Posted on May 22, 2016 07:54:00 PM
In two earlier columns (“Yes, New Taxes”, 1 February 2016, and “Low Hanging Fruit”, 29 February 2016), I pushed for comprehensive tax reform to make the system fairer, yield more for infrastructure financing, and, at the same time, simplify for ease in compliance and administration, thereby making it less prone to corruption.
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Earlier this month, the Department of Finance unveiled a work in progress Comprehensive Tax Reform Package. Its elements (and the revenue impact for the first year) are as follows:
1) Lower income tax rate to 25% for individuals and corporations (minus P158 billion to P222 billion);
2) P1 million all-in income tax exemption for wage earners;
3) Fiscal incentives rationalization (P5 billion);
4) Excise tax increase on gas, diesel, and other oil (P132 bilion);
5) Expand VAT base (P80 billion);
6) Increase VAT rate from 12% to 14% (P82 billion); and
7) Tax administration reforms
-Make tax evasion a predicate crime to money laundering
-Repeal Bank Secrecy for BIR
-Remove BIR and BoC from salary standardization and civil service protection
-Allow BIR and BoC to retain 1% of their revenues as their budget for modernization and to fund personnel enhancement measures.
Some quick comments on the tax reform package.
First, it seems aligned with earlier reform proposals from within the DoF and by outside experts. My only regret is that this is being proposed at the tail end of this administration. Tax reform is best pursued early while an administration has abundant political capital, and so that it reaps fiscal dividends early. Nonetheless, it is commendable that Sec. Purisima and his team of mostly career professionals have taken the initiative to help the new administration get off on the right foot.
The personal income tax gives in the plan look fairly aggressive, though almost fully offset by the higher rate and expanded VAT. What will likely be said by critics is that VAT is not a progressive tax; and that we already have the highest VAT rate in the ASEAN region.
Reductions in the corporate income tax side are called for. It makes us more aligned with the corporate income tax rates in the region.
On the other hand, it is disappointing to see the estimated gains from rationalizing tax incentives at only P5 billion. I was hoping for more bite from this reform measure, not only for revenue grounds, but also because it would suggest needed guillotine of incentives and exemptions, and a more level playing field.
The proposed additional tax on oil and diesel was computed at P10 for gasoline and P6 for diesel, and of the rates to be indexed to inflation at 4% per year. I think more can be squeezed from this tax source. Not just via higher rates, but as observed in my second column (“Low Hanging Fruits”) by adoption of technology to flush out smuggling, now estimated at minimum of 20% of imports. President Duterte is well placed to demonstrate the people’s wrath versus smugglers, who have vexed us for decades.
Nothing was said in the DoF package about tariffication of rice QRs.
As observed in my earlier column, this will not only halve the price of rice and help address poverty and malnutrition, but can raise revenue amounting to P30 billion annually. Just as important, it will release wasted subsidies to NFA in the billions of pesos annually. This has accumulated to around P150 billion in unpayable national government guaranteed debt.
The World Bank estimates that for every P5 of spending for NFA, P4 are wasted leakages that provide no public benefit. (Please see recent statement of the Foundation for Economic Freedom on this “Let change come to the present rice policy: Liberalize ride importation” in fef.org.ph )
The tax administration elements in the program pose high risks. Both in getting these highly sensitive legislation passed, and in actual implementation.
It will take very skillful navigation by new administration to get support by legislators on a law that will repeal the bank secrecy for BIR. Same with a bill to make tax evasion a predicate crime to money laundering. The argument that the Philippines is only one of two countries (the other being Lebanon) in the world where tax evasion is not a predicate crime and only one of three (Lebanon plus Switzerland) that do not allow tax administrations access to bank deposits has not swayed Congress so far. I think we can all guess why.
Exemptions of BIR and BoC from salary standardization and civil service protection will also not be easy -- this is a reform that earlier administrations have tried to push without success. Often it is the employees of the bureaus who lobbied Congress against the lifting of civil service protection.
Choosing the right people to head these two agencies is critical -- with the requisite technical background and experience, but perhaps even more important, the temper and skills to introduce and manage radical reform. They should be fully trusted by, and accountable to the Finance Secretary. The President needs to give him the say on these appointments.
As I said earlier, these reform proposals are not new, but failed to pass or be implemented. We can only hope that under a President who is known for resolute action, we shall see greater demonstration of skill in pushing through the mill and of political will to summarily execute (wink!).
Romeo L. Bernardo is vice-chairman of the Foundation of Economic Freedom and a GlobalSource Partners advisor. He was formerly undersecretary of Finance during the Aquino1 and Ramos administrations.
romeo.lopez.bernardo@gmail.com
