AFTER HURDLING the House of Representatives (HOR) by a vote of 246-9-1, the proposed Tax Reform for Inclusion and Acceleration Act (TRAIN) is now up for deliberations in the Senate.
TRAIN (House Bill 5636) is a bill that contains the first of four packages that are part of the Duterte administration’s comprehensive tax reform program. The bill includes revisions to the income tax bracket schedule, value-added tax (VAT) exemptions, and excise tax rates on oil, automobiles, and sweetened beverages. The bill was co-authored by about 100 representatives.
In an interview with The GUIDON, Department of Finance (DOF) Strategy, Economics, and Results Group (SERG) Chief of Staff Aladdin Ko expressed the department’s “hopes” that TRAIN can be implemented by 2018.
SERG has already began having regular technical working group meetings and public hearings in the Senate.
According to its official website, SERG is a DOF unit tasked “to develop sound tax and fiscal policy through policy-oriented analysis and communicating fiscal and economic priorities with stakeholders.”
Following TRAIN, SERG will begin working on the next three packages that form the comprehensive program, which cover corporate income tax, property tax, and capital income tax respectively.
The current administration’s tax reform initiative marks the most comprehensive reform package proposed since the Tax Reform Act of 1997 under former president Fidel Ramos. The 1997 tax reform package restored a uniform rate schedule for income tax and reduced the corporate tax rate. TRAIN is also the latest tax policy reform proposal tackled in Congress since the Sin Tax Reform Law of 2012 under the second Aquino administration.
According to Ko, TRAIN differs slightly with its policy due to its context. “In previous administrations, we needed to reform our tax system because of a high deficit or an economic crisis. This is not the case today—our economic fundamentals are strong and our deficit is manageable,” he said.
Priority fiscal initiative
Pursuing tax reform is the second item on the Duterte administration’s Ten-Point Socioeconomic Agenda. One of this government’s priorities is to “institute progressive tax reform and more progressive tax collection, indexing taxes to inflation.”
According to the DOF presentation on TRAIN, the comprehensive tax reform package is meant to finance the other initiatives on the Ten-Point Agenda for infrastructure and human capital development. The DOF estimates that in order to pursue these development programs, the national government will have to raise Php 366 billion annually from 2016 to 2022, or Php 2.2 trillion in total.
As to why more efficient tax administration is not enough to finance the government’s plans, Ko explained that “even if the Bureau of Internal Revenue and the Bureau of Customs were 100% efficient, they will still be unable to achieve the collection targets.” He cites that the current tax system “has inherent deficiencies that lead to revenue erosion and large-scale leakages.”
Ko highlighted three reasons for the current tax system’s “structural weakness”—tax bases not being indexed to inflation, the granting of “excessive exemptions and special treatments,” and highly-restrictive bank secrecy laws which “prevent our revenue agencies from fully auditing and enforcing tax laws.”
In addition, Economics Department lecturer Ser Peña-Reyes said that tax reform provides not just direct funding for the various infrastructure projects but also a means “to demonstrate fiscal responsibility.” He also said that fiscal responsibility will attract foreign investors to contribute to infrastructure financing.
“[This] is why TRAIN is important in complementing ‘Build, Build, Build,’” Peña-Reyes added, referencing the administration’s slogan for its aggressive infrastructure push.
Tax reform and accelerating infrastructure spending are both integral to the Duterte administration’s longer-term visions of reducing poverty incidence from 21% to 14% by 2022 and eradicating extreme poverty by 2040.
Key provisions
TRAIN proposes to reduce the number of brackets in the tax schedule from seven to six, with the threshold for the entry level income bracket revised from Php 10,000 to Php 250,000 and the threshold for the highest income bracket revised from Php 500,000 to Php 5 M.
The tax rate for Filipinos earning Php 0 to Php 250,000 annually is 0% while the rate for earning over Php 5 M annually will pay Php 1.45 M plus 35% of the excess over Php 5 M.
According to the DOF, the new tax system under TRAIN “will increase the take-home pay of most individuals thereby putting more money in people’s pockets.” The result for them is a tax system that is “fairer and more equitable.”
With the decrease in income tax rates, Peña-Reyes cautions: “Giving tax breaks without compensating reforms on the revenue side of the equation will most likely curtail government spending on goods and services.”
To offset the loss in revenues from income taxes, TRAIN mandates revisions to the excise tax rates for oil, newly-purchased automobiles, and sweetened beverages.
The bill also retained VAT exemptions for cooperatives while removing the exemption on the lease of residential units with a monthly rental not exceeding Php 10,000.
In crafting the provisions of the reform package, Ko stated that the DOF consulted stakeholders from around the country. “We have conducted roadshows in [several major] cities. We are talking to civil society groups, business groups, [and] labor unions,” he said.
Ko mentioned that they have received support from former Finance secretaries such as Cesar Virata, Jesus Estanislao, Roberto De Ocampo, Jose Pardo, Jose Isidro Camacho, Juanita Amatong, Cesar Purisima, and Margarito Teves.
Several former directors general of the National Economic and Development Authority including Arsenio Balisacan, Cielito Habito, and Romulo Neri, have also expressed support.
The Action for Economic Reforms, Mindanao Business Council, Tax Management Association of the Philippines, Foundation for Economic Freedom, and the Financials Executive Institute of the Philippines have also endorsed the package.
Anti-poor?
Amid strong support from former finance executives and institutions, several lawmakers—a good number from the Makabayan bloc—have criticized the bill for allegedly being “anti-poor.”
According to Anakpawis Representative Arnel Casilao, the tax reform proposal of the Department of Finance is “glaringly, very blatant anti-poor.” ACT Teachers Rep. Antonio Tinio also claimed the revised tax system will be a “burden” on poor Filipino families.
Peña-Reyes also cited Navotas Rep. Toby Tiangco, who believes that while the income tax cuts will help middle and lower classes, “new excise taxes on kerosene, liquefied petroleum gas and diesel will hurt them.” According to Peña-Reyes, Tiangco “notes that these three petroleum products are mostly used by the poor.”
Senator Juan Edgardo “Sonny” Angara, chairman of the Senate Ways and Means Committee where the bill is currently tackled, also admitted that the proposed excise taxes on petroleum are the “most sensitive” provisions for the people.
“That’s why we intend to have a lot of hearings. But sa finished product, tingin ko, kailangan maging sensitibo tayo sa marginalized sectors (we need to be sensitive to marginalized sectors),” Angara said in an interview with BusinessWorld.
Ko reiterated however that TRAIN “provides benefits to 99% of Filipinos” and that the resulting incremental revenue will be directed toward basic services “most needed in rural areas where poverty is the worst.”
He added that to understand the positive impact of tax reform, one has to look at the proposal as “a package.”
“Some stakeholders tend to focus only on the provision that will affect them, but if they see the broader package, including the increased spending in health, education, and infrastructure, the benefits become evident,” he said.
