Speech of Finance Secretary Carlos “Sonny” Dominguez

Rotary Club of Manila President Joaquin Rodriguez; Rotary Club of Makati West President Eric Tensuan; Past District Governor Tony Rufino; Rotary Club Secretary Franco Del Rosario; Past President Junvee Vital; Rotarian Cons Robertz: His Excellency, Koji Haneda, Ambassador of Japan; Her Excellency, Jana Šedivá, Ambassador of the Czech Republic; my fellow Rotarians, distinguished guests.

Thank you for the opportunity to be with you today. I find that all my important speeches begin with the phrase my fellow Rotarians. I thank you as well for your interest in the progress of the comprehensive tax reform program.

The tax reform is more than just a foundational plank of the Duterte administration’s socioeconomic agenda. It is at the heart of good governance. It is indispensable for pursuing the infrastructure modernization program of President Duterte by raising the revenues to fund it. It is necessary to fund social investments – such as our new Universal Health Care Program – at unprecedented levels for inclusive growth and a more competitive workforce.

In short, the comprehensive tax reform program is key to building a better future for all law-abiding Filipinos.

It is important to note that this is the first time in our history that we are undertaking a reconfiguration of our revenue system without being compelled to do so by an economic crisis. All previous efforts to reform our tax system were constrained by the need to contain an economic meltdown or avert the eruption of a debt volcano.

As we are not responding to the urgency of an impending crisis, the comprehensive tax reform program benefits from thorough study. We have been able to build public support behind the reforms, respond to stakeholder concerns, and advance the program at the correct pace and timing.

After the Tax Reform for Acceleration and Inclusion or TRAIN Law – the first tranche of the tax reform program – was enacted in December 2017, 99 percent of our wage earners benefitted from a significant reduction in their personal income tax rates. Unfortunately, most of the Rotarians here earn more than P3 million a year so they were not included in the reduction in tax rates. In fact, we increased it because you can afford it. The equivalent of a month’s take home pay was returned to the pockets of the workers to spend as they see fit. Our economic expansion was boosted by a surge in consumer demand.

Revenue losses from the lower personal income taxes were offset by higher excise taxes that better accounted for the negative effects of the sin products or commodities consumed disproportionately by higher-income households. Effective collection of these excise taxes produced a stronger revenue flow for the government. At the same time, it discouraged consumption of products that are unhealthy such as sweetened beverages and tobacco. In the middle of last year, we made history when the excise taxes on tobacco products were raised for a second time under one administration.

More recently, Congress passed a new set of sin taxes on electronic cigarettes or vaping products and alcohol to deter smoking and binge drinking while augmenting funds for the Universal Health Care program that will primarily benefit low-income families. We expect this measure to be signed into law this month.

For the first three quarters of 2019, total revenues from the first package of our tax reform program reached 91.3 billion pesos, outperforming our collection estimates by a little over 18 percent. This enables the government to fund both our ambitious Build, Build, Build program and expand social services, including the conditional and unconditional cash transfer programs, that help us cut poverty incidence.

A more reliable and recurrent revenue stream enabled the government to better manage its fiscal position as well as expand public spending. As a result, our sovereign credit rating was upgraded last year to BBB plus – the highest rating we have ever enjoyed. This has put us above countries like Italy and Portugal. This is just a shade below the single A rating we hope to achieve soon.

The higher credit rating tells investors that it is safe to do business in the Philippines and that the country is highly capable of paying its debts. For the private sector, this means being able to borrow at lower costs to finance business expansions. Ordinary Filipinos likewise benefit because banks would then be able to lend money to them at lower interest rates. This will translate into larger investments, as well as more jobs and better quality of life for Filipino families.

Completing the tax reform program will not just secure for the Philippines an A credit rating, but more importantly, it will ensure fiscal stability long into the future.

The task of pursuing game-changing reforms is a long and arduous one as we have to deal with the vagaries of our politics, the inertia of the bureaucracy, and the resistance of those who would rather have things stay as they are. But we remain confident that the pending tax reform packages will be approved by the Congress this year.

By March this year, we hope to see the Corporate Income Tax and Incentives Rationalization Act passed into law. The measure will gradually reduce our corporate income tax rate, the highest in ASEAN, to match regional benchmarks. We would likewise rationalize our badly tangled tax incentives system to create a level playing field, especially for new businesses coming into our economy. A reduced corporate income tax rate and a simplified, fair and accountable tax incentives system will bring huge benefits to about one million micro, small and medium enterprises or MSMEs that compose the bulk of businesses in our economy and employ an overwhelming majority of workers.

The old tax system entrenched established businesses and discouraged new enterprises from coming in. It gave some businesses tax protection in perpetuity regardless of whether they improved their competitiveness or not.

