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Second PH tax reform critical for next generation -- ADB.

By Chino S. Leyco

The passage of the Department of Finance's (DOF) second tax reform proposal is critical to ensure that the country's economy will be stronger and more inclusive for the next generation, the Asian Development Bank (ADB) said yesterday.

Yasuyuki Sawada, ADB chief economist, said that more revenues are needed to build the infrastructure as well as reduce poverty and inequality in country, noting the ratio between government's income and gross domestic product (GPP) is also below Asian average.

The ADB estimated the Philippines will need to invest about seven percent of GDP annually in infrastructure alone to support the country's rapid growth.

The Duterte administration is targeting reaching that level of infrastructure investment by 2022, more than doubling it from less than seven percent of GDP on average over the past two decades.

The Philippine government's revenues are currently just under 20 percent of GDP, well below the 25 percent average for developing Asia and the 36 percent average for advanced economies.

"There are several other features of a good tax system beyond revenue adequacy. These are equity, efficiency, competitiveness, stability and predictability, ease of administration and compliance, and the need to ground policies in evidence" Sawada said.

The ADB economist pointed out that the tax system should be fair by promoting a level playing field in terms of levies.

Sawada said there should be "horizontal equity" among investors, which the present tax incentive system of the government does not provide.

"If we look at the current system, the incentives that some firms get but others don't works against horizontal equity. Firms that manage to get tax incentives face much lower effective tax rates of six-14 percent, whereas firms that don't face a 30 percent rate," Sawada said.

This problem on the tax system, Sawada said will be addressed by the DOF's comprehensive tax reform program (CTRP) package two, which is now pending in the House of Representatives.

"By rationalizing existing fiscal incentives, TRAIN 2 will allow for a reduction in the 30 percent corporate income tax rate, and this will help with the third and fourth features of a good tax system -- efficiency and competitiveness," the economist said.

A lower corporate tax rate will make the Philippines' tax system more competitive, as it currently has the highest corporate tax rates in ASEAN, Sawada said.

He also countered criticisms that the second tax reform will result in stability and predictability of the tax system.

"One cannot and should not keep a tax system fixed -- especially a flawed one -- simply for the sake of 'stability.' The Philippines' tax system is in dire need of fixing, and this is the first major tax reform in the Philippines in two decades," Sawada said.

"If we allow it to be done right, and done quickly, the Philippines will not need another tax reform for another two decades," he added.

Sawada also supported the DOF's plan to simplify and make transparent the government's tax incentives regime by replacing the 123 special laws governing fiscal perks with a single law.

He is also amenable to the plan of bringing the 14 different investment promotion agencies under a single body, the Fiscal Incentives Review Board.

"In sum, TRAIN 2 and the broader tax package are critical to strengthening the Philippines' tax system," Sawada said.

"Passage of this important legislation will demonstrate the commitment of Congress, and the country more broadly, to the reforms that are needed to spur growth, reduce poverty and inequality, and achieve upper middle-income status," he added.

"It will also set the foundations for stronger and more inclusive growth for the next generation of Filipinos," the economist concluded.

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Title Annotation:Business News
Publication:Manila Bulletin
Geographic Code:9PHIL
Date:Jul 16, 2018
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