Finding solutions to economic and tax issues

Ever since the pandemic hit, economic development around the world has slowed down. In the Philippines, issues on budget deficits, increasing debt, and rising inflation have been staples in the news. But are these issues really as bad as we make it out to be? Though it may sound surprising, the Philippines is actually doing quite well, economically speaking.

According to Ralph van Doorn, a Senior Economist at the World Bank Philippines, the Philippines outperformed its regional peers in terms of economic growth. In his presentation at the 2023 International Tax Conference, Van Doorn reported that, for the first quarter of 2023, the Philippines grew by 6.4%, attributed largely to strong domestic demand.

Still, this is not all sunshine and rainbows. The Philippines still has the highest headline inflation within the ASEAN, and there are certain risks peculiar to the Philippines, such as the possibility of El Niño creating supply chain bottlenecks that may result in increasing food prices.

Romeo Balanquit, Assistant Secretary of the Department of Budget and Management (DBM), provided a similar positive outlook on the economy. He discussed the government’s Medium-Term Fiscal Framework at the conference. Among the key points of the Framework are improving tax administration, creating a broader revenue base, and the digitalization of government processes.

According to the Framework, tax administration can be improved through the digitalization and the modernization of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BoC). Meanwhile, a broader revenue base can be achieved through the imposition of taxes on digital service providers and excise taxes on sweetened beverages, single-use plastics, and pre-mixed alcohol products, and other similar policies.

The government’s proposal on the digitalization of its revenue collecting agency is in line with expert views on effective tax policies. Aekapol Chongvilaivan, a Senior Economist at the Asian Development Bank, noted that optimizing tax policy and administration can lead to an increase in the tax-to-GDP ratio by about three to four percentage points in the Asia-Pacific region.

Chongvilaivan noted that developing countries should have a tax-to-GDP ratio of at least 15% to ensure that they have the resources necessary to achieve sustainable economic growth. However, only Cambodia, Thailand, and Vietnam were able to achieve that threshold.

One of the problems he identified was that countries in the Southeast Asia region tended to have inefficient tax administrations. Even though Singapore remained among the top of the World Bank’s Paying Taxes rankings, the majority of the countries in Southeast Asia were in the bottom half of the rankings. Moreover, except for Indonesia, the Philippines, and Vietnam, most jurisdictions in Southeast Asia have not improved significantly since 2020.

He also identified taxation of the digital economy as a possible solution to improving the tax-to-GDP ratio. Presently, multinational companies pay their tax where production occurs, but in the digital economy, businesses can derive their income from consumers all over the world.

Ragnar Gudmundsson, the Resident Representative of the International Monetary Fund (IMF), also noted that once a country’s tax-to-GDP ratio reaches about 12.75%, economic growth increases sharply. However, a higher ratio is needed for emerging markets. Based on IMF estimates, the Philippines reached a tax-to-GDP ratio of 14% in 2020 and was projected to reach 14.7% in 2022. Still, this remains below the average for Asia-Pacific countries.

So, what can we do to fix this?

Gudmundsson noted recommendations on how to improve the collection of personal income tax and corporate income tax, but noted that VAT is where the Philippines was least efficient. VAT revenue collection in the Philippines was significantly below the average for emerging market economies, capturing only about a third of its potential tax base. He discussed that the VAT system could benefit from the adoption of anti-avoidance rules, enhanced VAT administration, and strict compliance mechanisms.

Aside from tax experts, Senator Win Gatchalian also prepared a presentation at the conference. He discussed the tax regime for micro, small and medium enterprises (MSMEs) and the proposed policies on how to improve the tax system. Particularly, he discussed the features of Senate Bill No. 2224, or the Ease of Paying Taxes Act, and Senate Bill No. 1806, or the Taxpayer’s Bill of Rights and Obligations Act.

Improving tax administration and simplifying tax compliance not only boosts revenue collection but can also lessen corruption. In the recently published book Reimagining the World Without Corruption, I provided a discussion on what corruption is and what measures we have implemented, and can implement, in the fight against corruption.

These economic and tax issues and policy proposals were all discussed at the 2023 International Tax Conference held on June 15. Hosted by renowned journalist Rico Hizon, the event was the culmination of the International Tax Roadshow of the Asian Consulting Group (ACG), which sought to guide Filipinos abroad and foreign investors in investing and doing business in the Philippines. Through the International Tax Conference, ACG continued this goal by creating a platform where these issues, which affect business owners and investors alike, could be discussed. As noted by Former Trade and Industry Secretary Ramon Lopez, who was the Conference Chair at the event, discussing these topics and policies is important if we want to help our MSMEs.

This article reflects the personal opinion of the author and does not reflect the of fi cial stand of the Management Association of the Philippines or MAP.

Raymond “Mon” A. Abrea is a MPA/Mason Fellow at the Harvard Kennedy School. He is a member of the MAP Tax Committee and the MAP Ease of Doing Business Committee, co-chair of the Paying Taxes on Ease of Doing Business Task Force, and the chief tax advisor of the Asian Consulting Group.

map@map.org.ph

mon@acg.ph