FINANCE Undersecretary Karl Kendrick T. Chua expressed doubts that tax reform was behind the divestment of a Mexican bottler that held the Philippine franchise for Coca-Cola products.
“I do not know the real reason why they decided to leave the Philippines. The first package of tax reform also imposed taxes on fuel companies and coal producers, and cigarette manufacturers, but they didn’t leave,” he said at a briefing on tax reform, referring to the decision of Coca-Cola FEMSA S.A.B de C.V. to sell its stake in the Philippine bottling operation for Coke products back to The Coca-Cola Co.
“Maybe FEMSA left for some other reason. In our opinion, tax reform was not very related” to the divestment decision,” Mr. Chua said.
This ran counter to comments made by Coca-Cola FEMSA chief executive officer John Santa Maria Otazua in an Aug. 17 teleconference with investors. Mr. Santa Maria said the new tax on drinks sweetened with high-fructose corn syrup (HFCS), which is used in Coca-Cola production, dampened imports of the sweetener and caused prices of cane sugar to rise.
The tax reform law “put restrictions on sweetener imports” and led to “soaring local prices of sugar. Prices of sugar have been up, up to 50%,” he said.
Mr. Chua said President Rodrigo R. Duterte and Speaker Gloria M. Arroyo are serious in bringing about tax reform regardless of the difficulties in getting the legislation approved, amid resistance from legislators concerned about its impact on prices.
“The President has said that tax reform is critical to his program, while Speaker Arroyo is taking it very seriously,” Mr. Chua said, adding that the Department of Finance (DoF) will continue to work with legislators to effect the passage of the necessary measures.
The first package of tax reform was known as Tax Reform for Acceleration and Inclusion (TRAIN) and focused on lowering income tax rates, freeing up disposable income for spending on consumer goods. On the other hand, TRAIN also raised taxes on fuel, sweetened drinks, automobiles, and coal, among others.
Mr. Chua was speaking at a briefing on the progress of tax reform, the second package of which has been named the Tax Reform for Attracting Better and Higher Quality Opportunities (TRABAHO) bill. TRABAHO focuses on rationalizing investment incentives while lowering corporate income tax.
Asked to comment on the House version of the TRABAHO bill, Mr. Chua said: “We continue to reach out to the Congress and the public in order to arrive at a reform that balances all interests.”
The DoF, Mr. Chua said, had intended the second tax reform package to be revenue neutral. “So for every peso that we save in unnecessary incentives, the idea is… to return (the savings) to those 90,000 small businesses who are paying 30% and now will pay less,” he said, adding that the DoF version imposed revenue-performance conditions on corporate tax cuts. The House, however, wants an “automatic reduction of two percentage points every two years,” he added.
Moody’s Investor Service vice-president and senior credit officer Christian de Guzman has said that “the absence of conditionality between the rationalization of fiscal incentives and the cuts in the corporate tax rates poses some risk” to the DoF’s goal of revenue neutrality. According to Mr. Chua, the government is expected to forego P62 billion in revenue in the package’s first year of implementation in 2021, for which the government will need to compensate by eliminating even more “unnecessary incentives.”
Mr. Chua is optimistic that the latest tax reform legislation will be approved before the 2019 midterm elections. “They are also evaluating the budget. That also means they will see the need for the tax reform. We all want a big budget but that would not be possible without tax reform. Whether or not there is an election, I think this is an important reform and I think Congress understands that especially when you need a budget that needs to be funded well.”
As for concerns that there will be job losses as a result of the TRABAHO bill, Mr. Chua said: “We are going to help all the firms as necessary. And those (incentives) that prove unnecessary, we believe they will continue to operate and invest. And we also have the lowering of the corporate income tax rate from 30% to 20%, which will create a lot of opportunity for expansion and job creation. So, I want to clarify that we do not expect any job losses, but there will be an adjustment fund just in case.” — Arjay L. Balinbin

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