Time now right to implement tax reforms —Dominguez

The convergence of favorable factors under the Duterte administration will allow the reform of the tax system, Finance Secretary Carlos Dominguez III said, as he described the current tax schedule as “crying out for reform.” 

Dominguez said now is the best time to cut personal and corporate income taxes while still raising enough revenues to fund President Duterte’s vision of inclusive growth, against the backdrop of a surging economy, strong investor confidence, declining debt, a stable peso, record gross international reserves, a balance-of-payments surplus, and unprecedented public support for a sitting Chief Executive.

Davao City Rep. Karlo Nograles, chairman of the House Committee on Appropriations said the pace of the proposed tax reforms would depend on the Department of Finance (DoF), which will make the draft and pass it on to Congress.

“The Department of Finance will have to send to Congress, or at the very least the members of the Committee on Ways and Means, a set of tax proposals that they want Congress to study,” Nograles said.

“But right now, as I noticed, I think they are still finalizing the sets of tax measures and new tax proposals that they have in store. All tax measures must emanate from the House of Representatives. We are awaiting the DoF submission.” he said.

Dominguez, meanwhile, said Mr. Duterte has the political will and capital to drive this comprehensive tax-reform plan “at such a fast pace that was unthinkable in the past administration.”

“We will seize the opportune convergence of factors at this time: a dynamic growth rate, a robust growth potential, a stable currency, a stable fiscal profile and determined national leadership,” Dominguez added.

Dominguez said tax reform, which was also one of Mr. Duterte’s campaign pledges, was necessary to realize the administration’s vision of inclusive growth, by providing relief to wage earners, broaden the revenue base, raise spending on infrastructure and human capital, attract more investors and sustain the upward trajectory of the economy, without “courting a credit rating downgrade.”

“Bringing down individual income-tax rates will boost the spending power of wage earners. Bringing down corporate-tax rates will encourage investment inflows to our economy. The prevailing tax rates have been a disincentive to investments coming into our economy,” he said.

But while the new administration wants personal and corporate income-tax rates reduced, it also needs to generate more revenues to effectively implement its 10-point socioeconomic agenda by, among other things, doing away with the kind of public underspending in the past that has prevented the benefits of growth from being felt by the Filipino majority, Dominguez said.

Dominguez said the government would focus on accelerating infrastructure spending “to ease congestion here in Manila, decrease the cost of moving people and goods through the archipelago, boost tourism and pump prime economic activity.”

“There will no longer be underspending which reined in economic performance in the past,” he said.

“All things considered, we have very good conditions in which to introduce policy and governance reforms. We have enough headroom to raise our budget deficit level from two percent to three percent. That single percentage point will allow us to undertake programs to make our economic expansion a lot more inclusive,” Dominguez added.

To make up for the revenue loss from lower income-tax rates estimated at P174 billion, Dominguez said the government would have to raise revenues from other sources.

These measures include reviewing the tax perks for businesses and some exemptions to the value-added tax (VAT), indexing oil excise-tax rates to inflation, and indexing and reforming property valuations, he said.

“We are reviewing the tax incentives that were so casually given out in the past. Many of the businesses are enjoying incentives they do not really need. We are designing a system that will be more transparent, performance-based, highly targeted, and time-bound. It’s about time to rethink our policy of attracting investments into the country,” Dominguez said.

“We are, likewise, reviewing the exemptions to VAT. We hope our people will understand that it is preferable to withdraw certain exemptions than to raise the VAT rate,” he added, emphasizing that the exemptions enjoyed by the poor would not be removed.

Dominguez said the government was also considering taxes on unhealthy food items to help raise additional funds and promote public health.

Complementing these revenue-generating measures are the implementation of reforms at the bureaus of Customs (BOC) and of Internal Revenue (BIR) to ensure transparency, reduce official corruption and expand the tax base.

Such reforms include the full computerization of transactions at the BOC “as well as (pegging the) valuation of goods to prevailing real time prices in the international market” to slowly phase out the need for brokers and the proliferation of fixers in the agency.

At the BIR, Dominguez said he has instructed the bureau to treat taxpayers better when they come to pay their taxes and to simplify the system to broaden the tax base.

“While we have among the highest tax rates in the region, we also have among the narrowest tax bases. For instance, the BIR’s Large Taxpayer Unit monitors fewer than 3,000 taxpayers. In an economy our size, that is obviously too low,” Dominguez said.

“We cannot go on with a tax system where under a million carry the tax burden of 105 million,” he added.

Dominguez assured Filipinos that while the Duterte administration plans to lower tax rates and continue with highly targeted subsidy programs for the poorest of the poor, the country’s fiscal position would remain stable.