Improved spending, tax administration to support gov’t fiscal consolidation efforts

MORE EFFICIENT spending and improved tax administration are key to achieving the government’s fiscal consolidation goals and bringing down debt levels, analysts said.

“The strategy to achieve fiscal consolidation and bring down the debt-to-gross domestic product (GDP) ratio below 60% hinges on faster economic growth to outstrip the increase in debt and improved revenue collections,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

“The Department of Finance (DoF) believes that improved tax collections will be enough to substantially improve the fiscal balances, however, lessons from the past could help us understand the magnitude of the challenges faced by this episode of fiscal consolidation,” he said.

Finance Secretary Benjamin E. Diokno has said improved tax administration, rather than new taxes or tax hikes, is the government’s preferred way of raising more revenues.

“Tax administration should be the focus of the government in terms of fiscal consolidation. It is important to identify spending pressures and to reduce them. In the Philippines, education, health, and public infrastructure are sources of spending pressures. Hence, improving the efficiency of spending for these public goods can go a long way towards fiscal consolidation,” University of Asia and the Pacific Senior Economist Cid L. Terosa said in an e-mail.

The Finance department has pushed a number of priority tax measures under its Comprehensive Tax Reform Program, which is composed of multiple packages to be implemented through the years.

The Tax Reform for Acceleration and Inclusion (TRAIN) law is part of the program’s first package. Signed into law in 2017, it aims to make the tax system fairer and more efficient.

It adjusted oil and automobile excise taxes and introduced an excise tax on sweetened beverages, among other measures.

Since 2018, the TRAIN law has raised PHP 476.1 billion in additional revenues for funding the government’s infrastructure, social, and healthcare programs, according to the DoF.

This year, income tax adjustments under the TRAIN law will be implemented.

Taxpayers earning more than PHP 250,000 but not over PHP 8 million a year will see lower tax rates ranging from 15-30%, while the top individual taxpayers whose annual taxable income exceeds PHP 8 million will face a higher tax rate of 35% from the current 32%.

Meanwhile, people earning PHP 250,000 or less are exempted from paying personal income tax.

This measure could yield an annual average of PHP 97.7 billion in revenues from 2023 to 2025, according to the DoF.

“(This year), the implementation of the TRAIN law will grant a lower income tax for some income brackets, which will erode revenue streams. Although we could see increased revenue from sales taxes borne about by the increased tax home pay of individuals, we believe that if fiscal authorities would want to bring down these debt-to-GDP ratio to more palatable levels at the soonest, they may need to consider fresh taxes to do so,” Mr. Mapa said.

NEW TAXES

Meanwhile, under the second package of the program, “sin” taxes, which refer to taxes on tobacco, alcohol and e-cigarette products, were increased to mitigate consumption and fund universal healthcare programs.

The measure implements incremental increases in products through the years.

Starting this year, fermented liquors will be taxed PHP 41 a liter; distilled spirits and alcopops at PHP 59 a liter; and wine products, both sparkling and still, at PHP 59.55 a liter. Heated tobacco products will be taxed PHP 32.5 a pack; freebase vapor products at PHP 60 a pack; and salt nicotine vapor products at PHP 52 a pack.

From 2020 to 2021, the increased excise taxes on sin products raised a total of PHP 85 billion in incremental revenues, according to the DoF.

Other packages under the tax reform program include the Real Property Valuation and Assessment Reform (RPVAR) and the Passive Income and Financial Intermediary Taxation Act (PIFITA).

The RPVAR was passed on final reading at the House of Representatives and is pending approval at the Senate Committee on Ways and Means. It aims to broaden the tax base used for property and property-related taxes of the national and local governments, improving tax collections without increasing existing tax rates or imposing new taxes.

The PIFITA was also passed and approved on third reading by the House and is pending at the Senate committee level. The bill aims to make passive income and financial intermediary taxes simpler and more efficient.

The DoF has also pushed the excise tax on single-use plastic bags, the imposition of value-added tax (VAT) on digital goods and services and the rationalization of the mining fiscal regime, among other priority measures.

In November, the House approved on third reading House Bill No. 4102 or the Single-use Plastic Bags Tax Act. The single-use plastic tax is seen to generate estimated revenues worth PHP 38.06 billion in five years, assuming collection efficiency is at 70%, according to the DoF.

The House also approved on third and final reading a bill that seeks to clarify the imposition of VAT on digital transactions such as digital advertising, subscription-based services and other services using information communications technology-enabled infrastructure, among others.

In August, the House Ways and Means Committee also approved the new fiscal regime for the mining sector. The measure aims to bring the country’s effective tax rate on mining, considering all taxes, to 51%, up from 38%.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said fiscal consolidation efforts should be the priority of the National Government to help cut the national debt to pre-pandemic levels.