For instance, in 2017, the government gave away a total of 441 billion pesos worth of tax discounts and exemptions to just 3,150 companies. This select group of firms, which account for less than half of one percent of almost a million companies currently registered in the Philippines, pay discounted tax rates of around 6 to 13 percent. In contrast, SMEs have to pay much higher corporate income tax rate at 30 percent. Moreover, a number companies have also been receiving incentives from 15 to more than 40 years and all this is being done without proper cost-benefit analysis to determine whether these incentives have yielded real benefits to the economy.

In addition, some of these firms cheat the government of some 63 billion pesos by abusing transfer pricing rules or by shifting profits and costs to reduce tax liabilities. The total is a staggering 504 billion pesos in one year alone. That amount is equivalent to around 93 percent of the budget of the Department of Education and more than 5 times the budget of the Department of Health in 2017. In other words, we have to account for the 504 billion pesos that we gave up and ensure that the taxpayers’ hard-earned money is not wasted.

Under the new system envisaged under CITIRA, incentives will be targeted, transparent, time-bound and performance-based. We just want to adhere to standards very similar to that of other countries.

In Singapore, for instance, while the maximum years to avail of incentives is 40 years, incentives are given initially for five years and renewed in five-year tranches only after a thorough performance review on both quantitative and qualitative investment criteria. Investment regulations require firms to regularly submit progress reports and any breach of the performance contract is subjected to revocation of the incentives. This is what time-bound and performance-based mean.

Thailand has a good system to target industries by giving more incentives and longer availments to high priority sectors that are pre-identified in its investment priority plan. It also publishes the names of the recipients in its Board of Investments website. This is what targeted and transparent mean.

Under the Philippines’ current tax system, 13 separate agencies independently award incentives. This has created a chaotic incentives regime that does not effectively support our development goals. It has also caused the government to give up hundreds of billions in potential revenue. The proposed system in CITIRA would closely resemble what is in effect in Malaysia, considered the best practice in the region. In Malaysia, the grant of incentives is centralized under the National Committee on Investment — thereby providing greater development coherence in the incentives system.

Moreover, this reform measure will create about one and a half million jobs for our people. More jobs will be generated as we can reasonably expect companies to reinvest at least 50 percent of their additional money from the reduction of the corporate income tax rate towards growing their businesses. In addition, a new menu of incentives for investors, as proposed in CITIRA, will encourage job creation, upskilling, and linking up SMEs into the export value chains.

The sooner Congress passes the bill, the quicker potential investors will discard their wait-and-see attitude and bring more business to the country. This will have incalculable benefits for our economic growth.

Meanwhile, the third package of the tax reform program aims to adopt globally benchmarked valuation standards and inculcate a higher degree of professionalism in real property valuation, which in turn, will promote investor confidence. It will likewise enhance the revenue-generating capacities of our local governments. As a beneficial side effect, it will help clear right-of-way issues currently inhibiting many key infrastructure projects.

The fourth package, known as the Passive Income and Financial Intermediary Taxation Act, seeks to make the country more attractive for capital and investments, which are urgently needed to finance large-scale infrastructure projects, including those under the Build, Build, Build program. Rationalizing the tax system in the financial sector will be a game-changer in encouraging long-term investments.

Taken together, the packages of the comprehensive tax reform program will dramatically alter the business environment in this country, removing the remaining hindrances to investment flows that make us a laggard in the region. This program will help us create better jobs for our people. It will surely enable this administration to deliver on its ultimate goal, which is to reduce poverty incidence from 23.3 percent in 2015 to 14 percent or lower by the end of the President’s term in 2022.

This is a tough assignment, you will agree. Residual incidence of poverty is always more difficult to root out. But I am pleased to inform you that our people are beginning to reap the rewards of a well-managed economy under the Duterte administration. Poverty incidence has significantly declined to 16.6 percent in 2018. A total of 5.9 million Filipinos lifted themselves out of poverty in three years. We are very optimistic about achieving and maybe even surpassing our goal.

Our strong economic performance and exemplary governance are reflected in the approval rating of our decisive leader. In a recent opinion survey conducted by an independent research firm, President Duterte received an 87 percent approval rating—unprecedented for a head of state during the second half of his or her term. The public satisfaction in the President was also apparent in the midterm elections that saw administration candidates winning a landslide vote. This electoral triumph translates to a supermajority in both chambers of Congress and eventually to the passage of more people-oriented reforms at the soonest possible time.

This is a virtuous cycle that we hope will continue producing positive results in the coming period.

Thank you, and if you have any questions, I will attempt to answer them.

Thank you very much.