Finance Secretary Carlos Dominguez III said the Philippines continues to be among the best performing economies in Asia on the strength of higher foreign direct investment (FDI) inflows and rising capital formation.
Dominguez said a significant increase in revenues resulting from tax administration reforms and the implementation of the first package of the Duterte administration’s comprehensive tax reform program (CTRP) has enabled the government to maintain its high level of spending needed to sustain the momentum of the country’s investment-led growth.
Moreover, hefty personal income tax (PIT) cuts under this first CTRP package–the Tax Reform for Acceleration and Inclusion (TRAIN) Law–will let the administration grow the country’s middle class and thus put on track its path towards an upper middle-income economy by 2022, Dominguez said.
Dominguez told economic journalists the Duterte administration will push the congressional approval this year of the rest of its tax reform packages to complete its goal of laying “the strongest foundations” for the country’s sustained and inclusive long-term growth.
“The reform of our tax policy is meant not only to ensure government a reliable revenue base but, more importantly, to enhance the modernization of our economy. This is the historic significance of this reform program. It will have lasting effects on our economic performance for many decades to come,” Dominguez said during the 2nd Economic Journalists Association of the Philippines (EJAP) Forum held Tuesday at the Ayuntamiento de Manila building of the Bureau of the Treasury (BTr) in Intramuros, Manila.
Dominguez said that, “If we do not modernize our infrastructure today and if we do not modernize our tax policy this year, we cannot possibly sustain our pace of growth. We cannot become the dynamic and inclusive economy that is the norm for our region.”
During the forum, Dominguez appealed to economic journalists not just to chronicle the news but to put in context and in the proper perspective their reporting on the reforms, some of them “not necessarily popular,” that the government is undertaking to help the public appreciate the long-term gains of such efforts to maintain fiscal stability and drive high–and inclusive–growth.
“Managing our fiscal stability sometimes requires doing things that are not necessarily popular. But it is only because the public fails to fully appreciate the long-term gains of doing them. I hope our economic journalists will help us convey the long view for the reforms we are now undertaking,” Dominguez said.
The Finance chief said, for instance, that getting the succeeding packages of the CTRP passed faces an uphill climb in the Congress, especially on the eve of an election year and the reality that “some of these reforms run against deeply entrenched vested interests.”
“I am sure you can help us explain to our legislators that the succeeding reform packages will be good for the Filipino people,” Dominguez told the economic journalists. “Be assured that the Department of Finance (DOF) is ready to help you with the latest numbers and, more important, explain to you the rationale behind our policies and our goals in pursuing them. Let us keep our channels of dialogue open and active.”
On the latest economic numbers, Dominguez said that despite the “restrained growth performance” of the Philippine economy of 6.0 percent in the second quarter, it remains the fastest-growing one in the region, with expansion increasingly fueled by investments.
He cited, for instance, the growth in capital formation, which refers to the net accumulation of capital goods such as equipment, transportation assets and electricity.
As a share of the gross domestic product (GDP), capital formation, which is the most comprehensive measure of investment, rose to 27.4 percent during the first half of 2018 compared to the 25.4 percent during the same period in 2017, which is remarkably higher than the 21.3 percent average share of investments to GDP for the past 16 semesters.
Meanwhile, fixed capital, which mainly consists of construction and durable equipment, grew by 14.8 percent compared to 10.4 percent in the same period in 2017, which is a substantial increase from the 12.4 percent average growth for the last 16 semesters.
Dominguez said FDIs rose by 142.9 percent in May this year, increasing to $1.6 billion from $677 million in the same month in 2017. From January to May this year, Net FDI inflows grew by 49 percent to $4.8 billion compared to the $3.3 billion recorded for the same period last year.
Fiscal performance also exceeded expectations, Dominguez said, as total revenue collections for the first seven months of 2018 amounted to P1.65 trillion, or 21 percent higher than the same period last year.
Of this amount, tax revenues accounted for P1.47 trillion, which is 18 percent higher than the same period in 2017. Of the total tax revenues, collections from the Bureau of Internal Revenue (BIR) improved 14 percent or P1.1 trillion; and Bureau of Customs (BOC) collections reached P331.5 billion, which is a full 35-percent increase over the same period last year.
“Our tax effort has improved as a consequence. At about 15 percent of GDP, our tax effort matches those of the best-managed economies in the region,” Dominguez said. “The improvement in the tax effort is a result of the continuing administrative reforms in our revenue agencies as well as the effects of the new tax reform law.”
Dominguez said these “healthy revenue collections help us make the necessary economic investments to sustain our growth momentum long into the future” and “enable us to make the investments in our precious human capital to power the modernization of our economy.”
While increasing revenues, Dominguez said the first tax reform package, in effect, gave out a 14thmonth pay by way of income tax cuts to 99 percent of the working population, or a combined P12 billion per month of additional money to spend, which is evidenced by the robust sales of retail establishments and fastfood chains.
“To be sure, increases in the effective take-home pay contributes to the inflationary pressures we are now experiencing. But it is, in a significant way, a measure for the alleviation of our working class,” Dominguez said. “Those mistakenly calling for a suspension of the tax reform law must explain to the 99 percent of Filipino taxpayers why a higher tax penalty will be restored on their incomes.”
Besides hefty reductions in the personal income tax, the first package also lowered the estate and donor’s tax, from 20 percent of the net estate value and 15 percent on net donations, to a single tax rate of only 6 percent.
The rest of the tax reform packages are:
· Package 1B, which is the proposed tax amnesty program and adjustments in the Motor Vehicle Users Charge (MVUC);
· Package 2, which aims to lower the corporate income tax (CIT) rate and broaden the tax base by modernizing investment tax incentives;
· Package 2 plus, which proposes to increase the excise tax on tobacco and alcohol products and increase the government’s share from mining;
· Package 3, which institutes reforms in property taxation to make the valuation system more equitable, efficient, and transparent; and
· Package 4, which proposes to rationalize capital income taxation to address the multiple rates and different tax treatments and exemptions on capital income and other financial instruments.
Of these packages, Dominguez said Package 2 comprises “the most important elements,” given that it would further fuel economic growth, attract investments, and, most important, benefit tens of thousands of small and medium enterprises (SMEs), which employ the biggest number of workers.
“The rationalization of fiscal incentives, in turn, will create a level playing field for our enterprises and attract new players to compete. The accretion of so many incentive schemes through the uncoordinated action of legislators and economic zones produced chaos,” he said.
Dominguez said the government is “seeking the rationalization of incentives to encourage enterprises to hire more workers, improve their competitiveness and deliver on the social benefits for which the incentives were granted in the first place.”