FIES sap Phl economic growth

by Marichu A. Villanueva (The Philippine Star), Aug 12, 2019

For the next three years, the economic managers of President Rodrigo Duterte have set their sights to completing the journey set on Day One of his administration. The journey “from stability to prosperity” is the vision for the Philippines when the term of President Duterte ends by June 30, 2022.

Like the 74-year-old President Duterte, his economic managers led by his former Ateneo classmate, Department of Finance (DOF) Secretary Carlos Dominguez, are of the same age bracket. But capable young technocrats carry the ball for the economic team.

Two of them have in fact, both once worked with the smartest finance and economics wizards at the World Bank. They are Finance Undersecretary Karl Kendric Chua and assistant secretary Antonio Lambino. While it was raining hard last Friday, Chua and Lambino went out of their way to conduct a briefing for The STAR editors on the government’s economic program for the remaining half of the Duterte administration.

The so-called economic “millennials” of the DOF sought to clarify issues and concern being raised in media by tax critics of the Duterte administration. Specifically, Chua and Lambino explained in layman’s language the government’s new tax measures to raise much-needed funds, the bulk of which would go to President Duterte’s “Build, Build, Build” infrastructure program.

President Duterte first submitted a five-point Comprehensive Tax Reform Program (CTRP) for approval into law during the 17th Congress. Chua cited the entire CTRP was designed to help transform the Philippine economy “through rapid and sustained growth, faster poverty reduction, and more opportunities for all.”

The President signed into law the first CTRP package – called the Tax Reform Acceleration and Inclusion or TRAIN Law for short – in December 2017. The TRAIN Law under Republic Act (RA) 10963, among other things, reduced the personal income tax of individual taxpayers but also imposed excise tax on diesel and other petroleum products, automobiles, cosmetic, on so-called “sweetened” beverages, tobacco, coal and mining.

TRAIN Law took effect on Jan.1, 2018 with its initial birth pains causing the country’s inflation – worsened by the global crude oil price crunch and rice crisis – to hit a record high during its first year of implementation.

Thus, only the first package of the five-point CTRP passed through the 17th Congress.

The second CTRP package is called the proposed Tax Reform for Attracting Better and High-Quality Opportunities or Trabaho bill for short. The Trabaho bill is now renamed as Corporate Income Tax and Incentive Reform Act or Citira. Among the principal authors behind the crafting of the CTRP that included the TRAIN Law, Albay Rep. Joey Salceda changed it to Citira to reflect the exact intent of the proposed tax reform rather than calling it Trabaho bill that creates false expectations that it could produce jobs.

Citira seeks to encourage investments by cutting the corporate income tax rate from 30 percent to 20 percent (gradually at 2 percent every two years), and modernize investment tax incentives to enhance fairness, improve competitiveness, plug tax leakages and attain fiscal sustainability. Package 2 of the CTRP also included the proposed “sin taxes” on alcoholic and on e-cigarettes and vape products to finance the gap in the funding requirements of the Universal Health Care (UHC) Law signed into law by President Duterte under RA 11223 on Feb. 20 this year.

The UHC Law that the 17th Congress approved mandated the government to provide funding for the automatic enrolment of all Filipino citizens in the National Health Insurance program. As the chief agency of government in producing revenues, the DOF must ensure the annual funding for the UHC program.

The two other remaining CTRP packages are, namely, the Real Property Valuation Reform and the proposed Passive Income and Financial Intermediary Act or PIFITA, which seeks to reduce withholding tax on bank savings from present 20 percent to 15 percent.

Salceda is again shepherding the proposed passage into law of CITIRA as principal author and sponsor. With only one out of five CTRP packages getting approved into law during the 17th Congress, Salceda, however, seemed to be unperturbed of the challenge of pushing through the legislative mills the remaining four tax reform packages of the CTRP.

Salceda exudes confidence – with a dash of optimism – there is more than enough time for them in the present composition of lawmakers. At both the Senate and the House of Representatives, a huge majority has allied with President Duterte after the midterm elections last May. Now as the chairman of the House ways and means committee of the 18th Congress, Salceda believes the so-called “super majority” would be able to deliver the speedy approval into law of the four CTRP bills hopefully by the end of term of President Duterte.

From estimate, Salceda projects the four CTRP packages will generate P49.6 billion additional revenues for the government by 2022 once approved into law. But the DOF reported in 2018 as much as P43 billion a year in tax leakages to firms that possibly exploit the country’s convoluted corporate income tax (CIT) system and abuse transfer pricing schemes.

These tax perks are enjoyed in the country’s 549 economic zones and free ports; medical-tourism hospital institutions; business process outsourcing (BPOs); and even Philippine Offshore Gaming Operators (POGO), many of them located in malls and commercial buildings in Metro Manila. This resulted to foregone revenues amounting to P504 billion worth of tax incentives in 2017 alone. Or, this was equivalent to 3.2 percent of the country’s 2017 gross domestic product.

Chua coined the acronym FIES that stood for the first letter of the four major sources of leakages draining the government’s revenue-generating capacity: Freebies, Incentives, Exemptions, Subsidies. If they all become into law, Chua believes the four CTRP packages would finally remove these FIES that sap the Philippine economic growth all these years.