May 27, 2018 |
9:25 pm
Business World Introspective
By Romeo L. Bernardo
They are in chronological order of their years in service: Former Prime Minister Cesar Virata, former Finance Secretaries Roberto de Ocampo, Salvador Enriquez, Jose Pardo, former Senator Alberto Romulo, Former Secretaries Jose Isidro Camacho, Margarito Teves, and Cesar Purisima, who served both in President Arroyo and President Aquino III administrations. Some of us former Undersecretaries are also co-signatories.
This is noteworthy not only in that these gentlemen served across several Presidencies, most succeeding each other in less than cordial political circumstances, but also in that there is no fiscal crisis now that compels either the current reform program, or this kind of show of national unity.
Typically, tax reform legislations everywhere are driven by crises. Or at least some kind of financial pressure coming from multilateral institutions like the IMF, international credit rating agencies or financial markets. This time around, reform is being pursued at a time when our fiscal situation has never been better.
Record low public and external debt to GDP ratios, low and manageable fiscal deficits, prices, interest rates and borrowing spreads, and record high international reserves.
The Philippines has also received continuing credit rating upgrades to above investment grade — the product of reforms done by his predecessors, as Sec. Dominguez graciously acknowledges.
It is a tribute to the current economic team that it has taken a long view, and is moving boldly to achieve an ambitious medium- term program that would lift our GDP growth to 7% and higher, and improve the lives of most of the quarter of our people who are jobless and living below the poverty line.
It is also a recognition of the quality of the technical work done by Finance Usec Karl Chua and his team that such wide support for a complex piece of legislation is forthcoming. Not just from these highly respected men of probity and integrity, but also from esteemed organizations like the Foundation for Economic Freedom (fef.org.ph) and the Management Association of the Philippines (www.map.org.ph).
Quoted at the end of this column is the statement of support.
TRAIN 1 is getting unfair flack for the recent spike in inflation.
Recall that this package, addresses the inequity in the personal income taxes, widens the tax net by plugging loopholes in VAT, and imposes additional taxes on goods with negative economic externalities like oil and sugary products. It also raises additional resources for government’s “Build Build Build” program and social investments in health and education.
Let me repeat here what Sec. Dominguez said in Congress on inflation since there continues to be gross misunderstanding, most disappointingly even by our better respected senators.
They are asking for a TRAIN 1 suspension, or worse a suspension of the collection of excise taxes on oil. This will undo the good the TRAIN 1 law that they passed will do, including the equitable reduction in personal income taxes for the lowly salaried. This will not do a whit for inflation — as inflation did not primarily emanate from TRAIN 1.
“TRAIN has been unfairly blamed for the elevated inflation rate we are currently experiencing. By our estimates, fully two thirds of last April’s 4.5% inflation rate is typical of a rapidly expanding economy. The remaining is due mainly to the sharp increases in key imported commodities specifically oil, the realignment of currency exchange rates and a robust increase in domestic demand.
TRAIN contributes only four tenths of a percent to the inflation rate. This means that for every additional peso our people have to spend because of inflation, only 9 centavos can be attributed to TRAIN.
It is also important to note that TRAIN’s biggest price impact is on tobacco and sugary beverages.
But in the case of these “sin” products, the tax rate is intentionally punitive to improve the health of Filipinos. At any rate, the inflationary impact of TRAIN is expected to diminish over the next few months.”
On his last point, we are already observing a slowing in the momentum of inflation on a month on month basis. This will only improve as government rice imports come in, and with the liberalization of rice import policy.
STATEMENT OF SUPPORT FOR THE COMPREHENSIVE TAX REFORM PROGRAM — PACKAGE 2 OF THE DEPARTMENT OF FINANCE
We, former Secretaries and Undersecretaries of the Department of Finance, reiterate our support for the administration’s comprehensive tax reform program (CTRP) and strongly encourage the government to urgently pursue the tax reform’s second package, aimed to modernizing the fiscal incentives regime and lowering corporate income tax rates.
We continue to share the country’s goal of becoming a prosperous, predominantly middle-class society. Achieving this will require an equitable tax system and robust public investment, which the first package of reform began to address.
Alongside strong and strategic public spending, tax policy must enable a fair, competitive, and growing business sector. Standard corporate rates must be reasonable, to encourage compliance, broaden the tax base, unburden small and medium enterprises, and create strong domestic value chains. At the same time, fiscal incentives must be treated as public investment: the economic benefits must outweigh the cost in foregone revenue; and the tax incentive regime must align with the country’s socioeconomic priorities.
We therefore believe that the fiscal incentives regime, made complex and costly by years of neglect and abuse, needs modernization, so that incentives are more transparent, performance-based, targeted, and time-bound. Modernizing the fiscal incentives regime will spur country development and public investment by incentivizing investment in less development areas and releasing local governments from a system that allowed registered enterprises to pay preferential rates in lieu of all taxes, including local taxes.
We likewise support effort to expand the TIMTA, consolidate tax incentives into a single menu, and harmonize the granting of incentives through the fiscal Incentives Review Board (FIRB) to be chaired by the Secretary of Finance.
We also believe that the corporate income tax (CIT) regime, burdened by the highest standard rate among ASEAN countries, at 30%, is in urgent need of reform. We strongly support the reduction of corporate income tax alongside the rationalization of tax incentives. Coupled with measures to simplify the tax system and improve tax compliance, reforms in the CIT regime will make the system simpler, fairer, and more efficient.
We see that the proposal of the Department of Finance is fair and well-crafted as it encourages equitable and inclusive growth, a competitive business environment, and strong countryside development. We therefore express our strong support for package 2 and urge members of Congress to ensure its timely passage.
Romeo L. Bernardo was Finance Undersecretary during the Cory Aquino and Ramos administrations and board director of Institute for Development and Econometric Analysis, Inc. (IDEA)
romeo.lopez.bernardo@gmail.com
