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Tax Reform and Inflation

TRAIN Law’s built-in suspension of the excise tax on fuel has yet to kick in despite increasing inflation. Consumer prices continue to skyrocket as inflation hits another 9-year high at 6.4% in August 2018, again exceeding the Department of Finance’s forecast of 5.9%.

According to the provisions in the law, the next scheduled increase of excise tax on fuel will be suspended once the price of Dubai Crude Oil exceeds USD80 per barrel for three months prior to the increase. This would mean essentially that if the price of Dubai Crude Oil does not break the USD80 per barrel limit by October 1, the next scheduled increase in the excise tax on fuel will still push through.

It is becoming apparent that the standards for suspension that TRAIN Law provides does not reflect what the economy needs right now. Whether it is a direct or indirect contribution, the impact of TRAIN Law – specifically, the excise tax on fuel and coal – is nevertheless evident in the rising prices of basic commodities.

Senate Bill No. 1798 and its counterpart in the lower chamber, House Bill No. 8171, seeks to implement inflation as the basis for the suspension of the excise tax on fuel. This will add a new section, which means that the current suspension of the next scheduled increase will still be in place.

Under the Senate bill, the imposition of excise tax on fuel will be suspended if the average inflation rate for a three-month period exceeds the annual inflation target. This measure will not be a suspension of the next scheduled increase, but of the excise tax itself. While the suspension is in effect, the excise tax prior to the implementation of TRAIN Law will be in effect.

The suspension will only be revoked if the inflation rate falls below the annual inflation target for three consecutive months. Once it is lifted, the excise tax rates at the time of suspension shall be imposed again.

The House version proposes a similar measure, but instead of on a three-month basis, the inflation performance will be measured on a quarterly basis. It similarly proposes that the pre-TRAIN excise taxes will be imposed during the time of the suspension.

However, the House bill also proposes to entirely remove the excise tax on kerosene and diesel fuel oil. This is a measure not found in the Senate bill. Under House Bill No. 8171’s proposal, effective January 1, 2018, the excise tax on kerosene and diesel fuel oil shall be P0.00.

Both versions will immediately address the increasing inflation that continues to harm those who do not receive any benefits from TRAIN Law – namely, the poorest of the poor.

It goes without saying that this should not affect TRAIN Law itself. Personal income tax needs to remain as it is regardless of whether or not its offsetting measures are still in place.

The logic that lowering tax rates needs to be complemented by raising other rates should be reconsidered. Raise tax rates to make the tax system fairer? Certainly, if it will target the rich and high-income earners. Impose new taxes as offsetting measure despite its inflationary impact? Maybe not.

To offset revenue losses, the government should instead broaden the taxpayer base by modernizing the tax administration. The Bureau of Internal Revenue (BIR) has missed its collection targets in the last three years, short of 2.73% in 2017, 2.65% in 2016, and 13.88% in 2015. This is despite a constant year-on-year growth of collections.

Instead of burdening taxpayers with more taxes, BIR needs to be made more efficient in collecting from a broader taxpayer base with higher voluntary compliance.

This is why it is crucial to continue the tax reform packages including tax administration. For instance, Package 2 or TRABAHO Bill not only proposes to lower the corporate income tax and rationalize the incentives system. It also contains provisions on the usage of electronic channels, authorization of electronic sales reporting, and other administrative provisions that will improve collection efficiency.

In its implementation, it is important that the electronic channels provided by Package 2 also include third parties in order to give taxpayers more choices which method would be most convenient for them.

Other measures that complement the tax reform need to be enacted as well.

One such measure is imposing provisions on the execution of BIR audits. As it is, the same taxpayers are audited yearly. If the audit went well, then the taxpayer should already be compliant by the first audit. In line with that proposal would be to raise the budget of the BIR and improve the salaries of its examiners to attract more technocratic and honest bureaucracy.

The tax amnesty needs to be prioritized and implemented immediately. In fact, it should be passed prior to the imposition of harsher penalties proposed by TRABAHO. By giving violators a chance to start-over, taxpayers will be able to start doing business again and finally pay the right taxes. After all, not all violators do it intentionally. Lack of knowledge is the most common reason for non-compliance.

Taxpayers who wish to avoid fines and penalties need to create a strategic tax plan that will ensure no unnecessary expenses or burdens will arise from violations. In celebration of the seventh anniversary of our social enterprise, the Asian Consulting Group (ACG) offers free tax consultation for individual and corporate taxpayers alike. CEOs and business owners may also attend Executive Tax Briefing while startups and entrepreneurs may join the Exclusive Tax Coaching to help them prepare and take advantage of the ongoing tax reform. For inquiries, email us at consult@acg.ph or call (02) 622-7720.

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