration’s ambitious infrastructure agenda was introduced without yet addressing existing constraints to public investment management”. -- E. J. C. Tubayan