FINANCE Secretary Carlos Dominguez III has unveiled a comprehensive tax reform plan as part of the Duterte administration’s broader reform program for inclusive growth.
“Tax reform is needed because we now have the tax system that is inequitable, complex and inefficient,” Dominguez told congressmen during a hearing on his agency’s budget for next year.
He said the Department of Finance estimates that the new tax plan will mean a revenue loss of P198 billion but a gain of P566 billion for a net gain of P368 billion.
The tax plan is bundled into four packages, consisting of a reduction in personal income tax rates to a maximum of 25 percent, except for the highest income earners, and; lowering corporate tax rates to 25 percent, along with simplifying other corporate income tax provisions to improve compliance.
The plan also includes lowering estate and donor tax rates to around 6 percent and harmonizing capital income taxes regardless of currency, maturity and type towards 10 percent so that low-income depositors pay less on the interest income and the rich pay more.
To offset revenue losses from these tax cuts, the DoF has proposed to limit value added tax exemptions only to raw food, health and education; increase excise taxes on petroleum products; levy taxes on sugary drinks, and; relax bank secrecy laws in fraud cases.
To protect vulnerable sectors from the impact of these new taxes, the government also plans to expand its conditional cash transfer programs and provide public transportation subsidies.
To help cancel out foregone revenues from the lowering of corporate income tax rates, Dominguez said they will rationalize incentives towards a “more transparent, performance-based, targeted and time-bound system” and provide sunset provisions to existing incentives.
The DoF also plans to expand the coverage of the Fiscal Incentives Review Board to include all incentive recipients beyond government corporations; replace the gross income tax earned rate of 5 percent to a reduced corporate income tax rate of around 15 percent; limit the VAT-zero rating to direct exporters and give VAT refunds in cash; and remove the use of tax credit certificates.
Dominguez said the tax reform plan is part of a broader program that is divided into seven components.
These seven components are: 1) reforming tax administration at the Bureaus of Internal Revenue and of Customs; 2) improving governance and reforming the budget; 3) enhancing competition; 4) simplifying business regulations; 5) securing property rights; 6) promoting food security, and; 7) addressing traffic, crime and vice.
“This program which will be presented to the Congress this month will comprise four packages,” he said. “Each of the packages will correspond to a bill that balances policy trade-offs. Other packages may be considered as needed.”
“From now until the end of the month, we are conducting a series of consultations to further refine this proposal,” said Dominguez at a meeting of the House committee on ways and means chaired by Rep. Dakila Carlo Cua.
The DOF has consulted former finance secretaries, legislators, economists, research and advocacy groups to help finalize the tax reform plan.