DOF Welcomes Final House Committee Approval of Pro-Poor Tax Reform Bill

The Department of Finance (DOF) welcomed Monday the final approval by the House ways and means committee of the substitute bill containing the first package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP), with Undersecretary Karl Kendrick Chua expressing the hope that the entire House of Representatives could pass this measure before the Congress adjourns this June with further improvements based on the DOF proposal.

This committee’s final approval of the first CTRP bill now paves the way for discussions on the measure at the plenary level.

“There has been further progress in the first CTRP bill with its final approval today by the ways and means committee chaired by Rep. (Dakila Carlo) Cua,” said Chua after Monday’s public hearing. “We are hopeful that the House could pass this bill at the plenary level before the Legislature’s sine die adjournment on June 2. We also hope they will reconsider a number of provisions that were removed from the administration proposal.”

The House panel gave its provisionary approval to the still unnumbered substitute bill last May 3 by a 17-4 vote with three abstentions, and then referred it to the House committee on appropriations for earmarking the funding provisions.

Cua’s committee gave its final approval at the start of Monday’s hearing after the bill was returned to it by the House appropriations panel headed by Rep. Karlo Alexei Nograles.

The substitute bill had consolidated House Bill No. 4774, the DOF-endorsed measure filed by Cua, with 54 other tax reform measures filed by other lawmakers.

Chua said after the bill’s approval that the progressive features of the final substitute bill will benefit the poor and will pass on most of the burden of consumption taxation to the rich.

Chua said that under the first CTRP bill, the price impact of the revenue reform measures will be “small to moderate,” with inflation rising by a maximum of 0.9 percentage points and the increase in prices of food, transport and freight charges only minimal.

“Just last year, oil prices increased by up to P14 over the 2016 period, yet we did not see prices skyrocketing. The price impact of the slight increase in fuel excise taxes under the CTRP is not a cause for concern,” said Chua after Monday’s hearing of the House ways and means committee on this tax reform bill.

“What we should be concerned about is the profiteering by businesses that will use tax reform as an excuse to unnecessarily increase prices. We are working closely with the Department of Trade and Industry to ensure that this will not happen,” Chua said in dismissing the erroneous perception being foisted upon the public by certain groups that this bill will hurt the poor more than wealthy Filipinos.

The substitute bill of the CTRP’s first package, which was already approved by this House panel last May 3, aims to lower personal income tax (PIT) rates while broadening the tax base through reforms in consumption taxes such as the VAT and the excise taxes on automobiles and fuel.

It was co-authored by some 100 congresspersons, 25 of whom chair House committees.

This substitute retained most of the DOF’s proposals and was approved with only “moderate modifications,” Chua said.

Chua said that contrary to misleading claims made by some quarters, the substitute bill is actually pro-poor because the additional revenues that would be collected under this modified version of Package One will be spent on job-generating infrastructure projects and programs on education, health and other forms of human capital development that will help low-income Filipinos improve their living standards.

As for the proposal by some groups to approve only the CTRP provisions on lowering PIT rates, Chua said “this would not only be fiscally irresponsible but also anti-poor” because the revenue losses arising from the reduced tax take would leave the government with insufficient funds for education, health and social protections–programs designed to lift the bottom 50 percent of the population from poverty.

A reduced tax take would also lead to a collapse in internal revenue allotments to local government units (LGUs) three years down the road, he said.

Under a scenario where only the PIT cuts are passed, Chua said the lack of revenues would force the government to breach the 3 percent deficit ceiling, which, in turn, would most likely lead to a sovereign credit rating downgrade and other negative economic effects.

“Losing our investment grade rating will mean higher interest spreads, which will mean higher borrowing costs not only for the government, but also for businesses and households as well,” Chua said.

A credit rating downgrade will possibly lead to a P2-peso depreciation of the domestic currency against the dollar, which would then result in additional debt servicing costs of P30 billion for the government and P100 billion more for the private sector, he said.

“This means that even housing loans and car loans would be charged higher interest rates,” Chua said.

