Tax Reform Bills Seen key to Ensuring Growth, Deutsche Bank Says

THE timely passage of the tax reform program will be crucial to overall economic growth, with lower income tax rates expected to keep investments buoyant despite political risks that could dampen the market’s appetite, Deutsche Bank said.

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In a report, Deutsche Bank said the government should work to secure Congressional approval for the proposal to lower personal income taxes with a June timetable — a month ahead of President Rodrigo R. Duterte’s State of the Nation Address — which is expected to be the key to funding its aggressive infrastructure program.

“A development worth watching in 2017 is the likely passage of the Duterte administration’s first major economic reform,” Deutsche Bank Economist Diana del Rosario said under the Asia Economics Monthly report.

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The draft plan forwarded by the Finance department to Congress is now being discussed as House Bill 4774, which aims to restructure the personal income taxes while expanding the value-added tax (VAT) base by removing exemptions, and increasing excise tax rates on fuel and cars to raise more funds for state programs.

The tax plan is expected to be implemented this year, while other reform packages are expected to be introduced soon after, including plans to reduce corporate rates to 25% to make them regionally competitive.

Albeit unpopular among some lawmakers, the tax proposal should get a boost from Mr. Duterte’s popularity, given that the majority blocs of both chambers are allied with the administration. 

During its Jan. 30 meeting, the Legislative-Executive Development Advisory Council (LEDAC) agreed to tackle the tax reform program as a priority.

Deutsche Bank backed the proposal, saying that the reforms would give Filipinos more money to spend. This, in turn, could support stronger consumption and underpin rapid economic growth. The bank currently expects gross domestic product to grow by 5.8% this year and 6% in 2018.

“Overall, the first tax reform package, once implemented, should generate additional revenues of P162.5 billion in its first year, ideally to help finance the government’s infrastructure push… We agree with DoF and the BSP that the net effect of the first package, if implemented simultaneously, would be a boost in disposable incomes,” the German bank said.

Lowering tax rates will also help improve the local business climate and attract more investors, helping counter the political uncertainty clouding the business environment.

“In our view, the passage of the first package would be a welcome development to a low-income country with one of the highest income tax rates in Asia. It would also give the Duterte government the momentum to push for the rest of the tax reforms in the pipeline, in turn, helping to counter downside risks to investment,” Ms. Del Rosario said.

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“We had previously flagged the contraction in approved investments in 2016Q3 and the declines in business sentiment in the last two quarters of 2016, which, while currently not our baseline scenario, bear the risk of further dragging down investment growth in 2017,” the report added.

In a previous report, Deutsche Bank warned that the economy could take a beating from political developments here, as it could potentially turn off foreign investors despite the country’s strong growth momentum.

The government has set a goal of between 6.5-7.5% GDP growth this year, potentially faster than the 6.8% logged in 2016 as it raises infrastructure spending to 5.3% of GDP. By 2022, the government wants growth to be as high as 8%, infrastructure spending at 7% of GDP, and poverty down to 14% on the back of promised economic reforms.

Source: Bworldonline