MANILA, Philippines — The Duterte government has proposed tax reform in the Philippines that will lift six million citizens out of poverty. In keeping with his promise in October, the President’s plan will supposedly reduce the philippine poverty rate from 21.6 percent to 14 percent by 2020.
The Tax Reform for Acceleration and Inclusion Act (TRAIA) will make the tax system more progressive by lowering the rate of personal income tax (PIT) relative to a person’s residence. In contrast, it will expand value-added tax (VAT) by limiting the current exemptions on raw food, education and healthcare and increasing excise taxes on fuel, cars, tobacco and alcohol. This is the only reform that has been submitted to Congress for enactment.
There are a further three reform packages still in the works. These will restructure the Philippine economy towards an inward-looking system, reversing the World Bank’s proposed policy of export-orientation that has been in place since the 1970s. By amending corporate income, real estate and capital gains taxes, the government hopes to stimulate domestic industries.
A flat rate of 25 percent will be set on corporate income, down from 35 percent at present, encouraging informal businesses to come out in the open. Some estimates measure the informal economy to be as much as 40 percent of the Philippines economy.
The aim of the first package is to generate a net gain of 174 billion Philippine pesos in 2018 (USD$3.5 billion), according to the government’s Finance Department. This outcome depends largely on revenue from the excise tax increases, which must offset the PIT revenue losses of 180 billion Philippine pesos.
“Along with this bleak scenario, the Philippines will most possibly suffer a credit rating downgrade as the government will be forced to rely on borrowings to manage the deficit, which means P30 billion in additional debt costs,” the Finance Department stated in a release.
The authorities will use the additional income from Philippines tax reform to invest in much-needed infrastructure, education and welfare. The Asian Development Bank estimates that Duterte’s government needs to spend at least 610 billion (USD$12.3 billion) annually on infrastructure. This is feasible if it manages to create a business-friendly environment to attract and facilitate investment.
In a statement on November 17, the Secretary of Finance Carlos Dominguez III announced that the Duterte administration would spend two trillion Philippine pesos (USD$40 billion) on infrastructure and welfare while in office. This includes urban and rural infrastructure, education, healthcare, social protection and employment.
This investment will be a welcome boost to the economy and will create a lot of jobs. Justino Calaycay Jr., head of marketing and research of A&A securities, said that “the devil is in the details” and while the plan sounded promising it required the right balance of growth and citizen well-being. “The important thing is the dispersion of these infrastructure projects and aligning human capital development with the overall economic blueprint,” he said.
This Philippines tax reform is occuring at a crucial time. Capital is abundant, interest rates are low, inflation rates are normal and business confidence is soaring as credit ratings are getting better. “This is the time to act boldly,” Dominguez proclaimed. The tax reform will increase disposable income, and allocate government revenues to sustainability and equal distribution of the expected growth.
The tax reform will also encourage investment. The Philippines currently invests 20 percent of its gross domestic product, whereas its high-growth neighbors boast investment rates of 30 to 40 percent.The government hopes its spending on infrastructure will make production in the country cheaper, making it more attractive to foreign capital.
The overall growth and social development the government hopes to achieve through Philippines tax reform will not only increase per capita income but provide crucial social protection to the country’s most vulnerable.
– Eliza Gkritsi