TRAIN Law Explain

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).

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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

How to achieve the vision Over the long-term, all these investments require additional funds of around 1 trillion pesos per year in 2016 prices on top of the current 1.7 trillion pesos. Over the medium term, the government will need to raise some 366 billion per year between 2016 and 2022 (or 2.2 trillion pesos in total).

Source: Department of Budget and Management

This can be sustainably achieved through tax reform, which is integral to the larger goals of the administration and crucial for achieving the vision of a prosperous country. In addition, complementary economic reforms are crucial: secure property rights, enhance competition, improve food security, and simplify regulations. 1/30/2017

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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

In summary, tax reform is needed to fund the ten-point socioeconomic agenda

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Expanding the VAT base by limiting exemptions The following exemptions will be removed, unless sold by firms whose gross sales fall below the VAT threshold: o o o o o o o

Exemptions found in special laws, except senior citizens and PWDs Cooperatives, except those selling raw agriculture produce. Low cost and socialized housing. Lease of residential units. Power transmission (replace the franchise tax with VAT). Domestic shipping importation. Boy scouts and girl scouts.

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 Move renewable energy from zero-rated to exempt.

Low-income and vulnerable households will be protected through a higher VAT threshold of 3 million pesos (i.e., business with gross sales below 3 million pesos, such as sari-sari stores, will be exempt from VAT) and targeted transfers to poor and vulnerable households. 1/30/2017

DEPARTMENT OF FINANCE

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Oil excise rates Pesos per liter 2017 H1 Diesel and essentials Gas and nonessentials

Excise rates

2017 H2

2018

2019

2020

0.00

3.00

5.00

6.00

6.24

4.35

7.00

9.00

10.00

10.40

Annual indexation of 4% starting 2020, 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

38.24

Gas

46

53

55

56

56.40

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Auto excise rates Net manufacturing/ importation price in pesos Up to 600,000 Over 600,000 to 1.1 Million Over 1.1 M to 2.1 M Over 2.1 M

Current (in pesos)

Proposed

2%

4%

12,000 + 20% in excess of 600,000

24,000 + 40% in excess of 600,000

112,000 + 40% in excess of 1.1 M 512,000 + 60% in excess of 2.1 M

224,000 + 100% in excess of 1.1 M 1,224,000 + 200% in excess of 2.1 M

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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

High end revenue impact in 2018 (PHP billion and percent of GDP) Tax package Package 1: PIT and consumption Lower personal income tax rate Estate and donor tax VAT base expansion Automobile excise Excise tax on petroleum Complementary revenues

Loss -139.6 -137.9 -1.7

Tax package Package 1: PIT and consumption Lower personal income tax rate Estate and donor tax VAT base expansion Automobile excise Excise tax on petroleum Complementary revenues

Loss -0.8 -0.8 0.0

Gain 302.1

Net 162.5

92.5 31.4 120.9 57.4 Gain 1.7

Net 0.9

0.5 0.2 0.7 0.3

Subject the change based on updated data 1/30/2017

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Gains from the lower PIT regime are more than enough to offset additional expenses from higher oil prices, car loan payments, and inflation.

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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Protecting the poor and low income Filipinos: VAT VAT threshold for marginal establishment can be increased from 1.9 to around 3 million pesos, thereby exempting their goods from VAT. o Cooperatives below the threshold will still be exempt o Raw agricultural products will continue to be VAT exempt.

Higher oil excise: targeted transfers, pantawid pasada, and jeep modernization.

To use the tax system to protect the poor and low income earners results into massive leakages. 1/30/2017

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DEPARTMENT OF FINANCE

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

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. Combined effect Decile/ percentile

Description

Package 1 change in annual take home pay (in pesos) 2018 projected monthly household total income*

Personal income tax

Valueadded tax

Petrol and transportation

Automobile**

Net tax

Inflationary

due

effect***

Change in Change in Transfer take home take home (full pay after pay year) transfer

D1

Subsistence poor

5,233

2

(374)

(160)

(532)

(522)

(1,054)

3,600

2,546

D2

Subsistence poor

8,362

86

(438)

(251)

(603)

(797)

(1,400)

3,600

2,200

D3 D4

Poor Near poor

10,741 13,076

400 1,051

(502) (601)

(339) (427)

(441) 23

(950) (1,093)

(1,391) (1,070)

