Government loses P100B annually in leakages from tax perks

By Luis Leoncio

Leakages from tax perks giv­en to corporations average P100 billion annually, com­pared to only P5 billion in revenues lost through inefficient collections from exemptions of se­nior citizens based, according to computations of the Department of Finance (DOF) in its studies on ways to plug loopholes in the tax system.

Finance Undersecretary An­tonette Tionko told a tax forum that the DOF’s proposed compre­hensive tax-reform program aims to plug these leakages and correct the “inequitable” fiscal incentives through a “simpler, fairer and more efficient” tax system.

DOF Spokesman Paola Alvarez had stressed that the 20-percent dis­count enjoyed by all senior citizens would remain and that some of the value-added tax (VAT) exemptions would be replaced, instead, by “bet­ter alternatives” to shield poor and low-income elderly citizens from the impact of the tax-reform plan.

These “better alternatives” are in the form of social-protection programs that include expand­ed pensions and conditional cash transfers (CCT), she said.

“A much better option that would effectively provide aid to our indigent seniors are targeted cash transfers, expanded pensions, free rice and other subsidies that the government has been giving them under the Pantawid ng Pamilyang Pilipino Program or 4Ps,” Alvarez said.

The proposed reforms also aim to correct the anomaly of the Philip­pines having one of the highest tax rates in Asia yet still having among the lowest revenue collections.

Under the current system of corporate taxation, foregone reve­nues were estimated at almost P50 billion annually on income-tax hol­idays, and another P50 billion in the special rate regime among large firms, based on DOF estimates.

These massive tax leakages were the result of a fiscal-incentive system that is not time-bound, which, in turn, has led to severe inequity, Tionko said

“For example, manufacturing companies in the special zones pay just one-third of what companies outside the zones pay; special manu­facturing firms pay P8 per P1,000 of revenues, while regular manufactur­ing firms pay P23 per P1,000 of reve­nues,” Tionko noted.

“The same trend is also seen in the services sector. At a standard cost of P25 million per kilometer for a two-lane road, that P100 billion translates to about 4,000 kilometers of new roads every year,” Tionko said. “Just think about that as you go through the traffic here.”

She said the government plans to increase revenues by correcting these inefficiencies and inequities in the sys­tem and by expanding the narrow tax base, in which “collections from the Bureau of Internal Revenue’s 2,300 largest taxpayers comprise already half of the country’s entire revenue base.”

Tionko, who heads the DOF’s Revenue Operations Group, said the tax-reform plan is designed to raise enough funds to help the government attain its ambitious goal of cutting the poverty rate from 26 percent to 17 percent over six years or by the time President Duterte ends his term in 2022.

“We submit that tax-policy re­form is needed to achieve a simpler, fairer, and more efficient tax system characterized by low rates and a broad base. This diverges from the inequi­table, complex, and inefficient system that we are currently faced with. And, you know, this results in having some of the highest tax rates in Asia, here in the Philippines, and lower collec­tions,” Tionko said.

Besides raising enough revenues to bankroll programs that would en­sure inclusive growth, the Duterte administration also plans to use the additional funds it would collect to expand subsidies and targeted pro­grams for the poor to cushion them from the impact of the tax-rate adjust­ments that the DOF is proposing as part of its comprehensive tax-reform plan, Tionko said.

“No less than the World Bank’s chief economist for poverty reduction Rogier Van Den Brink, said at the last business forum here in Manila that our cash-transfer program, now con­sidered the biggest in the world, has been able to support income growth in the lowest income brackets at a pace much faster than higher income groups,” Tionko said.

“And if this trend is sustained, the GDP growth of 6 percent per year would be enough to double per-capita income within a decade, five times in two decades, and by 11 times in three decades,” she added.

Tionko, however, pointed out that Van Den Brink’s assumptions do not take into account the Duterte administration’s plan to increase the amount for conditional cash transfers and incorporate training and liveli­hood programs for beneficiaries as part of the first package of tax reforms it has submitted in September to the Congress for approval.

This first package proposes to cut the rate of personal income tax (PIT), especially for low-income and mid­dle-income workers, to, in effect, raise their take home pay.

Included in the first package are measures to adjust and restructure the rates of excise taxes on certain products in order to offset the reve­nue erosion arising from the reduced PIT.

Among the offsetting measures proposed by the DOF is the expan­sion of the value-added tax (VAT) base by trimming the numerous ex­emptions in the system that have been subject to abuse, Tionko said.

She noted that instead of using an inefficient and leakage-prone VAT system to address the needs of the poor and the vulnerable, “we’re think­ing that it would be more prudent to increase the coverage of social protec­tion, perhaps through targeted cash transfers or higher pensions.”

Tionko pointed out that attaining the Duterte administration’s goal of raising the average incomes for many Filipinos, with the end-goal of trans­forming the Philippines into a high middle-income country by 2022, is premised on achieving sustainable economic growth that requires con­sistent job creation.

“In this regard, public invest­ments would be needed to stimulate private enterprise, particularly in rural areas to raise overall productivity and wages,” Tionko said.

“This administration recognizes this need, and in response, has com­mitted to raise public expenditures on infrastructure in the countryside to give the agricultural and tourism sectors a fresh shot in the arm in the coming years,” she added.

Going hand-in-hand with the proposed tax-reform measures that need congressional approval are the reforms implemented within the DOF, such as its anti-red tape pro­gram, which has already accomplished significant improvements in speed­ing up frontline government services in the BIR and other DOF-attached agencies, under the able guidance of Undersecretary Gil Beltran, the gov­ernment-appointed anti-red tape czar, Tionko said.

She also cited the presidential directive on Freedom of Information that now allows the public to access official records under the Executive branch, among the other reform ini­tiatives on the Duterte watch.

“Gearing fiscal policy toward inclusive growth is doable, and the administration is doing its part to achieve this goal. Of course, we are aware that there will be obstacles and roadblocks ahead, but rest assured we will continue to champion improve­ments in our tax reform and tax ad­ministration agenda in order to better serve our countrymen,” Tionko said.

Finance Undersecretary Karl Kendrick Chua, the DOF’s chief economist, said the tax-reform plan seeks to transform some of the VAT exemptions into a system that would provide social protection to those who deserve them — the indigent se­niors and other vulnerable sectors.

The proposed lifting of the VAT exemptions excludes raw food and other essentials, such as education and health care.

Using data from the 2012 Fam­ily Income and Expenditure Survey (FIES), the World Bank estimates that the leakage from the VAT exemptions granted to senior citizens was P4.9 billion in 2012.

“This includes non-seniors who benefit from the seniors’ VAT exemp­tion,” Chua said.

“The estimated nominal growth of consumption is around 35 percent between 2012 and 2016, thus, the 2016 estimated leakage was around P6.6 billion to P9.6 billion,” added Chua, a former senior economist of the World Bank for the Philippines.

‘”So what we are proposing is to just transform it into a system where the target [subsidies] only go to those who really deserve to be protected,” he said.

A significant portion of the rev­enues to be collected under Package One of the DOF tax reform program will go to subsidies and other forms of social protection for vulnerable sec­tors.

“To mitigate the impact of the tax increases on the poor and low-in­come households, earmarking for highly targeted subsidies is proposed to fully protect the poorest 50 percent of households and partially protect the working class,” according to the DOF-proposed tax bill submitted to the Congress last month.

For instance, a quarter of the in­cremental revenues to be generated from the excise-tax increase on pe­troleum products will be used to fund highly targeted subsidies for vulner­able sectors, while the remaining 75 percent will go to other social and in­frastructure expenditures.