(Greetings)
First of all, I thank the leadership and the members of the House of Representatives for their untiring and sincere commitment in passing the Tax Reform for Acceleration and Inclusion (TRAIN) Law. The first package brought immediate relief to 99 percent of our wage earners in the form of personal income tax rate reductions. For the information of the House, this amounts to around P12 billion a month reduced taxes from wage earners. It simplified the system, enhancing the effects of administrative reforms we have undertaken in the past years. The additional revenues resulting from this are better than expected. Both the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) exceeded their collection targets in the first quarter of this year.
The passage of TRAIN continues the process of fiscal consolidation that won us a succession of credit rating upgrades. With everyone’s continued support of the comprehensive tax reform program, we expect to be upgraded once more in the coming rating periods. This massive fiscal reform can only be good for our country’s economic growth prospects, which would translate into better lives for each Filipino.
We embarked on the comprehensive tax reform program with the desires and ambitions of our people in mind, and with the vision to propel our country to high-income status in one generation where no one is poor. As I mentioned when we first introduced TRAIN, this comprehensive reform is the first time the country is restructuring its tax policies in the absence of any compelling crisis. Although we are doing this reform free of any duress, external or internal, your prompt and effective legislative action will enable the country to sustain its current impressive rates of growth as well as make our economic development more inclusive.
Revenue policies, after all, are not only about raising money to reduce deficits or meet our debt payments. More importantly, they are effective instruments for reducing poverty, investing in the future and fashioning a fairer society.
It is true that the improved revenue flow will enable us to fund the aggressive infrastructure program we need to stimulate economic activity. More than that, however, it will enable us to properly fund education and health care as well as to conduct the cash transfer program for the poorest sections of our community. The general economic strategy we are pursuing, after all, has the final goal of reducing poverty dramatically over the next few years.
TRAIN has been unfairly blamed for the elevated inflation rate we are currently experiencing. By our estimates, fully two-thirds of last April’s 4.5 percent inflation rate is typical of a rapidly expanding economy. The remaining is due mainly to the sharp increases in key imported commodities specifically oil, the realignment of currency exchange rates and a robust increase in domestic demand.
TRAIN contributes only four tenths of a percent to the inflation rate. This means that for every additional peso our people have to spend because of inflation, only 9 centavos can be attributed to TRAIN. It is also important to note that TRAIN’s biggest price impact is on tobacco and sugary beverages. But in the case of these “sin” products, the tax rate is intentionally punitive to improve the health of Filipinos. At any rate, the inflationary impact of TRAIN is expected to diminish over the next few months.
To cushion the effects of the elevated inflation on the most vulnerable, government is implementing the unconditional cash transfer program. To meet the surge in domestic demand, driven in part by the windfall due to the income tax rate reductions, we are encouraging more investments to grow our domestic production capacity. Over the medium-term, better infrastructure, health, and education services will make people more productive to improve their welfare.
The success we have so far achieved for the first tax reform package is encouraging, but we cannot and should not stop the train from moving forward.
This is where the second package comes into the picture. Contrary to what critics want our people to believe, Package 2 is pro-business, pro-investments, and pro-incentives.
The second package of our tax reform program aspires to build a more competitive and transparent business environment. It seeks to rationalize our incentive systems to reduce overlaps, hidden subsidies that benefit a few, and loopholes that unfairly distribute business advantages. We seek reforms that will deliver a more even playing field, simplify collection procedures, bring greater transparency and reward genuine efficiency.
Consider the structural defects preventing us from more effectively attracting direct investments:
1. The Philippines has the highest corporate income tax rate in the whole ASEAN region, and most companies, particularly the small and medium enterprises pay the highest rate at 30%. We need to gradually bring down our corporate tax rate to the regional benchmarks.
2. We have a complicated tax incentive system. Currently, we have 14 investment promotion agencies. Outside the tax code, we have 123 laws that grant various forms of investment incentives and 210 laws that grant non-investment incentives. The situation cries out for rationalization.
3. The Philippines gives out the most generous tax incentives because they are granted forever, and in lieu of all taxes – both local and national. Incentives given out by all other countries in the region are time- and performance-bound. When we give out incentives without limit, the practice erodes both accountability and performance.
4. We are grateful to Congress and our immediate predecessor for the passage of the Tax Incentives Management and Transparency Act (TIMTA) law of 2015, which allowed us to verify the scale of the problem. In 2015 alone, we gave away a total of 301 billion peso-worth of potential revenues that might have been collected in the form of corporate income taxes, VAT or customs duties.
This situation stresses the urgency to legislate the second tax reform package. Now is the time to build on previous administrations’ efforts to pursue this important reform.
The second package continues to acknowledge the important role fiscal incentives play in attracting efficiency-seeking investments that otherwise would not have gone into our country in favor of more cost-effective destinations. Package 2, however, requires that every peso given up as an incentive must benefit the society in the form of better jobs, faster innovation and countryside development. Some of the incentives granted, however, were entirely unnecessary given the inherent attractiveness of our market size, our natural and human advantages and our freshly gained competitiveness. Whatever incentives are granted should be performance-based, tightly targeted, time-bound and transparent.
To achieve the above, we propose the following:
1. Lower corporate income tax rates while modernizing the fiscal incentives regime. These will be done conditionally to ensure fiscal discipline as we fund the much-needed infrastructure program and expansion of health and other social services.
2. We propose tax code amendments that will improve tax compliance and harmonize all incentives through the Fiscal Incentives Review Board. There will also be improvements in the TIMTA Law to ensure transparency and accountability of incentives.
3. Harmonize the incentives regime. Wepropose amendment or repeal of 123 special laws on investment incentives and consolidate them into one omnibus incentive code or the strategic investment priority plan.
4. Immediately narrow the disparity between enterprises operating under the standard rate and those enjoying incentives. We will keep the income tax holiday and other income-based incentives. Meanwhile, we propose replacing the 5 percent gross income earned (GIE) tax in lieu of all taxes with a 15 percent rate on net taxable income.
5. We propose that VAT be treated purely as a consumption tax in accordance with international best practices. In practice, this means when you buy, you pay; when you export, you claim a refund. VAT should never be used as an investment incentive.
6. We will not commit local taxes. The current practice of “in lieu of local taxes” is unfair to local governments. It runs contrary to the general economic strategy of enhancing countryside development.
It is important to note that incentives are not the only factor that drive investments. President Duterte’s policy to attract foreign investments, which he spelled out in a recent speech before Singaporean investors is to 1) provide a safe place for businesses by maintaining peace and order, 2) wipe out corruption, and 3) eliminate red-tape in the bureaucracy.
We look forward to a comprehensive discussion of these proposed reforms. We look forward, as well, to your continued support for making our tax policy more efficient and more responsive to our development needs in order to achieve true change.
Thank you very much.
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