Proposed tax reforms for resource mobilization

Times are downbeat. In the last few years, the Philippines has been impacted successively by global crises, starting with the pandemic followed by the Russia-Ukraine War. The light at the end of the tunnel that signals national recovery is still out of sight. As such, the government is looking to modify our tax landscape as a key in addressing these challenges.

Our tax system underwent major reform in the last few years with the passing of the TRAIN and CREATE laws, which generally reduced tax rates and rationalized tax incentives. However, the needs of the day prompted the government to seek additional sources of revenue to pay off the national debt and to finance its projects. This much was evident when the Department of Finance (DoF), under the leadership of former Secretary Carlos G. Dominguez III, released the 2022 Fiscal Consolidation and Resource Mobilization Plan, which aimed to modify and supplement existing tax laws for more effective and efficient revenue collection. Some of the salient points of the plan include the following:

1. Deferment of the TRAIN personal income tax reduction by retaining the currently imposed tax rates under the TRAIN Law and by deferring the second tranche of graduated income tax rate reductions of 15% to 35% until 2025.
2. Modifications to the Value-Added Tax (VAT) system
   • Expansion of the VAT base by making some previously VAT-exempt or VAT-zero rated items subject to the 12% VAT. Nevertheless, exemptions for the education, agriculture, health, finance, and raw food sectors will be retained.
   • A possible VAT reduction from 12% to 10%.
   • Reimposition of the VAT input tax amortization on capital goods valued at more than P1 million for a period not exceeding 60 months.
   • Imposition of 12% VAT on the digital economy including online advertisements, digital services, and the supply of other electronic and online services.
3. Additional excise taxes on motorcycles and pickups, petroleum and coal, single-use plastics, and expansion of the coverage of excisable luxury goods.
4. Reforms to health/sin taxes by taxing alcopops the same as fermented liquor, increasing the excise tax on cigarettes and e-cigarettes, and adopting a higher unitary rate for sweetened beverages.
5. Admission charges for casinos and a gaming tax on electronic betting.
6. Carbon emissions and cryptocurrency taxes which are still undergoing further study.
7. Strengthening tax administration including the taxation of social media influencers and the conduct of BIR transfer pricing audits.

Aside from the propositions above, the former DoF leadership also recommended the passage of the remaining packages of the previous administration’s Comprehensive Tax Reform Program (CTRP), which include a motor vehicle user charge, the rationalization of the mining fiscal regime, a proposed Passive Income and Financial Intermediary Taxation Act and a Real Property Valuation and Assessment Reform Act. All in all, these proposed reforms are expected to generate an annual average of P349.3 billion in additional revenue and should greatly help in minimizing the need to take on debt to finance the government’s programs.

The new Finance Secretary has declared a preference for improving tax administration over imposing new taxes. Thus, the new administration plans to increase tax effort and make the economy grow at a more ambitious pace to address our current challenges. That said, news reports indicate that he is eyeing carbon taxes, an excise tax on single-use plastics, and digital taxes, the latter estimated to generate at least P13.2 billion in incremental revenue annually, as well as the passage of the remaining packages of the CTRP, which would simplify the tax system and result in the more efficient and effective collection of real property, passive income, and financial intermediary taxes.

While the proposed tax laws have the potential to help the country address our current problems, we should equally remain vigilant and cautious in their enforcement lest they fuel poverty, with consumers absorbing the taxes passed along by businesses. Of what use are resources mobilized to swell the public treasury if citizens are burdened to death by inflation, unemployment, and taxes?