Even worse, the private sector would be discouraged from making investments, which will then lead to fewer jobs and a higher poverty rate, Chua said.

He urged lawmakers to view the CTRP as a package so that the bill can truly realize its ultimate objective of benefiting 99 percent of Filipinos.

“Tax reform is really about investing in every Filipino’s future. We need tax reform because we want all Filipinos to rise above poverty and be prosperous by 2040. The business-as-usual scenario of just doing a little is no longer acceptable given our huge investment gaps,” Chua said.

“We need the incremental revenues from tax reform to increase spending on health, education, social protection and infrastructure These basic needs and services are most needed in rural areas where poverty is the worst,” he noted.

Finance Secretary Carlos Dominguez III said that under President Duterte’s “economic breakout” strategy, tax reform will play a crucial role in fulfilling the government’s goal of transforming the Philippine economy to a high middle income one by 2022 and reducing poverty incidence to just 14 percent by that time.

If this strategy focused on inclusive growth is sustained over the medium term, the government envisions the Philippines to be a high-income economy in one generation or by 2040, Dominguez said.

The substitute bill, which the House committee chaired by Quirino Rep. Dakila Carlo Chua approved on May 3 by a 17-4 vote with three abstentions, consolidated the DOF-endorsed House Bill No. 4774, which aims to overhaul the country’s tax code by making the system simpler, more efficient and fairer especially for the poor and low-income Filipinos.

Among the key features of the substitute bill are the following: 1) the lowering of personal income tax (PIT) rates as proposed by the DOF but indexed to cumulative Consumer Price Index (CPI) inflation every three years; 2) a flat rate of 6 percent for the estate and donor’s taxes 3) broadening the tax base by removing special laws on VAT exemptions, including those for cooperatives, housing and leasing, but retaining exemptions for seniors and persons with disabilities; 4) staggered “3-2-1” excise tax increase for petroleum products from 2018 to 2020 but with no indexation to inflation, and liquefied petroleum gas (LPG) used as feedstock to be exempted from the hike; 5) a five-bracket excise tax structure for automobiles with a two-year phase-in period for the tax increases; and 6) earmarking of 40 percent of the proceeds from the fuel excise tax increase for social protection programs for the first three years of the tax reform measure’s implementation.

Chua said that for the Value Added Tax (VAT), the threshold for exemptions was increased to P3 million and indexed to inflation every three years.

The zero-VAT rate was also retained for the renewable energy sector and limited to direct exporters, pending the establishment of the DOF-proposed cash refund system, in which refunds can be obtained by the beneficiary-taxpayers within 90 days of their application for such exemptions, Chua said.

For the self-employed and professionals within the VAT threshold of P3 million, Chua said the substitute bill require them to pay an 8 percent tax on gross sales or receipts in lieu of the income and percentage taxes.

The tax for those above this VAT threshold will be based on the 30 percent corporate income tax rate with minimum tax, Chua said.

He said the Optional Standard Deductions (OSD) was retained at 40 percent but now based on gross income under the substitute bill.

This substitute bill adopted the DOF proposal to subject lottery and sweepstakes winnings from the Philippine Charity Sweepstakes Office (PCSO) to a 20 percent passive income tax in lieu of the lower 5 percent prize fund tax.

Another DOF proposal adopted under the substitute bill was the removal of the 15 percent tax rate for the employees of the Regional Operating Headquarters (ROH) of corporations, which are foreign business entities whose purpose is to service its affiliates, subsidiaries or branches in the Philippines and other foreign markets.

As proposed by the DOF, Chua said the fringe benefit tax will be initially lowered from 32 percent to 30 percent for the first three years and thereafter incorporated in the gross income of taxpayers.

On oil excises, Chua said the original proposal of staggering the P6 increase to P3 in the first year, P2 in the second year and P1 in the third year was adopted, but with no indexation to inflation thereafter.

For automobile excises, five brackets were adopted (based on price levels) under the substitute bill, which also set a two-year phase-in period for its implementation, he said.

Pickups are exempted under the substitute bill, along with hybrid cars if these vehicles can run 30 kilometers on a single charge.