Philippine Hotel Owners Association
October 23, 2018
(Greetings)
Thank you for inviting me to join you this morning. I am pleased in your interest in the fiscal and revenue issues that preoccupy us today.
For the first time ever, the country is undertaking a comprehensive reform of its tax policies without a compelling crisis driving us to do so. This has given us the leisure of studying the best practices elsewhere, peering deeper into the future and assessing what we need to do to achieve the inclusive economy we all want to build.
Last year, Congress passed the first package of the comprehensive tax reform program. The first package reduced personal income tax rates for 99 percent of our taxpayers. The revenue loss this implied was offset by excise taxes on sugary beverages, cigarettes and fuel products. Cigarettes and sugary beverages are items that have adverse effect on public health.
The first package of tax reform produced incremental revenues that allow us to fund the ambitious Build, Build, Build infrastructure program and expand our investments in human capital development. These investments in our physical and human capital will prepare our economy for sustained growth in the years ahead.
Our legislators are currently studying the succeeding packages of the tax reform program. Although they labor under the usual noise that accompanies each electoral season, we are hopeful they will consider the long-term benefits to the country of completing this reform program at the soonest possible time.
In the second package, we propose to lower corporate income tax rates to more closely reflect the regional average. We want to bring down the tax rates from 30 percent to 25 percent, and eventually to 20 percent. This is important in helping draw more of the direct foreign investments flowing into our region. Lowering the corporate income tax rate will benefit hundreds of thousands of micro, small and medium enterprises that employ millions of Filipinos.
To offset the foregone revenues from lowering corporate tax rates, we are proposing the rationalization of fiscal incentives given to certain businesses. Over the years, separate agencies have granted their respective incentives without coordination. Outside the tax code, we have 136 laws that grant investment incentives and 200 laws that grant non-investment incentives. On top of that, we have 14 investment promotion agencies all authorized by law to grant tax incentives. Most countries have one or two such agencies.
Some of these incentives were given perpetually or without reference to any beneficial social impact, such as target job creation. These incentives are not always transparent and have created disparities between similar businesses. To make our business environment more transparent and to underscore the importance we give to competitiveness, there is an urgent need to overhaul the fiscal incentives system.
To give you an example, data from the Securities and Exchange Commission and those reported by the investment promotion agencies as mandated under the Tax Incentives Management and Transparency Act or TIMTA, which incidentally was passed under the Aquino administration, show that for 2015 alone, the government gave away P86.3 billion-worth of income tax incentives to firms that paid out a total of P141.8 billion combined in dividends to their respective shareholders. These declared dividends were 164 percent of the income tax incentives received by firms from various sectors.
Such data showing that certain enterprises declared dividends that are way above the incentives they receive from the government prove that many of them are inherently profitable and no longer need such perks for their businesses to prosper here in the Philippines.
Moreover, the TIMTA and SEC data also show that 328 firms that declared the P141.8 billion in dividends declared only P104.6 billion in direct labor cost, or a difference of P37.2 billion. This begs the question who is really benefiting from the incentives? The shareholders or the workers?
This shows that Filipino taxpayers are, in effect, subsidizing a lion’s share of the profits earned by a select group of corporations that enjoy already redundant incentives under our convoluted corporate income tax and incentives system.
This is unfair to about 90,000 small and medium-scale enterprises in the country that pay the regular corporate income tax rate of 30 percent, which by the way is the highest in the region.
We have also identified a total of 645 registered enterprises that continue to receive tax incentives even after 15 to 40 years in the business, proving that investment perks given usually to big or multinational firms–many of them are inherently profitable–have become redundant and unnecessary. Perhaps it is time for them to help the country after being helped by the government for decades. Incidentally, other ASEAN countries do not give incentives more than 15 or 20 years.
Furthermore, some industries and firms received billions in tax incentives when the rationale for granting the incentives is less clear. For instance, some 60 hotels and amusement centers were recently granted tax incentives but around half of them are located in Metro Manila and major urban centers. While we can understand the need to grant incentives to those investing in poorer regions, the case for granting incentives in major urban areas where there is a clear market is far less convincing. I hope you will all understand the need for the government to be more circumspect as incentives are not free money from heaven. Someone has to pay for it and typically it is the regular Filipino people that shoulder the incentives by paying the regular taxes.
To be clear, we are not scrapping necessary fiscal incentives. We will continue to provide support for priority investment activities. But we insist that all the incentives be time-bound, tightly targeted, fully transparent and performance-based. This will be best for sustaining the robust economic growth that we now enjoy, and ensuring fairness and accountability in our tax incentives system.
Finally, let me address the matter of the elevated inflation rate we have been experiencing most of this year.
There is no question TRAIN contributed to the elevated inflation rate. The excise taxes imposed on sugary beverages and on cigarette products reflect in higher prices. Those higher prices were intended. They are means to dissuade consumption of harmful products and ensure that our youth will not waste away the opportunities brought about by the demographic dividend. The cigarette and sugary drinks taxes are not meant to stop people who are already addicted to these products. It is meant to stop the kids from getting the habit of smoking and drinking Coca-Cola like I’m addicted to.
The excise tax of P2.50 imposed on fuel products is a small increment to pump prices. This tax is not responsible for the spiral in fuel prices, Donald Trump is. The global market, over which we have no control, is responsible for this. At any rate, considering the social and environmental impact of fossil fuel consumption, the excise tax is completely justified. Compared to excise taxes imposed on the same products elsewhere, the one imposed by the new tax reform law is negligible.
An additional 2 pesos excise tax on fuels is scheduled for January 1, 2019. The law, however, provides that implementation of this additional excise tax will be suspended if international crude oil prices reach or break above $80 per barrel for three consecutive months prior to January 2019. Today’s price and multiple estimates of crude prices over the next two months show that the average price will stay above the $80 per barrel-threshold. We made the decision to recommend to the President the suspension of the increase two months before the time required by law, to proactively anchor people’s expectations on inflation and allow the public to manage their finances better.
By our best calculation, TRAIN contributes only 0.4 to 0.7 percentage points to the total inflation rate. The strategic contributions of the tax reform program to achieving rapid and inclusive growth far outweigh that cost.
Apart from fuel prices, which nearly doubled this year, rice caused the elevated inflation rate, where its contribution to inflation increased tenfold from January toSeptember of 2018, from 0.10 percent to 1 percent. Other food items like fish, meat, and vegetables also saw large price hikes. We are addressing the supply problems that caused the price spikes. The immediate solution is to shift to a tariff-based, open trading system for rice. The law that will provide for that is being considered by Congress.
The long-term solution is to rapidly modernize our domestic logistics system to reduce spillage and spoilage that are incorporated into the final price of our products. The most crucial step towards an efficient domestic logistics system is the infrastructure program that we now have in place. That infrastructure program, in turn, requires adequate fiscal space brought about by prudent debt management and improved revenue collection.
Alongside logistics modernization is to improve the productivity of agriculture by first individualizing the collective land titles given under the Comprehensive Agrarian Reform Program or CARP. Doing so will secure property rights and incentivize farmers to invest and be more productive.
I don’t know how many of you are familiar with it, but most CARP lands are given collectively. In other words, if a group of 10 of you are given the title to, say, 20 or 30 hectares, I don’t think any of you will be incentivized to really invest in that farm. So we want to give individual titles to the farmers.
I am confident that the cycle of elevated inflation has peaked. Over the next few months, we can expect inflation to subside.
Our economy remains strong. Even as we have adjusted our growth and spending targets to reflect a less hospitable global environment, the Philippines will remain a leader in a dynamic region.
Thank you.
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