Simpler, Fairer and More Efficient

The Duterte administration has set ambitious goals for itself. By the time this presidency bows out in 2022, we aspire to reduce the nation’s poverty rate from the current 26% to just 17%. We seek to achieve peace within the country and with our neighbors by finally ending the insurgencies that festered for decades. We look forward, over the next six years, to achieve a law-abiding country with capable and reliable law enforcement. In the medium term, we see the country achieving high middle-income status with investment-led and inclusive growth. On a longer horizon, we expect that by 2040 the great task of completely eradicating poverty shall have been achieved. We expect a dynamic and nurturing community that opens equal opportunities for all Filipinos. In one generation from today, we foresee achievement of high-income country status for the Philippines.

This is not a pipe dream. The medium-and long-term goals are eminently achievable. There is only one benchmark we need to consistently attain year after year: this is to keep growth at 7% for the next generation. Such a sustained growth performance cannot be achieved if our economic performance is exclusive: enriching only a few and impoverishing the many. Nothing can be achieved if the nation slides into the cauldron of drug addiction and narco-politics. The nation cannot be at its best if law enforcement is weak and the judicial system is corrupted. Such conditions will only nourish a criminal obligarchy that keeps the majority mired in poverty.

We need to reconfigure our economy with the goal of enhancing, access to opportunity, reducing disparities among the regions and preparing the young for meaningful economic roles through superior but accessible educational systems. Achieving inclusive economic growth is not a macroeconomic goal. It requires a comprehensive microeconomic program of economic management. This is why, while the new administration adheres to the macroeconomic policies of its predecessors, it also introduces a 10-point economic agenda to guide its governance.

The 10-point agenda includes: continuing the sound macroeconomic policies of our predecessors; the introduction of a tax-reform package that will ensure both fairness as well as broad participation; improvements on the ease of doing business through more efficient and responsive governance; massive investments in new infrastructures to close the gap between what we need and what we have; a new focus on rural development to assure that our agricultural sector will be an engine for wealth-creating rather than the poverty-trap it has been; reform of our land administration system to free up land as a component of our nation’s capital base; increased investments in improving our human capital; increased support for science, technology and the arts; the consolidation of our social protection programs; and, expansion of our reproductive health services.

The aspiration for a just and prosperous society calls for numerous reforms in policy. These reforms will ensure we have the institutions of governance required to speed up growth and make the economy more inclusive. The massive investments in infra as well as education and health care in turn requires robust revenue inflows. Without reforming our tax system so that it becomes fairer, simpler and more efficient, government cannot undertake the volume of spending required in achieving the goals earlier mentioned.

This brings me to the point I would want to discuss with you today: the package of tax reforms we intend to bring to the Congress for legislation. Before I do so, let me assure you that we will improve the efficiency of our tax system by addressing the discrepancies between the volume of imports as reported by authorities and the figures actually reported by the exporter-countries. You may not believe it, but official 2014 records alone of the UN Comtrade World Exports Show a value gap of one point eight trillion pesos (P1.8 trillion) between the value of imports as reported locally as against the value of shipments to the Philippines by exporting countries. This staggering figure means we can still collect P231 billion more or 2% of GDP. We note, however, that part of this trade gap can also be due to timing issues and inclusion and exclusion of particular commodities in reporting. In order to bridge this gap, we need to relax bank secrecy for fraud cases, simplify and automate processes, and improve the ability of customs to enforce the law. We will also send customs personnel to these countries and reconcile our trade records with them to find out the reason behind these discrepancies and plug whatever leakages need to be addressed to make sure that we are able to collect the right amount of taxes.

Meanwhile, we can collect around P726 billion or 6.44% of GDP if we simplify, address inefficiencies, and remove loopholes in BIR tax administration and tax policy. Critical in bridging this gap are: relaxing bank secrecy for tax fraud cases, making tax evasion a predicate crime to money laundering, automating electronic filing and payment, reducing the number of pages and fields in tax reforms, preparing simpler forms for micro and small taxpayers, expanding the large taxpayer service from 2,300 to 3,000 large corporations, and hiring young Filipinos of competence and integrity into 10,000 vacancies in the BIR.

We are focusing on making payment of taxes simpler and easier. We are looking at further segmentizing our taxpayers by including a Medium-Sized Taxpayers Division to better address the needs of these taxpayers. We are simplifying the process of paying taxes and changing the mindset of BIR employees to make them service-oriented and more customer friendly. Recovering the tax gaps we have mentioned is already set in the revenue targets of BIR and BOC. But without reforms in tax policy that make it easier for the bureaus to collect and taxpayers to pay their taxes, recovering these tax gaps will be impossible.

As for the tax reform package, we seed to lower personal and corporate income taxes. Each item that will result in revenue loss will be coupled with a proposal that will result in revenue gain. When all these reform measures are undertaken, we expect a net revenue gain that will help finance inclusive growth.

We are now ready to propose the restructuring of personal income tax rate; expansion of the VAT base by reducing the number of exceptions to the tax; adjustment of the excise taxes imposed on petroleum; and, imposition of a new excise tax on sugar-sweetened beverages in the interest of public health.

Over a two-year period we expect to reduce the top tax rate from 32% to 25%—excepting the ‘ultra-rich” which is defined as individuals making P5 million or more annually. The reduction will bring our income tax rate in line with the rest of the Southeast Asian region. The reduction of income tax rates will greatly benefit the mass of wag-workers. It will effectively increase their disposable income, which will redound to the benefit of the domestic economy.

To help compensate for the revenue loss from lowering personal income tax rates, we propose to raise excise taxes on fossil fuels. The increase will account for the depreciation over the years. It will have marginal impact on fuel costs since we expect the current low price regime for petroleum products to last for quite a while. An excise tax on petroleum products will not make our tax system regressive. Economic studies demonstrate that per capita consumption of these products hew closely to income levels. It is regressive to subsidize petroleum; but it is eminently progressive to tax consumption of the product.

To cushion the impact of the tax adjustment, we will be funding direct subsidies for the vulnerable sectors that will be affected by higher fuel prices in the form of conditional cash transfers, cash cards, direct discounts and other forms of social protection for the affected sectors. About a quarter to a third of the net revenues of some P370 billion that we expect to gain from the tax reform plan will be set aside for these proposed subsidies for the benefit of sectors that will be affected the most by this tax adjustment.

Public health concerns inspire us to propose an excise tax on sugar-sweetened beverages. This excise tax will be on a uniform rate of P10 per liter or kilogram regardless of form, liquid or powdered. The products covered by this excise tax are softdrinks, soda pop, energy drinks and sweetened teas and coffees.

Lastly, we are seeking to remove all other exemptions outside of agriculture, health, banks, education and purchase of medicines by senior citizens and persons with disabilities.

There are other measures we are closely studying to enhance revenues and improve the capacity of our tax system for producing inclusive growth. The tax reform package thus far outlined may be described as the linchpin of the broader reform package envisioned by the Duterte Administration. Without tax reforms, the broader strategic goals mentioned at the onset of this presentation will be compromised.

In closing, let me seek your support for this particular reform effort. Taxes are never popular. We are emerging from a history of chronically low tax efforts and damaged institutions. This history of weak and inefficient governance is a more significant factor than colonialism in explaining our underdevelopment. Today, we have a leadership with enough political will to alter the historical patterns and finally deliver to our people the satisfaction of modern nationhood.

Thank you and good day.