3,600 3,600

2,209 2,530

D5

Near poor

15,826

2,281

(766)

(557)

958

(1,263)

(305)

3,600

3,295

D6

Informal worker

19,375

3,924

(1,025)

(695)

2,204

(1,434)

771

1,500

2,271

D7

Minimum wage worker

24,502

7,364

(1,981)

(904)

4,479

(1,667)

2,811

1,500

4,311

D8

Above minimum wage

32,482

14,010

(3,930)

(1,183)

8,898

(1,988)

6,910

1,500

D9

Professional

47,424

26,774

(6,090)

(1,673)

(1,701)

17,310

(2,458)

14,852

14,852 26,515

8,410

D10

Middle class

112,781

56,187

(12,011)

(4,316)

(9,029)

30,831

(4,316)

26,515

P100

Executive

287,685

75,555

(23,288)

(9,150)

(27,710)

15,406

(6,382)

9,024

9,024

T1000

CEO

626,703

(34,637)

(30,821)

(10,674)

(177,841)

(253,973)

(8,022)

(261,995)

(261,995)

Top taxpayer A

1,376,147

(325,459)

(67,679)

(23,438)

(517,932)

(934,507)

(14,720)

(949,227)

(949,227)

Top taxpayer B

2,752,294

(862,156)

(135,358)

(46,876)

(517,932)

(1,562,321)

(22,080)

(1,584,401)

(1,584,401)

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, income from entrepreneurial activities (i.e. businesses), and other sources of income (i.e. cash transfers) **Automobile excise tax impact were computed using 2016 prices ***The inflationary effect was computed as a function of income, MPC, and estimates on the price effect of the increased oil excise on food.

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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

After the tax-transfer reform, the poor benefits the most. % increase in household income 5%

4.1%

3%

2.2% 1.7% 1.6% 1.7%

1%

1.0% 1.5%

2.2% 2.6% 2.0% 0.3%

-1% -3%

-3.5%

-5%

-5.7%

-7%

-4.8%

*based on FIES 2015 data

10/27/2016

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DEPARTMENT OF FINANCE

Price effect of excise on inflation

2017 H2 to 2018 Commodity

Share of CPI (%)

Food Transportation

6

Electricity Others Total

Share of petroleum CPI products 2015 as input (%) 1

Net impact of excise to prices (%)2,3 Diesel Gasoline LPG Kerosene

Inflation rate (%)4,5

159

10

1.9

1.2

1

14

16

129

30

5.7

3.5

4

2

8

1.3

0.8

0.8

0

1

1.2

0.7

0.7

0.9

0

131 51

131

100

141

6

1.5

Notes: 1. Transportation share is the daily average of jeepney and bus operation in Metro Manila based on the National Tax Research Center computation. Electricity Diesel 18.6% share is based on the Department of Energy power statistics. Gasoline 11.2% 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. LPG 10.5% Kerosene 13.3% 3. Below is the increase in the price of the petro products as a result of an increase in excise tax using the prevailing Diesel 64.5% petro prices in Metro Manila as of Dec. 13 Gas 29.4% 4. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 2011 LPG 4.7% Kerosene 1.3% 5. Overall inflation computed from the weighted average of commodity inflation based on the share of CPI 1/30/2017

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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

A comparison

RVAT 2005 and oil price shock 2011: We survived and became much stronger. VAT reform Indicator

Oil price shock

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

6.7

4.8

5.2

7.6

3.7

6.7

Consumption

6.0

4.4

4.2

3.4

5.6

6.6

Overall Inflation

4.8

6.5

5.5

3.8

4.6

3.2

Food inflation

6.0

6.4

5.2

4.0

5.5

2.4

Transport inflation

11.5

16.8

10.7

3.7

6.0

2.3

Electricity inflation

3.8

7.5

5.9

5.1

5.2

4.6

Gasoline (in pesos)

20.1

26.5

30.0

35.5

48.1

48.6

Diesel (in pesos)

18.0

25.9

30.2

31.4

41.3

41.7

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DEPARTMENT OF FINANCE

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Cars increase every year despite oil price fluctuations 70

2 1.8

60

1.6 1.4 1.2

40

1 30

0.8

Millions

PHP

50

0.6

20

0.4

10

0.2

0

0

Unleaded pump price (LHS) 1/30/2017

Diesel pump price (LHS) DEPARTMENT OF FINANCE

New car registrations (RHS) 69