The government is losing P5 billion annually from leakages arising from the value-added tax (VAT) exemptions for senior citizens and another P100 billion from tax holidays for corporations plus other tax perks given to large firms, according to Finance Undersecretary Antonette Tionko.

Tionko said among the primary goals of the Department of Finance (DOF)’s proposed comprehensive tax reform program is to plug these leakages and correct inequitable fiscal incentives by making the current tax system simpler, fairer and more efficient.

The DOF-proposed reforms, she said, also aims to correct the anomaly of the Philippines imposing one of the highest tax rates in Asia, yet having among the lowest revenue collections.

She said the government plans to increase revenues by correcting these inefficiencies and inequities in the system and by expanding the narrow tax base, in which “collections from the BIR’s (Bureau of Internal Revenue’s) 2,300 largest taxpayers comprise already half of the country’s entire revenue base.”

Tionko, who heads the DOF’s Revenue Operations Group, said the Department’s tax reform plan is designed to raise enough funds to help the government attain its ambitious goal of cutting the poverty rate from 26 percent to 17 percent over six years, or by the time President Duterte steps aside in 2022.

“We submit that tax policy reform is needed to achieve a simpler, fairer, and more efficient tax system characterized by low rates and a broad base. This diverges from the inequitable, complex, and inefficient system that we are currently faced with. And, you know, this results into having some of the highest tax rates in Asia, here in the Philippines, and lower collections,” said Tionko in her opening remarks at the 2nd International Tax Forum at the Peninsula Manila Hotel in Makati City.

The annual forum, which the DOF has been hosting since 2015, aims to provide insights from economists and finance experts on relevant issues on tax policy and administration, focusing on policy tools to enhance economic development.

The two-day forum, with this year’s theme “Fiscal Policy and Inclusive Growth,” will also serve as an opportunity to discuss and share best practices on prevailing tax policies and administrative issues in the context of reducing inequality and ensuring inclusive growth.

Besides raising enough revenues to bankroll programs that would ensure inclusive growth, Tionko said the Duterte administration also plans to utilize the additional funds it would collect to expand subsidies and targeted programs for the poor to cushion them from the impact of the tax rate adjustments that the DOF is proposing as part of its comprehensive tax reform plan.

“No less than the World Bank’s chief economist for poverty reduction, Mr. Rogier Van Den Brink, said at the last business forum here in Manila that our cash transfer program, now considered the biggest in the world, has been able to support income growth in the lowest income brackets at a pace much faster than higher income groups,” Tionko said.

“And if this trend is sustained, the GDP growth of 6 percent per year would be enough to double per capita income within a decade, five times in two decades, and by 11 times in three decades,” she added.

Tionko, however, pointed out that Van Den Brink’s assumptions does not take into account the Duterte administration’s plan to increase the amount for conditional cash transfers and incorporate training and livelihood programs for beneficiaries as part of the first package of tax reforms it has submitted in September to the Congress for approval.

This first package proposes to cut the personal income tax (PIT) rate, especially for low-income and middle-income workers, to, in effect, raise their take home pay.

Included in the first package are measures to adjust and restructure the rates of excise taxes on certain products in order to offset the revenue erosion arising from the reduced PIT.

Among the offsetting measures proposed by the DOF is the expansion of the VAT base by trimming the numerous exemptions in the system that have been subject to abuse, Tionko said.

“For instance, we estimate that we lose about P5 billion on leakages from the exemptions granted to senior citizens,” Tionko said.

She noted that instead of using an inefficient and leakage-prone VAT system to address the needs of the poor and the vulnerable, “We’re thinking that it would be more prudent to increase the coverage of social protection, perhaps through targeted cash transfers or higher pensions.”

Aside from these proposals, Tionko said the DOF is also studying how it can improve the current system of corporate taxation “where foregone revenues are estimated at almost P50 billion pesos per year on income tax holidays, and another P50 billion pesos in the special rate regime among large firms.

These massive tax leakages, she said, is the result of a fiscal incentive system that is not time-bound, which, in turn, has led to “severe inequity.”

“For example, manufacturing companies in the special zones pay just one-third of what companies outside the zones pay; special manufacturing firms pay P8.00 per P1,000.00 of revenues, while regular manufacturing firms pay P23.00 per P1,000.00 of revenues,” Tionko noted.

“The same trend is also seen in the services sector. At a standard cost of P25 million per kilometer for a two-lane road, that P100 billion translates to about four thousand kilometers of new roads every year,” Tionko said

“Just think about that as you go through the traffic here,” she added.

Tionko pointed out that attaining the Duterte administration’s goal of raising the average incomes for many Filipinos, with the end-goal of transforming the Philippines into a high middle-income country by 2022, is premised on achieving sustainable economic growth that requires consistent job creation.

“In this regard, public investments would be needed to stimulate private enterprise particularly in rural areas to raise overall productivity and wages,” Tionko said.

“This Administration recognizes this need, and in response, has committed to raise public expenditures on infrastructure in the countryside to give the agricultural and tourism sector a fresh shot in the arm in the coming years,” she added.

Going hand in hand with the proposed tax reform measures that need congressional approval are the reforms implemented within the finance department, such as its anti-red tape program, which has already accomplished significant improvements in speeding up frontline government services in the Bureau of Internal Revenue and other DOF-attached agencies, under the able guidance of Undersecretary Gil Beltran, the government-appointed anti-red tape czar, Tionko said.

She also cited the presidential directive on Freedom of Information that now allows the public to access official records under the Executive Branch, among the other reform initiatives on the Duterte watch.

“Gearing fiscal policy towards inclusive growth is doable, and the Administration is doing its part to achieve this goal. Of course, we are aware that there will be obstacles and roadblocks ahead, but rest assured we will continue to champion improvements in our tax reform and tax administration agenda in order to better serve our countrymen,” Tionko said.

-oOo-