Passage of TRAIN 2 critical for PH economy –ADB chief economist - The Daily Sentry

Passage of TRAIN 2 critical for PH economy –ADB chief economist

Photo credit: Rappler
“In sum, TRAIN 2 and the broader tax package are critical to strengthening the Philippines’ tax system,” Sawada said.

The Asia Development Bank said on Sunday that the passage of the Department of Finance’s (DOF) second tax reform proposal is critical to ensure that the country will have a stronger economy for the next generation.

ADB's chief economist Yasuyuki Sawada said that in order to reduce poverty and inequality in the country, more infrastructures are necessary which can be built by more revenues, noting the ratio between government’s income and gross domestic product (GPP) is also below Asian average.
ADB's chief economist Yasuyuki Sawada, photo from Asian Development Bank
Sawada said that the problem on the tax system  will be addressed by the DOF’s comprehensive tax reform program (CTRP) package two, which is now pending in the House of Representatives.

“Passage of this important legislation will demonstrate the commitment of Congress, and the country more broadly, to the reforms that are needed to spur growth, reduce poverty and inequality, and achieve upper middle-income status,” he said.
“It will also set the foundations for stronger and more inclusive growth for the next generation of Filipinos,” the economist added.

According to the ADB's estimate, the Philippines will need to invest about seven percent of GDP annually in infrastructure alone to support the country’s rapid growth.

The Duterte administration is targeting reaching that level of infrastructure investment by 2022.

This is more than doubling it from less than seven percent of GDP on average over the past two decades.

“There are several other features of a good tax system beyond revenue adequacy. These are equity, efficiency, competitiveness, stability and predictability, ease of administration and compliance, and the need to ground policies in evidence” Sawada said.
He pointed out that the tax system should be fair by promoting a level playing field in terms of levies and that there should be “horizontal equity” among investors, which the present tax incentive system of the government does not provide.

“If we look at the current system, the incentives that some firms get but others don’t works against horizontal equity. Firms that manage to get tax incentives face much lower effective tax rates of six-14 percent, whereas firms that don’t face a 30 percent rate,”  Sawada said.

“By rationalizing existing fiscal incentives, TRAIN 2 will allow for a reduction in the 30 percent corporate income tax rate, and this will help with the third and fourth features of a good tax system — efficiency and competitiveness,” the economist added.

He said that a lower corporate tax rate will make the Philippines’ tax system more competitive, as it currently has the highest corporate tax rates in ASEAN.
Asked if the second tax reform will result in stability and predictability of the tax system, he said,

“One cannot and should not keep a tax system fixed — especially a flawed one — simply for the sake of ‘stability.’ The Philippines’ tax system is in dire need of fixing, and this is the first major tax reform in the Philippines in two decades. If we allow it to be done right, and done quickly, the Philippines will not need another tax reform for another two decades." he added.

One of the plans under TRAIN 2 is to simplify and make transparent the government’s tax incentives regime by replacing the 123 special laws governing fiscal perks with a single law.

Sawada said that he supports this, as well as the plan of bringing the 14 different investment promotion agencies under a single body, the Fiscal Incentives Review Board.