• Most Filipinos consider the tax system unfair and complicated, the latest FTCR survey shows.
  • The government’s first tax reform bill will benefit middle-income Filipinos and take money from high earners.
  • Although the government promotes its tax reform as a pro-poor policy, we think the impact on low-income Filipinos will be limited.

The importance of President Rodrigo Duterte’s efforts to amend the Philippines’ 20-year-old tax law is highlighted by FTCR’s second-quarter survey, which shows that most Filipinos think the current system is complicated and unfair (see chart). The government says its planned tax policy is pro-poor but only middle-income Filipinos are likely to benefit.

Just 21 per cent of respondents agreed with the statement that the tax system is simple, while only 17 per cent agreed it is fair. Those earning between 60,000 and 120,000 pesos ($1,200-2,400) a year were most likely to agree. Most respondents in this group fall below the official poverty threshold of 108,768 pesos in annual income for an average Filipino family.

Public support for the first of four tax reform bills, which will lower income tax rates, remains high. Yet some legislators express concerns over plans to recoup lost revenue through an increase in the tax on fuel and the imposition of a new tax on sugary drinks (see chart). So far, only the first bill has been finalised, with details of the other three still subject to change.

The poor unlikely to benefit

Although the government promotes the bill as pro-poor, we believe it will have little to no impact on low-income groups. The changes will, however, benefit young middle-income Filipinos who have been driving the economy for the past few years through their work in high-growth sectors such as outsourcing.

The bill lowers income tax rates for middle-income groups while exempting those who earn up to 250,000 pesos a year. The government has pledged more than 25bn pesos for cash transfers to the poor, to be funded by an increase in fuel taxes (see chart).

Increasing the tax threshold, however, will have no effect on minimum wage earners, already exempt from paying income tax under current law. Although the government plans to increase the income tax threshold to 250,000 pesos, higher fuel taxes and the tax on sugary drinks will increase food price inflation. This may offset the monthly cash transfers of 200 pesos to the poor promised in the bill.

There are also logistical challenges to implementing the cash transfers. The new programme will expand an existing measure, in place since 2007, which suffers from problems such as fake beneficiaries. The current programme, covering 4.6m households, is being managed by the social welfare department. The new plan will expand that to 15m households, potentially overwhelming the department’s manpower.

Shrinking ambitions

The expected revenue gains of the bill, being debated in the Senate, have been reduced since it was first filed before the lower house in September last year. Net revenue during the measure’s first year of implementation stands to be 71.3bn pesos, or about 50 per cent below the original target (see chart). One of the aims of the bill is to gain funding for the estimated 7tn pesos in infrastructure projects planned before 2022.

The senate plans to amend the bill further, with some senators expressing concern over the impact of the higher fuel tax and new sugary drinks tax on the poor. The same provisions drew heavy opposition from the House of Representatives, which watered down the bill heavily at the committee level, before the full house reinstated some of the measures. Any further dilution could limit the government’s infrastructure drive, or create budgetary constraints in the future as the Duterte administration would need to borrow more to raise revenue.

Millionaires expected to pay more

Across population groups, the middle-income bracket stands to gain the most from the proposed law. Those earning up to 400,000 pesos a year will pay 20 per cent income tax, down from 30 per cent currently. The government admitted that the present system is skewed heavily against middle-income earners and it hopes the bill will win their favour.

Millionaires, however, will be asked to pay more. Income tax for those earning above 5m pesos a year will rise from 32 per cent to 35 per cent. There is a risk this increase won’t boost government revenue if more of the rich channel their wealth elsewhere to avoid the higher rate. Business owners could shift earnings to their companies; the current corporate tax rate is 30 per cent and the government plans to lower that to 25 per cent under the second tax reform bill.

More broadly, the government is planning a tax amnesty to discourage evasion and encourage payment of arrears. The plan has strong public support; 48 per cent of our respondents see the measure as a good way to increase state revenue (see chart).

However, Congress has deliberated on the first tax bill for more than a year, with implementation planned for January 2018. We expect the other bills to take up just as much time, if not more. It will be difficult for all four packages to pass during Mr Duterte’s current term, set to end in 2022, and so a tax amnesty may not arrive soon.

— Prinz Magtulis, Philippines Researcher

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.