ADB sees TRAIN law as ‘critical’ to reforming tax system

THE ASIAN Development Bank (ADB) said reforming the corporate tax system is a matter of urgency, with successful reforms expected to bolster economic growth and reduce poverty.
“TRAIN 2 and the broader tax package are critical to strengthening the Philippines’ tax system. Passage of this important legislation will demonstrate the commitment of Congress, and the country more broadly, to the reforms that are needed to spur growth, reduce poverty and inequality, and achieve upper middle-income status,” ADB Chief Economist Yasuyuki Sawada said in a statement, referring to the second package of the Tax Reform for Acceleration and Inclusion law.
Mr. Sawada said that a “good tax system” has about seven dimensions outside revenue-raising capacities. These include equity, efficiency, competitiveness, stability and predictability, ease of administration and compliance, and the need to ground policies in evidence.
The second package of the tax reform seeks to lower the corporate income tax (CIT) rate to between 20-25%, aligning rates with the regional norm, while streamlining fiscal incentives. The Department of Finance (DoF), meanwhile, wants to raise revenue equivalent to 0.15% of gross domestic product (GDP) first before cutting one percentage point of the CIT rate.
“If we look at the current system, the incentives that some firms get but others don’t work against horizontal equity. Firms that manage to get tax incentives face much lower effective tax rates of 6-14. TRAIN 2 aims to improve horizontal equity by rationalizing fiscal incentives for businesses,” Mr. Sawada said.
“One of the principles in public finance is that distortions, or the decline in society’s well-being due to a tax, rise disproportionately with the tax rate. For this reason, it is more efficient to have a broader tax base and a lower rate, and that is what TRAIN 2 is trying to do for corporate taxation. A lower corporate tax rate will make the Philippines’ tax system more competitive, as it currently has the highest corporate tax rates in ASEAN (Association of Southeast Asian Nations),” Mr. Sawada said.
The DoF said that the Philippines had the lowest revenue productivity — or the ratio of tax revenue as a share of GDP divided by the tax rate — among the 10 member-states at 12% despite having the highest tax rate. Thailand, meanwhile, had 31% revenue productivity at a CIT rate of 20%.
Although lower tax rates are welcome, businesses have argued that the reforms will disrupt the business climate by taking away predictability, which they rely on in their planning.
“One cannot and should not keep a tax system fixed — especially a flawed one — simply for the sake of ‘stability.’ The Philippines’ tax system is in dire need of fixing, and this is the first major tax reform in the Philippines in two decades. If we allow it to be done right, and done quickly, the Philippines will not need another tax reform for another two decades,” he said.
The government also proposes to replace the 5% gross income earned tax incentive with a 15% tax on net income, repeal some “redundant” incentives, and retain those consistent with the government’s medium-term Strategic Investment Priority Plan (SIPP) to be administered by the Fiscal Incentives Review Board (FIRB); cap perks for five years; disallow the use of value-added tax as an investment incentive; and expand the coverage of the Tax Incentives Management and Transparency Act.
“One lesson from history is that the government should not be in the business of ‘picking winners’ — the track record of countries around the world in doing this is not good, and it often stimulates lobbying for personal gain. Rather, incentives should be based on firms’ documented ability to deliver, whether it be creating more jobs, raising incomes, or increasing exports,” Mr. Sawada said.
The second package of the tax reform law is currently with the House committee on ways and means, filed as House Bill No. 7458.
The government hopes to have the measure approved by both chambers of Congress before year’s end, for implementation starting 2019.
The government projects GDP growth at 7-8% from 2018-2022, and bring down the poverty rate to 14% from 21.5% in 2015. — Elijah Joseph C. Tubayan