DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.Tax Reform for Acceleration and Inclusion Revised package 1 As of January 30, 2017 3:02 PM (Full presentation) DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Vision for the Philippines By 2022 (6 years from now) o Poverty rate reduced from 21.6 to 14% (or some 6 million Filipinos uplifted from poverty). o Law abiding country. o Peace within the country and with our neighbors. o Achieve high-middle income status, where per capita gross national income (GNI) increases from USD 3,500 to at least China are today). By 2040 (24 years or one generation from now) o Extreme poverty eradicated. o Inclusive economic and political institutions where everyone has equal opportunities. o Achieve high income status, where per capita GNI increases (where Malaysia and South Korea are today). 1/30/2017 DEPARTMENT OF FINANCE 5 and simplify regulations. the government will need to raise some 366 billion per year between 2016 and 2022 (or 2. improve food security.2 trillion pesos in total). Source: Department of Budget and Management This can be sustainably achieved through tax reform. SUBJECT TO CHANGE. Over the medium term. enhance competition. In addition.7 trillion pesos. DRAFT FOR DISCUSSION. How to achieve the vision Over the long-term. 1/30/2017 DEPARTMENT OF FINANCE 7 1/30/2017 DEPARTMENT OF FINANCE 8 . which is integral to the larger goals of the administration and crucial for achieving the vision of a prosperous country. all these investments require additional funds of around 1 trillion pesos per year in 2016 prices on top of the current 1. complementary economic reforms are crucial: secure property rights. 1/30/2017 DEPARTMENT OF FINANCE 9 1/30/2017 DEPARTMENT OF FINANCE 10 . In summary. SUBJECT TO CHANGE. tax reform is needed to fund the ten-point socioeconomic agenda 1/30/2017 DEPARTMENT OF FINANCE 12 .1/30/2017 DEPARTMENT OF FINANCE 11 DRAFT FOR DISCUSSION. 1/30/2017 DEPARTMENT OF FINANCE 29 1/30/2017 DEPARTMENT OF FINANCE 30 . SUBJECT TO CHANGE. 1/30/2017 DEPARTMENT OF FINANCE 33 . 1/30/2017 DEPARTMENT OF FINANCE 32 DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. DRAFT FOR DISCUSSION. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. 1/30/2017 DEPARTMENT OF FINANCE 34 1/30/2017 DEPARTMENT OF FINANCE 35 . o Move renewable energy from zero-rated to exempt.. o Boy scouts and girl scouts. business with gross sales below 3 million pesos. Limit the VAT zero-rating to direct exporters who actually export goods out of the country. This will be implemented together with the VAT refund starting in 2018. Remove the following zero-ratings: o Indirect exporters and agents. o Domestic shipping importation. will be exempt from VAT) and targeted transfers to poor and vulnerable households. such as sari-sari stores. Low-income and vulnerable households will be protected through a higher VAT threshold of 3 million pesos (i.1/30/2017 DEPARTMENT OF FINANCE 36 Expanding the VAT base by limiting exemptions The following exemptions will be removed. except those selling raw agriculture produce. except senior citizens and PWDs o Cooperatives. o Low cost and socialized housing. unless sold by firms whose gross sales fall below the VAT threshold: o Exemptions found in special laws. o Lease of residential units. o Power transmission (replace the franchise tax with VAT).e. 1/30/2017 DEPARTMENT OF FINANCE 37 . 