No thanks: US behind Duterte’s anti-poor tax reform

November 13, 2017

by IBON Foundation

At the onset of the much-anticipated first-ever bilateral talks between United States president Donald Trump and President Rodrigo Duterte on Philippine soil, it should be reiterated that the US has a hand in what would be the most anti-poor tax program in the country’s history. The Tax Reform for Acceleration and Inclusion (TRAIN) exemplifies how US hold of country’s economic policies remains very much intact.

Malacanang’s elation over the American Chamber of Commerce (AmCham) lauding the tax reform program also shows how beholden the Philippine government remains to the US contrary to whatever nationalist stance taken just the previous year. AmCham has praised TRAIN to be inclusive and said that it would certainly expedite Philippine development.

Certified anti-poor

TRAIN is targeted by government to take effect in 2018 to generate over Php1 trillion in funds for its grand infrastructure campaign until 2022. A priority program of the Duterte administration, it will lower personal income, estate and donor taxes being paid by the highest-income 40% of Filipinos. It will also increase taxes by broadening the base of items charged with the value added tax (VAT) such as electricity transmission, shipping, and low-cost housing; and by imposing additional taxes on excise oil, automobiles, and sweetened beverages.

TRAIN would be the most blatantly anti-poor tax program of any Philippine government. It can take away anywhere from Php807 to Php3,794 from the already meager earnings of the poorest 60% of the Philippine population on the first year of implementation due to paying higher taxes and fees bound to increase through time. On the other hand, TRAIN will allow the richest 10% of Filipinos to take home Php33,795 more due to lower personal, estate and donor taxes.

Moreover, the Build Build Build infrastructure campaign, which will purportedly be funded by TRAIN, assigns the biggest bulk of its flagship projects to already established economic centers such as the National Capital Region, Central Luzon, and Southern Tagalog. Noticeably, the smallest amount of infrastructure is allocated to the poorest regions where social and economic infrastructure are needed the most. Big local and foreign construction firms and their bureaucrat middlemen are the ones to certainly benefit from Build Build Build.

US recommendation

Duterte’s tax reform program takes into account US policy recommendations included in a Partnership for Growth (PFG) project with the Joint Foreign Chambers of Commerce (JFCC). The PFG is the most comprehensive US intervention in policy-making in the Philippines in coordination with many US government agencies such as the US Agency for International Development (USAID) and the Millennium Challenge Corporation (MCC), as well as the IMF-World Bank.

Made up of 471 economic policy recommendations, PFG’s The Arangkada Philippines Project (TAPP/ Arangkada) includes the following in 29 of its macroeconomic policy suggestions: “Undertake comprehensive tax reform to reduce CIT (corporate income tax) and individual income tax, while raising VAT, ACT (alcohol, cigarettes and tobacco), and fuel excise taxes. Reduce or eliminate small taxes and fees that increase business costs.” Such comprehensive tax reform program failed to take off under the previous administration.

Last September, the AmCham/ Arangkada came up with “Arangkada Philippines: Implementing the 10-Point Agenda” which combines an additional set of recommendations with the 2010-2016 batch. The recommendation includes, “There is a need to reduce corporate income tax to a level that makes Philippines competitive in a field of countries competing for the same direct investment funds.”

According to the Arangkada publication, the implementation of these recommendations will assure that the Philippines “will be rated in future years much closer to the other ASEAN-6 economies that it currently lags behind”. This must pertain to an expected increase in now declining foreign investments upon lessening the cost of doing business, part of which will be due to relieving business tycoons and foreign corporations further of tax obligations.

For the US, which remains among the top sources of foreign direct investments as of early this year, easier taxes on foreign corporations may yield even more imports to and expanded operations in the Philippines. In 2014, US firms accounted for 45% of the country’s electric power systems imports, 25% of aerospace imports, 24% of medical equipment imports, 10% of water equipment and services imports, and 26% of information technology imports. US firms also accounted for 31% of foreign equity in business process outsourcing (BPO) companies.

Railroading TRAIN

To railroad its passage in the national legislature, Pres. Duterte sent a letter to House Speaker Pantaleon Alvarez and Senate President Aquilino Pimentel III on May 29 certifying the TRAIN bill as an urgent and priority measure.

With this certification, the TRAIN has swiftly hurdled the lower chamber on the last day of May with 246 congressmen in the affirmative, 9 negative, and only one abstention following 13 public hearings in the course of four months. The Senate ways and means committee led by Senator Juan Edgardo Angara filed its version of the bill in September. While Senate approval looms as Angara’s and Pimentel’s bills have been debated and interpellated in plenary sessions, the DOF is reportedly insistent on its version.

Regardless of which version makes it through, the general frame as per US recommendation of decreasing taxes for ease of doing business on one hand, and on the other hand increasing taxes imposed on consumers – regardless of income – is retained.