Commuters walk to the Metro Rail Transit (MRT) station. — PHILIPPINE STAR/ MIGUEL DE GUZMAN

By Tobias Jared Tomas

THE FINANCE department is pressing the incoming Marcos administration to impose new tax measures, defer personal income tax reductions and repeal some tax exemptions to raise much-needed revenues and reduce the Philippines’ debt.

President-elect Ferdinand R. Marcos, Jr. is scheduled to assume office on June 30, inheriting a record amount of debt incurred by the Duterte administration to fund its pandemic response.

Finance Secretary Carlos G. Dominguez III in a press conference on Wednesday said a fiscal consolidation and resource mobilization plan is vital to “ensure that the government can continue to effectively manage its increased budget deficit while spending on investments in infrastructure, education and healthcare for economic growth and recovery.”

The Bureau of the Treasury has estimated the government needs to raise P249 billion every year in revenues to avoid resorting to borrowings to pay the P3.2-trillion additional debt incurred during the pandemic. As of end-March, the National Government debt stood at a record P12.68 trillion.

Mr. Dominguez said the government could cover existing debt by borrowing more or reducing spending by P249 billion each year.

Instead, he said the government has to raise revenues, improve tax administration and cut unnecessary spending with fiscal reforms.

The Department of Finance (DoF) proposed three tax reform packages that it described as “fair, efficient and corrective,” which will be implemented from 2023 to 2025.

The first package, which is targeted to be in place by 2023, is estimated to have an average yearly revenue impact of P247.8 billion.

It includes a three-year deferment of the reduction of personal income tax under the Tax Reform for Acceleration and Inclusion (TRAIN) law, which will have an estimated average revenue impact of P97.7 billion per year.

Under TRAIN, individual taxpayers earning over P250,000 but not more than P8 million must pay lower tax rates of 15-30% starting Jan. 1, 2023.

The DoF also proposed the expansion of the value-added tax (VAT) base, and a possible reduction in the VAT rate. It also suggested a repeal of some VAT exemptions, excluding education, agricultural products, health, financial sector and raw food.

“There is a possibility of lowering the (VAT) rate. There is a distinct possibility that the rate can be actually lowered from 12% to 10%,” Mr. Dominguez said, noting that although tax collections should be 12% of gross domestic product (GDP), it is only 4% of GDP.

“There is a big gap. And that is I think, accounted for a lot of things -— one, exemptions, two, maybe the tax administration. So, we have to tighten all of that up.”

Finance Assistant Secretary Valery Joy A. Brion said the first package is made up mostly of tax measures in “advanced stages” in Congress. These include the last two tax reform packages of the Duterte administration — Passive Income and Financial Intermediary Taxation and Real Property Valuation Reform — which appear unlikely to be approved before Congress adjourns next week. 

The proposal also included VAT on digital service providers, reform on the motor vehicle users’ charge, rationalization of the mining fiscal regime and excise tax on single-use plastics, motorcycles and luxury goods.

The DoF also suggested intensifying the implementation of income tax on social media influencers.

It proposed imposing a mandatory casino admission charge at a flat rate of P3,500 and a 5% tax on gross gaming revenues of electronic betting machines, which is expected to contribute P13.1 billion annually.

Meanwhile, the second package to be implemented in 2024 is expected to bring in an average of P349.3 billion a year. This includes health tax reform that involves increasing taxes on cigarettes, e-cigarettes, alcopops and sweetened beverages, which is estimated to bring in an average of P91.4 billion a year.

The DoF also proposed increasing petroleum tax by P1 a liter for a minimum of three years, imposing excise tax on domestic coal and increasing excise tax on domestic and imported coal.

A measure imposing taxes on cryptocurrencies was also proposed.

The third package to be implemented in 2025 is made up solely of a tax on carbon emissions.

In total, the projected revenue impact of all packages combined is seen to be an average of P349.3 billion a year, between 2023 and 2027. This is seen to peak at 2025, with an estimated annual average income of P464.1 billion for that year.

The DoF warned that failure to implement tax reform measures would lead to unsustainable deficit and debt levels, which in turn would cause slower growth, and eventually an economic crisis.

“I cannot predict how long it would take because we have a democratic system, and a democratic system requires legislation and it has to pass both houses,” Mr. Dominguez said, adding that they would try to draft the legislation before their term ends.

Mr. Dominguez also said the smaller tax reform packages would allow the government to implement these more quickly, noting that the 1998 Comprehensive Tax Reform program took five years to achieve.

Though these expanded taxes might be a “bitter” medicine, Mr. Dominguez said these measures are needed to raise revenues.

“It’s not easy. It’s not noncontroversial, but I think it is necessary. Sometimes you have to take medicine that tastes lousy, it’s bitter, it’s no good. But if you don’t take it, it may even get worse,” the DoF chief said.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion noted that while the proposed tax measures might not be popular, these are needed.

“I believe it is necessary at this point. There are other ways of shoring up the rising debt, but new or the postponement of personal tax reduction, for example, would be the easiest to undertake,” he said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the proposed measures were needed to allow the country to keep its credit rating.

“Better to intensify tax revenue collections and raise new taxes when economic conditions are better in view of the further reopening of the economy towards greater normalcy,” he said.

Albay Rep. and House of Ways and Means Chairman Jose Maria Clemente “Joey” S. Salceda said the government should address tax leakages first before imposing new taxes.

“For me, fiscal consolidation just has to mean strengthening our existing tax structure through administrative action and enforcement. The first year of the Marcos administration can be devoted to that — streamlining tax collection, improving tax administration and making tax compliance easier,” he said in a statement.

“And then, let’s do fiscal expansion. That means new taxes and the lifting of old exemptions.”

However, Bayan Muna Rep. Carlos Isagani T. Zarate slammed the proposed tax reforms, which he said target the poor and middle-class citizens.

Instead of these tax measures, Mr. Zarate said a 1% wealth tax could be imposed on P1 million earned by a person or company.

“This is a very regressive and anti-poor proposal. If the incoming government wants to increase its revenues, it should embark on a progressive tax system that taxes the rich more rather than the poor,” he added. “This latest DoF proposal is definitely anti-poor, anti-consumer and must be opposed, junked and buried.”