00 5.00 3.00 6. Oil excise rates Excise rates Pesos per liter 2017 H1 2017 H2 2018 2019 2020 Diesel and 0.24 Gas 46 53 55 56 56.00 10.40 1/30/2017 DEPARTMENT OF FINANCE 38 1/30/2017 DEPARTMENT OF FINANCE 39 .00 10.00 6.40 nonessentials Annual indexation of 4% starting 2020.24 essentials Gas and 4. except if Dubai crude exceeds $100/barrel Pump price (USD 53.72 per barrel) Pesos per liter 2017 H1 2017 H2 2018 2019 2020 Diesel 32 35 37 38 38.00 9.35 7. 224.1 M Over 2.000 Over 1.000 + 200% excess of 2.000 + 40% in 224.000 2% 4% Over 600.000 + 40% in Million excess of 600.000 + 100% in excess of 1.1 M in excess of 2. Auto excise rates Net manufacturing/ importation price in Current (in pesos) Proposed pesos Up to 600.1 M 1/30/2017 DEPARTMENT OF FINANCE 40 1/30/2017 DEPARTMENT OF FINANCE 41 .1 M 512.000 to 1.1 12.000 + 20% in 24.1 M to 2.1 M 112.000 excess of 600.000 + 60% in 1.1 M excess of 1. car loan payments.7 Complementary revenues 0.5 Automobile excise 0.5 Lower personal income tax rate -137.6 302.7 0.2 Excise tax on petroleum 0.5 Automobile excise 31. 1/30/2017 DEPARTMENT OF FINANCE 46 . High end revenue impact in 2018 (PHP billion and percent of GDP) Tax package Loss Gain Net Package 1: PIT and consumption -139.4 Excise tax on petroleum 120.8 Estate and donor tax 0. and inflation.7 VAT base expansion 92.9 Lower personal income tax rate -0.4 Tax package Loss Gain Net Package 1: PIT and consumption -0.1 162.3 Subject the change based on updated data 1/30/2017 DEPARTMENT OF FINANCE 45 Gains from the lower PIT regime are more than enough to offset additional expenses from higher oil prices.8 1.9 Estate and donor tax -1. DRAFT FOR DISCUSSION.9 Complementary revenues 57. SUBJECT TO CHANGE.0 VAT base expansion 0. e.988) 6.080) (1. cash transfers) **Automobile excise tax impact were computed using 2016 prices ***The inflationary effect was computed as a function of income. o Cooperatives below the threshold will still be exempt o Raw agricultural products will continue to be VAT exempt.459) (67.410 D9 Professional 47.093) (1.679) (23.156) (135.024 9.294 (862.600 2.852 14.674) (177. and estimates on the price effect of the increased oil excise on food.054) 3.852 D10 Middle class 112.076 1.637) (30.584.720) (949.995) (261. income from entrepreneurial activities (i.600 2.774 (6. To use the tax system to protect the poor and low income earners results into massive leakages.932) (1. thereby exempting their goods from VAT.310 (2.710) 15.401) Source: DOF staff estimates using 2015 Family Income and Expenditure Survey & January 2016 Labor Force Survey Notes: Each household has about two income earners * Total household income includes compensation income.438) (517.010 (3.584. Higher oil excise: targeted transfers.502 7.673) (1.434) 771 1.482 14.479 (1.458) 14.271 D7 Minimum wage worker 24.876) (517.362 86 (438) (251) (603) (797) (1.233 2 (374) (160) (532) (522) (1.841) (253.811 1. Combined tax-transfer effect* Targeted transfers will be crucial in protecting the poor from shocks and can help improve the progressivity of the tax reform.316) (9. and other sources of income (i.200 D3 Poor 10.910 1. MPC.209 D4 Near poor 13.515 26. Change in Transfer Decile/ monthly Personal Petrol and Net tax Inflationary take home Description added Automobile** take home (full percentile household income tax transportation due effect*** pay after tax pay year) total income* transfer D1 Subsistence poor 5.500 2.995) Top taxpayer A 1.981) (904) 4.555 (23.741 400 (502) (339) (441) (950) (1.500 4.051 (601) (427) 23 (1.831 (4. 