Global debt watcher Fitch Ratings said Wednesday the passage of the first package of the government’s comprehensive tax reform program will boost government revenue, improve fiscal stability and support public investments.
“Low government revenue is currently a key weakness in the Philippines’ fiscal profile – general government revenue was equivalent to just 22 percent of GDP at end-2016, compared with a median 30 percent for ‘BBB’ rated countries. The potential passage of proposed tax reforms was listed as a positive rating sensitivity when we last affirmed the Philippines’ BBB-/Positive rating in March,” Fitch said.
“The tax package passed last week by the Philippines’ House of Representatives should widen the tax base and boost revenue… It also demonstrates the administration’s commitment to broader tax reforms that have the potential to improve fiscal stability and support an ambitious public investment program,” Fitch said in a report.
The package is the first component of a planned overhaul of the tax system that aims to raise revenue and achieve a simpler, more equitable and efficient system. A key goal of the overall tax reforms is to lower personal and corporate tax rates while expanding the tax base, resulting in a net positive gain to government revenue.
The government estimated that the full set of tax reform packages would boost revenue by 2 percent of GDP by 2019 and it expected administrative measures that simplify tax bureaucracy to add another 1 percent of GDP to revenue over the same period.
Among the areas to be covered in subsequent planned reform bills are corporate, property and capital income taxes. The corporate tax rate is set to be reduced from 30 percent to 25 percent, which would bring it more into line with regional standards, while corporate tax provisions will be simplified in an attempt to increase compliance.
“The speed with which this first bill passed through the House – and President Duterte’s intervention to give it a push over the line – suggests that tax reform is a priority for government. Indeed, tax reform is crucial to the rest of the administration’s ‘10-Point Socioeconomic Agenda’ which includes plans to ramp up investment in infrastructure, health, education and social protection,” it said.
Fitch Ratings was the first major global credit rating agency that gave the Philippines an investment grade score in March 2013.
Moody’s Investors Service also considered the passage of the first package of the government’s tax reform program as credit positive because it would address the country’s weak revenue generation.
Moody’s vice president and senior credit officer of the Sovereign Risk Group Christian de Guzman said the bill was also crucial to maintaining narrow fiscal deficits since the administration of President Rodrigo Duterte intended to ramp up infrastructure spending over the course of its term in government through 2022.