THE INTERNATIONAL Monetary Fund (IMF) backs the current tax reform proposal of the Finance department, noting the host of “well-structured” packages would help boost revenue collection even as income taxes are bound to go down.
IMF Country Representative Shanaka Jayanath Peiris said the set of changes drafted by the Department of Finance (DoF) is on the right track to a more progressive taxation system that will also raise additional funds to support a hike in public investments.
“We are very supportive of the tax reform. All aspects are very much in line with what we have thought of for a long time,” Mr. Peiris said in an interview on the sidelines of the AVCJ Private Equity & Venture Forum in Makati City yesterday.
Finance Secretary Carlos G. Dominguez III on Tuesday presented a rough outline of the administration’s proposed tax reforms before the House of Representatives, which if passed will cumulatively yield a net revenue gain of P368.1 billion by 2019.
The plan is split into five packages, the first of which covers the planned reduction in income tax rates to be offset by removing exemptions from value-added tax, higher fuel excise taxes and a similar levy on sweetened products.
The Cabinet official said the proposed measures are designed to make the rich pay more and to give the poor some relief.
Speaking to reporters on the sidelines of an oath-taking ceremony in Manila, Mr. Dominguez said the income tax rate for taxpayers earning P3-5 million will remain at 32%, the current tax rate for most income brackets. Those making more than P5 million annually will be levied a 35% rate. For employees earning below P3 million, the tax rate will decrease annually until it reaches the 25% threshold. All-in-all, the new personal income tax scheme will slash the number of tax brackets to five or six from the current seven to prevent “income creeping.”
Mr. Dominguez said higher taxes for the richer Filipinos should not be a big concern -- even if they move investments abroad -- as there are less than a thousand wage earners earning more than P5 million a year.
“And [the cost of raising tax rates] from 32% to 35%, it’s only P60,000,” Mr. Dominguez explained, adding that “if somebody would spend so much money to set up a company in Hong Kong to divert the money, he would have done it already.”
Income tax rates in the Philippines are deemed among the highest in Southeast Asia, making it less attractive for foreign firms to invest here.
The personal income tax reform package will be submitted to Congress before the end of the month, to be followed by the corporate income tax package, property tax package and capital income tax package, respectively.
“If Congress has the appetite, we can accelerate it,” Mr. Dominguez said of the timetable for submission of the tax reform packages.
The plan to trim the corporate income tax rate to 25% from 30% will be offset by streamlining tax incentives granted to companies.
Lower estate and donor’s taxes will be made up for by increased property valuation rates to raise more funds for local governments, Mr. Dominguez added.
A set of additional luxury taxes -- which include imposing higher duties on fancy cars and yachts, duties on fatty food, and income taxes from lotto and casino winnings -- may be considered in the future should there be a need to “augment” tax collections, Mr. Dominguez said, noting this package raise P129.4 billion more.
IMF’s Mr. Peiris said the DoF’s decision to present various tax adjustments by cluster is a good design that would ensure that changes would be balanced, as any revenue-eroding proposal would be matched by new or additional sources of taxes.
“The initial view is it seems like the tax reform packages have been well-structured and sequenced exactly to avoid some of those pitfalls,” the IMF official said.
“We think the tax reform packages have been structured and it’s the right way to go… These packages should be passed together to ensure you have a revenue-enhancing and inclusive growth package.”
Plans to reduce personal and corporate income taxes are positive for overall growth, the IMF said in its annual health check on the Philippine economy last July.
Mr. Peiris said the IMF is poised to revise upward its growth forecast for the Philippine economy -- currently at 6% -- following a faster-than-expected 6.9% expansion last semester. He noted that increased public spending would be required to sustain robust economic growth, hence the need for bigger revenues.
“The key thing for the Philippines is the revenue ratio is relatively low, and public investment -- although increasing -- is still low,” the IMF official added.
“Even if you raise the deficit from 2% to 3% [of GDP], it’s still not enough to achieve the investment targets. Very clearly, we need revenue reform to put money into public investment.”
Tax effort stood at 13.7% of GDP last year, far short of Southeast Asia’s 15% average.
Total collections hit P2.109 trillion in 2015, up by a tenth from the previous year but 7% short of target, according to Treasury data.
The government plans to raise as much as P2.257 trillion this year, with more than half -- some P1.271 trillion -- raised in the first seven months.
Economic managers of President Rodrigo R. Duterte have raised the deficit cap to about 2.7% of GDP for this year and to 3% annually from 2017 to 2022, as the government embarks on more “audacious” spending to plug the country’s infrastructure gap and infuse more funds for social services.
In particular, Budget Secretary Benjamin E. Diokno expects infrastructure spending to reach P7 trillion for the next five years. -- with Lucia Edna P. de Guzman
source: Businessworld
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