The government will never hit, much less surpass, its annual collection targets unless it indexes taxes to inflation and modernize fiscal incentives given to certain industries that account for over P100 billion in foregone revenues, according to Finance Undersecretary Karl Kendrick Chua.
Chua said that alongside these reforms, the government also needs to relax the country’s bank secrecy laws that are among the most restrictive in the world and which prevents the Bureaus of Internal Revenue (BIR) and of Customs (BOC) to conduct the proper tax audits and subsequently run after tax dodgers and money launderers.
The Philippines, according to Chua, is only one of three countries that still keep bank accounts out of the scrutiny of tax officials.
“Let me put it in perspective: we collect 13.6 percent of GDP in taxes. That is very low. Thailand has 17 percent, most of the advanced countries are above 20 percent. There’s no way we can fund massive, radical ways in providing service if we do not raise the tax-to-GDP ratio. The highest that has been achieved was in 1997 when we reached 17 percent. But since then we have fallen to as low as 11 percent,” Chua said during a recent tax forum organized by the StratBase-Albert Del Rosario (ADR) Institute.
Chua said the Philippines has to improve its current tax-to-GDP ratio of 13.6 percent to 16.6 percent, which means the government has to raise some P600 billion per year in new tax revenues, to enable the Duterte administration to fund its planned unprecedented investments in infrastructure, human capital and social protection for the country’s vulnerable sectors.
Citing as one of the reasons the failure to index taxes to inflation for the country’s low revenue collection rate, Chua pointed out as an example the case of fuel excise taxes, which have not been adjusted since 1997, although the peso value of the tax rate has eroded and incomes have increased over the past two decades.
Another major reason revenue collection targets are never met is the grant of numerous incentives to protected industries, which violate any or all of the four principles on why these had been given to them, Chua said.
He said fiscal incentives in other countries follow these four principles: they must be time-bound, performance-based, transparent and targeted for specific beneficiaries.
These principles, Chua said, are seldom practiced in the Philippines, whereincentives are given with no time limits, are neither transparent nor based on performance, and never target specific areas that need investments to spur economic growth.
“[Incentives] should be targeted, typically to those investing in the provinces, if you want to make development in the provinces, if you are an exporter, or if you can create jobs. But not all are targeted,” Chua said.
“Not all (incentives) are performance-based. There are many instances wherein firms that are underperforming are still getting incentives without limits,” he added.
Chua said the country’s outdated fiscal incentives program has resulted in foregone revenues totaling P100 billion, of which half are from income tax holidays and the rest from special tax rates given to companies.
He noted that there are over 200 laws granting incentives to various industries that were approved and enacted without amending the Tax Code.
“And finally, our bank secrecy law. We are one of only three countries in the world wherein there’s no way to open bank accounts except when you give your consent or when you die. So there’s no way to audit. That is the reason why we are not able to recover (from a low revenue collection rate),” Chua said.
He said these lapses can be corrected by instituting reforms in tax policy, alongside reforms in tax administration that can be implemented by the Executive Branch without any need for prior congressional approval.
Such reforms include simplifying tax forms, setting up a “small” and “medium” taxpayers division in the Bureau of Internal Revenue, improving the electronic tax payment system, mandating more active data sharing, and expanding the coverage of the Large Taxpayers Service, Chua said.
Tax policy reforms require legislation, which is why the Department of Finance submitted to the Congress last September the first package of its comprehensive tax reform plan that aims to make the system simpler, fairer and more efficient, he said.
The Tax Reform for Acceleration and Inclusion proposal, the first of a series of tax reform packages, aims to lower personal income tax rates, while expanding the base for the value-added tax (VAT) to plug massive leakages, adjust the excise tax on petroleum products and index these to inflation, and restructure the excise tax on automobiles via a progressive ad valorem system.
Finance Secretary Carlos Dominguez III has said that tax reform is necessary to help fund the government’s accelerated spending on infrastructure, human capital and social protection, which would require an additional P1 trillion annually.
Dominguez said the Duterte administration is pushing a comprehensive tax reform program that would make the system simpler, fairer and more efficient to attain its vision of reducing the poverty rate from the current 22 percent to 15 percent by 2022, which translates into lifting six million Filipinos from poverty.
Sustaining tax reform and a high growth rate of 7 percent annually would realize the government’s medium term goal of transforming the Philippines into a high middle income country five years from now, with a per-capita gross national income (GNI) of $4,100, or where Thailand and China are today, Dominguez said.
This would, in turn, clear the ground for the long-term objective of achieving high-income status in one generation or by 2040, with the country’s per-capita GNI at $12,000, like where Malaysia and South Korea are right now, he added.