Philippines Outgoing Minister to Submit $3 Billion Tax Plan

Duterte's Economic Challenges: Should Investors Worry?
  • Finance Secretary Purisima to submit tax proposal to successor
  • Proposal could yield as much as $3 billion of revenue a year

Outgoing Philippine Finance Secretary Cesar Purisima will submit tax reform recommendations to the administration of newly elected President Rodrigo Duterte that he says could yield as much as $3 billion of revenue annually, enough to wipe out the budget deficit last year.

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The proposal includes lowering income and corporate taxes while lifting the sales tax, Purisima said in a May 20 interview in Manila. It also calls for increasing the excise tax on oil, removing exemptions for the sales tax, and lifting bank deposit secrecy, all of which could yield as much as 141 billion pesos ($3 billion) in the first year of implementation, he said.

“They can look at how we planned to approach tax reform and mix it with whatever their concepts are,” Purisima, whose six-year term ends in June, said in an interview at his home. “We wanted to do it, but we ran out of time.”

While outgoing President Benigno Aquino has almost doubled state earnings by hunting tax evaders and curbing corruption, Fitch Ratings estimated general government revenue remains low at about 20 percent of gross domestic product in 2015, compared with the 28.6 percent median for similarly rated nations.

President’s Ear

Reforming the country’s tax regime forms part of Duterte’s economic agenda outlined by his designated Finance Secretary Carlos Dominguez on May 12. Purisima said he is confident in the skills of his successor, who he met for lunch before the interview, citing Dominguez’s previous stint as Agriculture Secretary, deep business experience and strong support from Duterte.

“Having the president’s ear is crucial” if you want to push for reforms, Purisima said.

The tax reform package includes cutting personal and corporate income tax rates to 25 percent within six years, and exempting workers earning 1 million pesos and below a year from paying taxes, said Purisima. The corporate tax rate is currently 30 percent while income tax rates are as high as 32 percent, among the highest in the region, according to the International Monetary Fund.

These cuts will only be implemented if specific levels of the tax-to-GDP ratio are met, Purisima said.

The plan also recommends increasing the sales tax to 14 percent from 12 percent, reducing incentives for industries like real estate and allowing revenue agencies to retain part of their collection to modernize and fund personnel enhancement, according to a summary of the study obtained by Bloomberg.

Similar Plan

The proposal is similar to a plan unveiled by incoming Economic Planning Secretary Ernesto Pernia. The new economic team plans to cut personal income taxes to benefit low-income earners, while the corporate income tax can be patterned after neighbors in Southeast Asia where the rate is about 25 percent, Pernia said by phone on May 20. 

There’s also a plan to lift bank deposit secrecy and reduce tax perks to offset foregone revenue due to lower income taxes, said Pernia, professor at the University of the Philippines’ School of Economics who was previously lead economist at the Asian Development Bank.

The Philippines must ensure any tax reductions are offset by revenue-enhancing measures to protect fiscal gains and fund pro-poor programs, Purisima said. Under Aquino, the nation won its first-ever investment grade ratings and had its best period of growth since the 1970s.

“We’re turning over a country in a better position, a country now with wind beneath its wings,” said Purisima.

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