1/30/2017 DEPARTMENT OF FINANCE 61 .898 (1.227) (949.364 (1. pantawid pasada.376.281 (766) (557) 958 (1. 1/30/2017 DEPARTMENT OF FINANCE 49 DRAFT FOR DISCUSSION.701) 17.400) 3.401) (1.562.150) (27.781 56.9 to around 3 million pesos. and jeep modernization.600 2.826 2.391) 3.667) 2.183) 8.515 P100 Executive 287.029) 30.500 8.022) (261.011) (4.703 (34.752.e.311 D8 Above minimum wage 32.090) (1.321) (22.507) (14.375 3.187 (12. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.685 75. Protecting the poor and low income Filipinos: VAT VAT threshold for marginal establishment can be increased from 1.546 D2 Subsistence poor 8.821) (10.316) 26.406 (6.227) Top taxpayer B 2.600 3.973) (8.600 2.147 (325.382) 9.924 (1. businesses). Combined effect Package 1 change in annual take home pay (in pesos) 2018 projected Change in Value.263) (305) 3.930) (1.024 T1000 CEO 626.295 D6 Informal worker 19.025) (695) 2.424 26.204 (1.530 D5 Near poor 15.932) (934.288) (9. SUBJECT TO CHANGE.070) 3.358) (46. 8 0 1 Others 51 131 6 1.7% 1.0% 1.2 0.3% -1% -3% -5% -3. SUBJECT TO CHANGE.5% Gas 29. % increase in household income 5% 4.3% petro prices in Metro Manila as of Dec.8% -7% -5.7% 2.2% 1. Diesel 18. Electricity share is based on the Department of Energy power statistics.1% 3% 2. The net impact of the excise is obtained by multiplying the share of oil as input and the price increase as a result of the excise. Overall inflation computed from the weighted average of commodity inflation based on the share of CPI Kerosene 1. After the tax-transfer reform.0% 1.7 0. the poor benefits the most.5% 1% 0.5 Notes: 1. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 2011 LPG 4.7 3.4% 4. DRAFT FOR DISCUSSION.2% 2.3 CPI Inflation Commodity of CPI products 2015 rate (%)4.6% 1.3 0. LPG 10.5 4 2 8 Electricity 131 1.7% *based on FIES 2015 data 10/27/2016 DEPARTMENT OF FINANCE 64 Price effect of excise on inflation 2017 H2 to 2018 Share of Net impact of excise to prices Share petroleum (%)2.3% 1/30/2017 DEPARTMENT OF FINANCE 67 . 13 Diesel 64.9 0 Total 100 141 1.6% Gasoline 11.5% -4.2% 2.6% 2.9 1.8 0. Below is the increase in the price of the petro products as a result of an increase in excise tax using the prevailing Kerosene 13.2 1 14 16 Transportation 6 129 30 5.7 0.7% 5. Transportation share is the daily average of jeepney and bus operation in Metro Manila based on the National Tax Research Center computation.5% 3.5 (%) as input (%) 1 Diesel Gasoline LPG Kerosene Food 159 10 1. 6 Gasoline (in pesos) 20.0 35.8 60 1.0 5.3 41.8 6.1 5. Cars increase every year despite oil price fluctuations 70 2 1.8 4.7 6. SUBJECT TO CHANGE.7 4.1 48.2 7.8 10.5 2.4 41.2 40 Millions PHP 1 30 0.6 3.2 4.5 30.4 4.7 Consumption 6.4 5.9 5.6 50 1.7 1/30/2017 DEPARTMENT OF FINANCE 68 DRAFT FOR DISCUSSION.5 16. DRAFT FOR DISCUSSION.1 26.2 Food inflation 6.8 20 0.0 4.4 1. VAT reform Oil price shock Indicator 2004 2005 2006 2010 2011 2012 Effective VAT rate 0 10 12 12 12 12 Dubai crude (US dollars) 34 49 61 78 106 109 GDP growth 6.5 3.8 7.6 Overall Inflation 4.6 3.2 0 0 Unleaded pump price (LHS) Diesel pump price (LHS) New car registrations (RHS) 1/30/2017 DEPARTMENT OF FINANCE 69 .4 5.6 6.4 10 0.2 31.7 3.4 Transport inflation 11.2 4.6 0.7 6.6 Diesel (in pesos) 18.8 5.5 5.3 Electricity inflation 3.0 6.0 2.5 48.0 25. A comparison RVAT 2005 and oil price shock 2011: We survived and became much stronger.9 30.2 3. SUBJECT TO CHANGE.5 5.