Reforms in Tax Policy, Administration to Raise P600 Billion by 2019

The Duterte administration aims to raise some P600 billion by 2019 to fund its priority investments in infrastructure, human capital development and social protection for the poor through the implementation of its proposed reforms in tax policy and administration, according to Finance Secretary Carlos Dominguez.

Responding to queries from senators on the proposed tax reform program of the Department of Finance (DOF), Dominguez said that the amount, which represents 3 percent of the country’s Gross Domestic Product (GDP), would come in part from implementing tax administration reforms in the Bureaus of Internal Revenue (BIR) and of Customs (BOC).

“Now, if we are able to increase our collections through [reforms in] tax administration [and policy]… that should be around P550 billion or P600 billion improvement over the current system,” Dominguez said at the hearing held by the Commission on Appointments’ committee on finance on his confirmation as DOF secretary.

Dominguez said some P400 billion of this amount would come from the implementation of tax policy reforms and another P150 billion to P200 billion from tax administration reforms.

He said one key aspect of the DOF’s tax administration reforms in the BIR and BOC is to systematically deal with corruption in these two agencies.

“The first part is improvement in tax administration. We want to improve our collections in the BIR and Customs. The first measure we are doing there is reducing the corruption in those areas. And second we want also to do it systematically,” Dominguez said.

In the BIR, for instance, the DOF plans to use information technology to come up with tax profiles based on industries, and compare the tax payments made by companies to flush out possible tax evaders, the finance chief said.

In its presentations before the Congress and in tax forums organized by private sector groups, DOF officials also cited other reform measures that the BIR would be implementing to encourage tax compliance, such as simplifying the process of paying taxes; making the system fairer and more efficient by, among others, reducing income tax rates; and facilitating electronic tax filing and payments.

In the BOC, the government will intensify its campaign against smuggling while enhancing trade facilitation through the implementation of the Customs Modernization and Tariff Act (CMTA).

One way to do this, Dominguez said, is to identify areas where massive under-declaration and non-declaration of imports take place.

He cited statistics from the United Nations Comtrade database, which show an alarming discrepancy of P1.8 trillion in 2014 alone between the volume of imports reported here by the traders and the actual figures recorded by their suppliers from the exporter-countries.

This massive value gap or possible leakage of P1.8 trillion translates into foregone revenues of roughly P231 billion.

“So we are going to each country and each major trading partner and we are going to talk to their customs people there to ask who are the exporters and …. who are the receivers in the Philippines so that we can trace where the under-declaration or non-declaration are,” Dominguez said.

According to Dominguez, the second part of the DOF’s proposed program involves tax policy reforms, which would cover taxation measures and plugging massive leakages through the reduction of tax exemptions.

Earlier, Dominguez said the government plans to massively increase investments in infrastructure, human capital and social protection to achieve inclusive growth, which would require robust revenue inflows.

The DOF had submitted last month to the House and the Senate its proposed Tax Reform for Acceleration and Inclusion Act, which covers Package One of its comprehensive tax reform program, in keeping with the Duterte administration’s 10-point socioeconomic agenda.

Dominguez said the DOF tax reform bill was completed after the Department consulted with members of the Cabinet, legislators, former Secretaries of Finance, prominent economists, stakeholder and business groups, and with various foreign embassies, global financial institutions and joint foreign chambers signifying their support for the tax reform proposal.

According to the Finance Secretary, this tax reform plan which include reductions in the personal income tax rates and its corresponding offsetting measures is part of a broader reform program to ​drastically reduce poverty and transform the Philippines into an upper middle-income country by 2022.

These offsetting measures include adjusting the fuel and automobile excise tax and indexing it to inflation and expanding the value-added (VAT) tax base by lifting certain exemptions to the tax.

The DOF said a quarter to a third of the net gains from the first tax reform package would be allocated for highly targeted transfers, direct discounts and targeted subsidies for the sectors to be affected by the offsetting measures.

A comprehensive tax reform program that includes other measures divided into four other packages will also augment the P1 trillion in investments needed to transform the country into a high-income economy in one generation or by 2040.

“Without reforming our tax system so that it becomes fairer, simpler and more efficient, government cannot undertake the volume of spending required in achieving our goals” of reducing poverty and elevating the Philippines to the status of a high-income country in one generation, he said.

“Taxes are never popular. We are emerging from a history of chronically low tax efforts and damaged institutions. This history of weak and inefficient governance is a more significant factor than colonialism in explaining our underdevelopment,” he said. (DOF)