New Taxes Are a Double-Edged Sword as Frugal Philippines Eyes Stimulus

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The Philippines is weighing a bevy of new taxes to fund anti-virus economic stimulus -- with the risk that these levies could slow activity even further.

The economy is expected to contract by the most in at least three decades this year, limiting the government’s ability to marshal fiscal stimulus against the pandemic. Committed to keeping the fiscal deficit at 9% or less of gross domestic product, the government can spend only about another 180 billion pesos ($3.6 billion) unless it finds new sources of revenue, Finance Secretary Carlos Dominguez has said.

Lawmakers are considering taxes on everything from online casinos to Netflix subscriptions to help bankroll additional spending.

The proposals “are meant to raise revenues without eroding growth or significantly affecting the poor and the working class,” according to a policy brief sent by congressman Joey Salceda, who heads the Ways and Means Committee in the Philippine House of Representatives.

Governments across Asia are looking at new sources of revenue for spending against the virus’s blow. India is considering increasing import levies on edible oil, while Indonesia and Thailand are preparing regulations to collect value-added-tax on digital products.

In the Philippines, the government’s anti-virus fiscal package amounts to 3.1% of GDP, said Jessie Lu, a Singapore-based economist at Continuum Economics. That “pales in comparison with its regional peers,” such as Malaysia and Singapore, which have each announced stimulus worth nearly 20% of GDP.

At the same time as new taxes are on the table, the Philippine Finance Department wants to slash the corporate income-tax rate from 30% to 25% by July to help companies during the pandemic. The bill, which is pending in Congress, is expected to reduce revenues by 42 billion pesos this year and 625 billion pesos over the next five years, according to the department’s estimates.

Consumers’ Pocket

New taxes are in line with the government’s goal of fiscal sustainability, but could “stifle consumption,” a key driver of the Philippine economy, said Nicholas Mapa, a senior economist at ING Groep NV in Manila. “What you want is to put money into consumers’ pocket.”

An oil-tax hike in 2018 stoked inflation and damped household spending, which accounts for more than 70% of the economy. This year, rampant job losses at home and abroad are forcing households to tighten their belts.

“We doubt the fiscal and monetary stimulus combined will be effective in averting a recession this year,” said Continuum’s Lu, who expects the economy to shrink 2% this year before growing 7.4% in 2021.

Despite risks from the pandemic, the Japan Credit Rating Agency upgraded the Philippines’ sovereign debt rating this month, saying the nation’s “fiscal soundness will not be impaired.”

READ: Philippines Affirmed at BBB+ by S&P, Citing Fiscal Prudence

Here are some revenue measures under consideration:

Digital Economy

• Expanding value-added tax to cover digital advertising services rendered by the likes of Google and Facebook Inc., and subscription-based services like Netflix or Spotify. Pending in Congress, the bill also seeks to make digital platforms -- which link customers with providers of goods and services -- withholding agents for income-tax
  • Estimated revenue: 29.4 billion pesos in the first year and 172.5 billion pesos over five years, according to the Ways and Means Committee
• Imposing a 25% income tax on foreigners working in online gaming companies in the Philippines, which mainly cater to Chinese gamblers. The bill also would levy a 5% franchise tax on gross revenue or receipts derived from operations
  • Estimated revenue: 30 billion pesos in the first year and 199 billion pesos over five years, according to the Ways and Means Committee

Motor Vehicles

• Raising fees by 30% for use of roads by private and government vehicles. The funds usually are earmarked for road maintenance and air-pollution control
  • Estimated revenue: 9.4 billion pesos in the first year and 219.7 billion pesos over five years, according to the Ways and Means Committee

Oil imports

• In May, a 10% duty was imposed on imported crude oil and refined petroleum products to fund coronavirus relief. Rates will revert to 0% when international oil prices increase
  • The measure has raised at least 1.2 billion pesos so far, Dominguez said by text message

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