Aquino, Henares at odds over tax-system efficiency

By Riza Lozada

Three tax experts, including Internal Revenue Commissioner Kim Jacinto-Henares, for different reasons, agree that the tax system in the Philippines is not ideal and needs to be reformed.

Henares said the current tax system in the Philippines has cost the government P157 billion in foregone revenues in 2012,and P144 billion in 2011; both figures accounted for over 10 percent of government revenues during those years.

Only President Aquino appears content with it, saying it has enabled his administration to make giant strides in fighting tax evasion.

Many say this is probably why the President has not committed himself to a pet project of one of his administration’s allies, Sen. Juan Edgardo “Sonny” Angara, chairman of the powerful Senate Committee on Ways and Means, who said a bill updating the income-tax schedule to reduce tax payments for the poor and middle-class brackets has a window for enactment “toward the end of this year or the start of next year.”

Angara said the country has a “one-size fits all type of tax system” where business tycoons have the same requirements as sari-sari storeowners and sidewalk vendors.

Former Budget Secretary Benjamin Diokno agreed with Angara on the need to reform the tax system, but doubted if such a reform could start toward the end of the Aquino administration. It is likely, he said, that the problem would fall on the lap of the country’s next executives, who would face the paradox of reforming the tax system “to make the country’s income-tax regime competitive with its neighbors in Southeast Asia” but, at the same time, raise more taxes to generate funds for formidable spending challenges such as the K+12 educational system and the costly conditional cash-transfer problem.

Diokno earlier said the Aquino was shortchanging the people in terms of services rendered, as compared to taxes collected. In a study titled “Limited Government, Negative Impact on the Economy,” Diokno, now a faculty member of the University of the Philippines School of Economics, also showed that the government, instead of contributing to the country’s economic expansion, has been one of the major factors for the limited growth achieved because of its inefficient use of the national budget.

Speaking before members of the Filipino community in Chicago, Illinois, Mr. Aquino on Thursday said that, through the country’s existing tax system, his administration has made major strides in fighting tax evasion, citing the BIR’s Run After Tax Evaders (Rate) campaign.

A total of 637 cases have been filed under the Department of Finance (DOF) Revenue Integrity Protection Service (Rips) program, the Bureau of Customs (BOC) Run After the Smugglers (Rats) program, and the BIR’s Rate program, he said.

“Our guiding principle has been good governance equals good economics, equals good quality inclusive growth.

“In the fields of economics, let us forget the tag on the Philippines about being the Sick Man of Asia, but many countries now consider us the Darling of Asia,” he said. “The positive view on the Philippines continues as we have achieved an investment-grade status; we have moved up 33 spots in the Global Competitiveness Report of the World Economic Forum; and 49 spots higher in the Ease of Doing Business Report of the World Bank.”

But earlier in New York, Henares told a forum that the Philippines, under its current tax system, was providing a “plethora of fiscal incentives“ that not only has caused confusion among potential investors, but also has fostered a culture of “tax avoidance.”

She estimated the cost of fiscal incentives in 2012 at P157 billion in foregone revenues and P144 billion in 2011, both of which account for over 10 percent of government revenues during those years.

The granting of fiscal incentives resulted in “no new investments but only recycled investments” being poured in the country, she said.

“With many fiscal incentives that no longer attract new investment still being indefinitely extended, this is also fostering the culture of tax avoidance,” she said during her recent US Workshop on Tax Incentives and Base Protection in New York.

Henares said the country’s fiscal-incentive system involved 211 special laws with different implementing agencies assigned to 14 investment promotion agencies (IPAs).

These incentives cited by Henares include income-tax holidays; a 5-percent tax on gross income earned; an exemption from taxes and duties on imported capital equipment, spare parts, materials, and supplies; a zero rate of value-added tax on sales of goods and services by local suppliers; and research and development incentives.

She said the DOF and the BIR have a “limited role” in policy formulation and the granting of incentives, which are mostly based on the Investments Priority Plan (IPP).

Henares said the government is pushing for bills to rationalize and increase the transparency of the fiscal-incentive framework in the Philippines.

Diokno, however, said the country has high tax rates as a result of the system’s narrow tax bases.

“For a given revenue target, tax rates may be lowered if only many more individuals and firms will pay taxes. Lower tax rates also mean lower economic deadweight loss or economic inefficiency,” he said.

Meanwhile, it was learned that tax collections are threatened by the sharp drop—approximately by half—in world oil prices.

The DOF estimates the revenue loss due to lower oil prices at around P40 billion.

Diokno said the proposal in Congress to rationalize the grant of fiscal incentives is moving so slowly in the legislative mill. There is a strong lobby to maintain the status quo, he said.

Diokno added that there are a number of tax-eroding proposals, but none that would raise revenues adequately, rationally and sustainably.

“There is one that proposes to exempt the payment of VAT for power. Another proposal seeks to expand tax exemptions for senior citizens,” he said.

“And as the 2016 national election approaches, I expect more tax exemption proposals. They are what I call pork barrel on the tax side,” Diokno added.

The fear is that these tax-giving proposals may just be too tempting for somebody who has just squandered a huge chunk of his political capital, according to Diokno, referring to President Aquino.

Aquino’s trust rating that started at an enviably high 78 percent (80 trust, 2 distrust) and lately plunged to a single-digit 9 percent (36 trust, 27 distrust).

Henares said the BIR “would like to see a situation where the granting of fiscal incentives is concentrated on one law and one IPA, with their control being handled by the Department of Finance and the National Economic Development Authority.”

The reforms on tax incentives being sought in Congress is the abolition of tax holidays and a sunset provision on all tax incentives.