BIR Can Collect Extra P433-B from Tax Policy, Administration Reforms

The government can collect some P433 billion in additional revenues, representing 2.7 percent of the current Gross Domestic Product (GDP), by implementing reforms to fix inefficiencies and remove loopholes in the Bureau of Internal Revenue (BIR)’s tax policy and administration, according to the Department of Finance (DOF).

DOF Undersecretary Karl Kendrick Chua said eliminating these loopholes and efficiencies, however, would be difficult under the existing tax system because these problems are mainly a result not of weak enforcement alone but of “bad policy design,” which only the Duterte administration’s proposed Comprehensive Tax Reform Program (CTRP) can solve.

“We can potentially collect around P433 billion or 2.7 percent of GDP, based on 2017 prices, if we simplify, address inefficiencies, and remove loopholes in BIR’s tax administration and tax policy, as well as improve governance. This amount is already lower than the 2006 estimate of P726 billion given stronger tax administration in the last 7 years,” said Chua.

“But we cannot accomplish this by just implementing reforms in tax administration because room for improvement in this area is limited. In fact, the key reasons for weak tax collection is the large number of tax exemptions and incentives that give rise to discretion and negotiations, and thus tax evasion and even corruption. Removing unnecessary exemptions and incentives will make the tax system fairer and easier to administer, thereby increasing collections,” he added.

Chua noted that there has already been a 40 percent improvement in tax administration efficiency since 2006 when the World Bank started measuring the Philippines’ tax gap.

“This means that tax administration continues to be prioritized even when policy is still being considered in the Congress (via the CTRP bill),” he said.

Among the tax policy reforms proposed by the Duterte administration in Package One of the CTRP are [1] broadening the Value Added Tax (VAT) base while retaining exemptions for seniors and persons with disabilities, [2] updating the excise tax rates for fuel and automobiles, and [3] lowering personal income tax (PIT) rates to align these with Association of Southeast Asian Nations (ASEAN) benchmarks.

House Bill No. 5636 or the Tax Reform for Acceleration and Inclusion Act (TRAIN) was approved by the House of Representatives by a 246-9 vote with one abstention last May 31 before the Congress’ sine die adjournment. TRAIN comprises Package One of the CTRP. This bill, which had consolidated the DOF’s original proposal—House Bill 4774—with 54 other tax-related measures, seeks to make the country’s tax system simpler, fairer and more efficient.

The DOF said it hopes the Senate would act swiftly on the bill when the Congress opens its second regular session in July and retain the original features of TRAIN outlined n HB 4774.

Finance Secretary Carlos Dominguez III said the DOF will continue to hold dialogues with senators during the remaining weeks of the congressional break to explain to them the merits of tax reform package and convince them to retain the original DOF-endorsed version outlined in Cua’s HB 4774.

“I’m very confident that our legislators are very aware of what is needed in the country, and are very responsive to what the country needs. I’m very confident that we will all sit together, and reason together, and come to a bill that will be good for country,” Dominguez said.

Dominguez said he hopes the Senate will retain the original features of TRAIN under HB 4774 to optimize the bill’s revenue gains, which were trimmed under the House-approved version.

“We can live” with HB 5636, “but of course it’s better if we get more,” he said.

HB 5636 was passed after President Duterte had certified the bill as urgent, given that it was designed to help provide a steady revenue stream to his government’s ambitious high—and inclusive—growth agenda anchored on record spending on infrastructure, human capital and social protection for the poor and other vulnerable sectors.

In his letter to Senate President Aquilino Pimentel III and Speaker Pantaleon Alvarez, President Duterte said, “The benefits to be derived from this tax reform measure will sustainably finance the Government’s envisioned massive investments in infrastructure thereby encouraging economic activity and job creation, as well as fund the desired increase in the public budget for health, education and social programs to alleviate poverty.”

Dominguez, who had earlier asked the President to certify the tax reform bill as urgent, said in his memorandum to the Chief Executive that this TRAIN bill is “expected to help reduce poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,500 in 2015 to at least $4,100 by 2022.”

In the same memo, Dominguez told Mr. Duterte of the “dire consequences” of the Congress’ failure to write a tax reform law.

“The government’s strategy to embark on an aggressive expenditure program by raising deficit spending to three percent of the Gross Domestic Product (GDP) would lead to an “unsustainable fiscal position,” which, in turn, could trigger a credit rating downgrade possibly costing the government an extra P30 billion in annual debt servicing and P100 billion more in higher borrowing costs for the public.,” he said.

Financial institutions have welcomed the House approval of the tax reform bill. Deutsche Bank said that “Beyond its fundamental economic benefits, [the tax reform bill’s] passage would send investors a strong signal that the administration has the political will to pass unpopular laws to institute long-term structural economic reforms.”

Nomura said “the timeliness of the vote and the decisive result again underscore the strong priority that Duterte places on the economic reform agenda and his strong control over Congress.”

Moody’s Investors Service said in a credit outlook that the House approval of HB 5636 will boost the Philippines’ credit rating because it will provide government with a fresh revenue stream and showed it can put reforms in place despite political controversies.

Fitch Ratings said the speed with “which the bill passed through the House—and President Duterte’s intervention to give it a push over the line—suggests that tax reform is a priority for government.” The tax reform package approved by the House, it said, will “widen the tax base and boost revenue.” (DOF)