office of the chief economist and undersecretary for strategy · 2017-02-02 · title: office of...

Tax Reform for Acceleration and Inclusion

Revised package 1

As of January 30, 2017 3:02 PM(Full presentation)

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Vision for the PhilippinesBy 2022 (6 years from now)o Poverty rate reduced from 21.6 to 14% (or some 6 million

Filipinos uplifted from poverty).o Law abiding country.o Peace within the country and with our neighbors.o Achieve high-middle income status, where per capita gross

national income (GNI) increases from USD 3,500 to at least

China are today).By 2040 (24 years or one generation from now)o Extreme poverty eradicated.o Inclusive economic and political institutions where everyone

has equal opportunities.o Achieve high income status, where per capita GNI increases

(where Malaysia and South Korea are today).

1/30/2017 DEPARTMENT OF FINANCE 5


How to achieve the visionOver the long-term, all these investments require additional funds of around 1 trillion pesos per year in 2016 prices on top of the current 1.7 trillion pesos.Over the medium term, the government will need to raise some 366 billion per year between 2016 and 2022 (or 2.2 trillion pesos in total).

This can be sustainably achieved through tax reform, which is integral to the larger goals of the administration and crucial for achieving the vision of a prosperous country.

In addition, complementary economic reforms are crucial: secure property rights, enhance competition, improve food security, and simplify regulations.



Source: Department of Budget and Management



In summary, tax reform is needed to fund the ten-point socioeconomic agenda




Expanding the VAT base by limiting exemptions

The following exemptions will be removed, unless sold by firms whose gross sales fall below the VAT threshold:

o Exemptions found in special laws, except senior citizens and PWDso Cooperatives, except those selling raw agriculture produce.o Low cost and socialized housing.o Lease of residential units.o Power transmission (replace the franchise tax with VAT).o Domestic shipping importation.o Boy scouts and girl scouts.

Limit the VAT zero-rating to direct exporters who actually export goods out of the country. This will be implemented together with the VAT refund starting in 2018. Remove the following zero-ratings:o Indirect exporters and agents.o Move renewable energy from zero-rated to exempt.

Low-income and vulnerable households will be protected through a higher VAT threshold of 3 million pesos (i.e., business with gross sales below 3 million pesos, such as sari-sari stores, will be exempt from VAT) and targeted transfers to poor and vulnerable households.


Oil excise rates


Excise ratesPesos per liter 2017 H1 2017 H2 2018 2019 2020

Diesel and essentials

0.00 3.00 5.00 6.00 6.24

Gas and nonessentials

4.35 7.00 9.00 10.00 10.40

Pump price (USD 53.72 per barrel)Pesos per liter 2017 H1 2017 H2 2018 2019 2020

Diesel 32 35 37 38 38.24

Gas 46 53 55 56 56.40

Annual indexation of 4% starting 2020, except if Dubai crude exceeds $100/barrel


Auto excise rates

Net manufacturing/ importation price in

pesosCurrent (in pesos) Proposed

Up to 600,000 2% 4%

Over 600,000 to 1.1 Million 12,000 + 20% in

excess of 600,00024,000 + 40% in

excess of 600,000

Over 1.1 M to 2.1 M 112,000 + 40% in excess of 1.1 M

224,000 + 100% in excess of 1.1 M

Over 2.1 M 512,000 + 60% in excess of 2.1 M

1,224,000 + 200% in excess of 2.1 M




High end revenue impact in 2018 (PHP billion and percent of GDP)


Subject the change based on updated data

Tax package Loss Gain NetPackage 1: PIT and consumption -139.6 302.1 162.5Lower personal income tax rate -137.9Estate and donor tax -1.7VAT base expansion 92.5Automobile excise 31.4Excise tax on petroleum 120.9Complementary revenues 57.4

Tax package Loss Gain NetPackage 1: PIT and consumption -0.8 1.7 0.9Lower personal income tax rate -0.8Estate and donor tax 0.0VAT base expansion 0.5Automobile excise 0.2Excise tax on petroleum 0.7Complementary revenues 0.3

DEPARTMENT OF FINANCE 46

Gains from the lower PIT regime are more than enough to offset additional expenses from higher oil prices, car loan payments, and inflation.

1/30/2017

Protecting the poor and low income Filipinos: VAT

VAT threshold for marginal establishment can be increased from 1.9 to around 3 million pesos, thereby exempting their goods from VAT. o Cooperatives below the threshold will still be exempto Raw agricultural products will continue to be VAT exempt.

Higher oil excise: targeted transfers, pantawid pasada, and jeep modernization.


To use the tax system to protect the poor and low income earners results into massive leakages.