“There is no lack of examples from the past of improved tax collection and administration. The fiscal space afforded to the National Government pre-pandemic was the result of better tax administration in the past and the government should keep pushing this agenda harder,” Mr. Asuncion said.

Mr. Terosa likewise said the country’s debt could return to pre-pandemic levels with the “vigorous implementation of the fiscal consolidation plan and the achievement of consistent and, if possible, faster rates of economic growth.”

The National Government’s outstanding debt as a share of GDP rose to 63.7% at the end of September, its highest in 17 years or since 65.7% in 2005. It remains above the 60% threshold considered manageable by multilateral lenders for developing economies.

The government is aiming to bring down the debt-to-GDP ratio to 61.8% by end-2022 and all the way to 52.5% by 2028.

However, Mr. Asuncion noted that the country would likely see a slight uptrend in the debt-to-GDP ratio in the next two to three years before declining and slowly returning to the pre-pandemic level.

“The last time the Philippines was faced with a high debt-to-GDP ratio was back in 2004, when the ratio was at 71.6%. If we recall, the Philippines was only successful in improving fiscal imbalances after they passed fresh taxes,” Mr. Mapa added.

EXPAND TAX BASE

Albay Rep. Jose Maria Clemente S. Salceda said in a Viber message the government should be pushing for measures that “plug loopholes, expand the tax base, or punish inefficient or dysfunctional consumption.”

He said he would push changes to the Customs Modernization and Tariff Act (CMTA).

“I am considering removing the de minimis rule in the CMTA to address sizable leakages in customs duties and taxes from the e-commerce sector,” he added.

The CMTA was signed into law in 2016. It amended the Tariff and Customs Code of the Philippines to upgrade and smoothen out customs rules and procedures for faster trade, reduce opportunities for corruption, improve service delivery and address supply chain issues.

Apart from tax administration, analysts said that the government should implement reforms in land registration, ramp up efforts against tax evasion and expand the tax base.

“One change that I personally would like to see is the reforms needed in land registration and administration. I think this has long been delayed and should be put forward as a contribution to better tax administration. Harmonization and making real estate tax work for all stakeholders are top in mind,” Mr. Asuncion said.

Pantheon Chief Emerging Asia Economist Miguel Chanco said in an e-mail the government should boost efforts to improve tax administration and crack down on tax evasion.

“It can go a long way to alleviate budgetary pressures, given that this still is a long-running problem that the Philippines has yet to tackle in a concerted and sustained manner,” he added.

Raising revenues could also be done by broadening the tax base instead of implementing new taxes, Mr. Terosa said.

“One way, although controversial, is eliminating tax credits and tax deductions wherever possible. Social media influencers and the digital economy can be made part of the tax base as well. Indeed, expanding the VAT base appears to be a promising option,” he added.

The government should also consider imposing more wealth and luxury taxes, analysts said.

“Given the high inequality and the job polarization in the Philippines, it is crucial to consider wealth taxes especially for the richer income classes. The previous administration was wary of this tax because of the risk of capital flight,” Leonardo A. Lanzona, an economist at the Ateneo de Manila University, said in an e-mail.

“But all taxes have this kind of risk. In light of the global recession, it is unlikely that capital will easily flow to other countries, assuming that the country is a good investment. This then highlights the most important ingredient in setting up wealth taxes: governance. If rich individuals and corporations know that these taxes are going to be spent efficiently, capital flight is unlikely,” he added.

Mr. Diokno previously cautioned that imposing a wealth tax might drive out capital and investments.

“Given the high cost of living, it would be prudent to look at very specific taxes that will not disproportionately hurt the poor,” China Banking Corp. Chief Economist Domini S. Velasquez said in a Viber message.

“Wealth or luxury goods tax should be easy to push. Additionally, even with multiple rounds of sin taxes, taxes on cigarettes and alcohol remain to be one of the lowest in the world. Legislators can come up with various proposals but we think the main criteria is that any tax proposed should be progressive,” she added.

Mr. Chanco also said pushing new or higher taxes would be difficult due to inflationary pressures.

“I think it’ll be very difficult for the government to justify an increase in tax rates over the next one or two years, partly because of the pressure inflation already is exerting on households,” he said in an e-mail.

“But, more broadly, we’re continuing to see signs that private consumption isn’t as healthy as the headline growth numbers suggest, so any move to raise income tax rates or indirect taxes on consumer spending would be very risky,” he added.

Analysts also said the expected slower growth this year could lead to lower government revenue collections.

Mr. Asuncion said there would be downward pressures on revenues due to slower economic activity this year.

“This should have implications on the speed of consolidation largely because the original schedule was based on higher growth targets. Slower growth suggests lower revenue collections and could pose a fresh challenge to hitting planned consolidation timelines,” Mr. Mapa added.

Economic managers are targeting a 6-7% GDP growth for 2023, slightly slower than the 6.5-7.5% target last year. – Luisa Maria Jacinta C. Jocson, Reporter