Decile/percentile

Description

2018 projected monthly

household total income*

Personal income tax

Value-added

tax

Petrol and transportation

Automobile**Net tax

due Inflationary

effect***

Change in take home

pay

Transfer (full year)

Change in take home pay after transfer

D1 Subsistence poor 5,233 2 (374) (160) (532) (522) (1,054) 3,600 2,546D2 Subsistence poor 8,362 86 (438) (251) (603) (797) (1,400) 3,600 2,200D3 Poor 10,741 400 (502) (339) (441) (950) (1,391) 3,600 2,209D4 Near poor 13,076 1,051 (601) (427) 23 (1,093) (1,070) 3,600 2,530D5 Near poor 15,826 2,281 (766) (557) 958 (1,263) (305) 3,600 3,295D6 Informal worker 19,375 3,924 (1,025) (695) 2,204 (1,434) 771 1,500 2,271D7 Minimum wage worker 24,502 7,364 (1,981) (904) 4,479 (1,667) 2,811 1,500 4,311D8 Above minimum wage 32,482 14,010 (3,930) (1,183) 8,898 (1,988) 6,910 1,500 8,410D9 Professional 47,424 26,774 (6,090) (1,673) (1,701) 17,310 (2,458) 14,852 14,852D10 Middle class 112,781 56,187 (12,011) (4,316) (9,029) 30,831 (4,316) 26,515 26,515P100 Executive 287,685 75,555 (23,288) (9,150) (27,710) 15,406 (6,382) 9,024 9,024T1000 CEO 626,703 (34,637) (30,821) (10,674) (177,841) (253,973) (8,022) (261,995) (261,995)

Top taxpayer A 1,376,147 (325,459) (67,679) (23,438) (517,932) (934,507) (14,720) (949,227) (949,227)Top taxpayer B 2,752,294 (862,156) (135,358) (46,876) (517,932) (1,562,321) (22,080) (1,584,401) (1,584,401)

* Total household income includes compensation income, income from entrepreneurial activities (i.e. businesses), and other sources of income (i.e. cash transfers) **Automobile excise tax impact were computed using 2016 prices ***The inflationary effect was computed as a function of income, MPC, and estimates on the price effect of the increased oil excise on food.

Combined effect Package 1 change in annual take home pay (in pesos)

Source: DOF staff estimates using 2015 Family Income and Expenditure Survey & January 2016 Labor Force SurveyNotes: Each household has about two income earners

Combined tax-transfer effect*



Targeted transfers will be crucial in protecting the poor from shocks and can help improve the progressivity of the tax reform.

After the tax-transfer reform, the poor benefits the most.



4.1%2.2% 1.7% 1.6% 1.7% 1.0% 1.5% 2.2% 2.6% 2.0%

0.3%

-3.5%

-5.7%-4.8%

-7%

-5%

-3%

-1%

1%

3%

5%

% increase in household income

*based on FIES 2015 data

Price effect of excise on inflation 2017 H2 to 2018


CommodityShare of CPI

(%)

CPI 2015

Share of petroleum products as input

(%) 1

Net impact of excise to prices (%)2,3

Inflation rate (%)4,5

Diesel Gasoline LPG Kerosene

Food 159 10 1.9 1.2 1 1 4 1 6

Transportation 6 129 30 5.7 3.5 4 2 8

Electricity 131 1.3 0.8 0.8 0 1

Others 51 131 6 1.2 0.7 0.7 0.9 0

Total 100 141 1.5Notes:1. Transportation share is the daily average of jeepney and bus operation in Metro Manila based on the National Tax Research Center computation. Electricity

share is based on the Department of Energy power statistics.2. The net impact of the excise is obtained by multiplying the share of oil as input and the price increase as a result of the excise.3. Below is the increase in the price of the petro products as a result of an increase in excise tax using the prevailing

petro prices in Metro Manila as of Dec. 134. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 20115. Overall inflation computed from the weighted average of commodity inflation based on the share of CPI

Diesel 18.6%Gasoline 11.2%LPG 10.5%Kerosene 13.3%

Diesel 64.5%Gas 29.4%LPG 4.7%Kerosene 1.3%


A comparisonRVAT 2005 and oil price shock 2011:

We survived and became much stronger.


VAT reform Oil price shock

Indicator 2004 2005 2006 2010 2011 2012

Effective VAT rate 0 10 12 12 12 12

Dubai crude (US dollars) 34 49 61 78 106 109

GDP growth 6.7 4.8 5.2 7.6 3.7 6.7

Consumption 6.0 4.4 4.2 3.4 5.6 6.6

Overall Inflation 4.8 6.5 5.5 3.8 4.6 3.2

Food inflation 6.0 6.4 5.2 4.0 5.5 2.4

Transport inflation 11.5 16.8 10.7 3.7 6.0 2.3

Electricity inflation 3.8 7.5 5.9 5.1 5.2 4.6

Gasoline (in pesos) 20.1 26.5 30.0 35.5 48.1 48.6

Diesel (in pesos) 18.0 25.9 30.2 31.4 41.3 41.7

Cars increase every year despite oil price fluctuations



0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

0

10

20

30

40

50

60

70

Mill

ions

PHP

Unleaded pump price (LHS) Diesel pump price (LHS) New car registrations (RHS)

office of the chief economist and undersecretary for strategy · 2017-02-02 · title: office of...

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