Philippines : Strengthening Tax and Fiscal Policy Capacity for Inclusive Growth

Project Name

Strengthening Tax and Fiscal Policy Capacity for Inclusive Growth

Project Number

50331-001

Country / Economy

• Philippines

Project Status

Closed

Project Type / Modality of Assistance

• Technical Assistance

Source of Funding / Amount

TA 9250-PHI: Strengthening Tax and Fiscal Policy Capacity for Inclusive Growth

Source	Amount
Technical Assistance Special Fund	US$ 2.00 million

TA 9250-PHI: Strengthening Tax and Fiscal Policy Capacity for Inclusive Growth (Supplementary)

Source	Amount
Technical Assistance Special Fund	US$ 1.00 million

TA 9250-PHI: Strengthening Tax and Fiscal Policy Capacity for Inclusive Growth

Source	Amount
Technical Assistance Special Fund	US$ 800,000.00

Strategic Agendas

• Inclusive economic growth

Drivers of Change

• Gender Equity and Mainstreaming
• Governance and capacity development
• Knowledge solutions
• Private sector development

Sector / Subsector

• Public sector management / Economic affairs management - Public expenditure and fiscal management

Gender

Some gender elements

Description

The proposed technical assistance (TA) supports the Department of Finance (DOF) of the Philippines to develop sound tax and fiscal policy through policy-oriented analysis and communication of fiscal and economic policy priorities with stakeholders.

The TA will support the development of the strategy, economics, and results group''s (SERG) policy and advisory role and, in particular, enhance SERG''s capacity under the DOF. To develop sound tax and fiscal policy through policy-oriented analysis and communicating fiscal and economic policy priorities with stakeholders, SERG requires ADB''s support in (i) providing technical advice on the design of priority reforms, (ii) enhancing quantitative and qualitative analytical research skills for policy reform, (iii) communicating policy reform agenda and research outputs to stakeholders; and (iv) tax administration capacity strengthened.

Project Rationale and Linkage to Country/Regional Strategy

Public spending levels on public services such as infrastructure, education, and health are critically dependent on sufficient tax revenues, fiscal space, and adequate budget execution. Low government spending on basic infrastructure and social services, either because of low tax or slow budget execution, causes poor economic and social outcomes and a higher burden for the populationespecially those in low-income groupswho must spend for what the government should have provided. According to the Global Competitiveness Report 2015-2016, tax regulations complexity was ranked fourth among the most problematic factors for doing business, and tax rates were ranked fifth, following inefficient bureaucracy (first), inadequate infrastructure (second), and corruption (third). This implies limited tax capacity, coupled with the lack of indexation and tax rationalization, is a factor in constraining the country''s competitiveness and further growth. More effective tax and fiscal policy reforms such as an expanded tax base are needed to support government expenditure conducive to poverty reduction programs and inclusive growth while maintaining public spending and debt at sustainable levels.

To meet the ever-increasing demand for investment in infrastructure and social services, the Ten-Point Socioeconomic Agenda rolled out by the current government identified tax reform to institute a more progressive, equitable, efficient, and simple tax system among its policy priorities. It also underscored the need to make the tax system competitive relative to neighboring countries. Tax measures being proposed to Congress include (i) lower individual and corporate income taxes, (ii) expansion of value-added tax base, (iii) indexation of oil excise tax to inflation, and (iv) rationalization of fiscal incentives to investors. Other tax measures being considered pertain to reforming property taxes and imposing taxes on luxury goods (e.g., automobiles, yachts, and jewelry) and sugary products. On the fiscal policy, the government is expected to increase infrastructure investment to 7.0% of GDP by 2022, raising the budget deficit to 3.0% of GDP from the 2015 level of 0.9% while mobilizing additional revenues to finance increased spending. To develop the tax package and further fiscal consolidation measures, rigorous economic and welfare analysis is needed. This will provide an evidence-based case for the tax reform package and planned fiscal policy. There is also a need for stakeholders to understand the impacts of implementing the government-proposed tax measures. The analysis will help ensure tax reform and fiscal policy are effective, objective, and pro-poor, ultimately ushering in investment, job generation, poverty reduction, and inclusive growth.

Recognizing the need for careful, yet determined, policy-making and implementation, the DOF has proposed the creation of the SERG, a full-time delivery group within the DOF reporting directly to the secretary of finance and concurrently chair of the Cabinet Economic Development Cluster (CEDC), which, in turn, reports to the cabinet members and Presidential Management Staff. The SERG is mandated to provide strategic advice on tax, fiscal policy, and other priority reforms; conduct policy analysis to support the case for these reforms; and manage or coordinate these reforms to improve the standard of living in the country, especially for the poor and marginalized. As a tax and fiscal policy unit dedicated to the CEDC, the SERG will enable the government to take decisive actions that are timely, of high quality, and evidence based, and to effectively and objectively communicate the reform and policy with stakeholders. Therefore, the establishment of SERG is the DOF''s critical step to facilitate the government's planned tax reform and fiscal policy as well as other socioeconomic agenda.

Impact

Tax revenues increased to 15.6% of GDP

Project Outcome

Description of Outcome

SERG capacity for tax and fiscal policy to recommend policies and reforms strengthened

Progress Toward Outcome

The TA helped the DOF achieve an important milestone on 19 December 2017 when the Republic Act 10963, also dubbed as 'TRAIN Package 1 , was signed into law by President Rodrigo Duterte. Among the measures included in TRAIN Package 1 are: (i) lowering individual income tax rates; (ii) broadening the base of the value-added tax (VAT); and (iii) increasing excise taxes on oil products, automobiles, and sugar-sweetened beverages. The first year of the tax law implementation in 2018 witnessed additional tax revenues amounting to $3.47 billion (PhP180 billion)equivalent to an increase of the tax revenue-to-GDP ratio by more than 1.0% to 15.3% in 2018 from 14.2% in 2017.

Implementation Progress

Description of Project Outputs

Technical advice on the design of priority reforms provided

Quantitative and qualitative research skills for policy reform enhanced

Policy reform agenda and research outputs communicated with/circulated to key stakeholders

Status of Implementation Progress (Outputs, Activities, and Issues)

Under outputs 1 and 3, a wide array of specialized experts on tax laws, tax and fiscal policies, tax administration, public opinion surveys, and public communications were mobilized in response to the DOF's needs for technical advice for preparation of the Tax Reform for Acceleration and Inclusion (TRAIN) under the CTRP.

Under output 2, the TA, through support of tax-related training courses for DOF's permanent staff, as well as procurement of IT equipment and statistical software, has led to institutionalization of tax and fiscal policy capacity within the DOF. On 28 June 2017, President Duterte signed the Executive Order 31 to create the SERG of the DOF. It is mandated to provide strategic advice on tax and fiscal policies in support of the administration's socio-economic reform agenda focused on sustaining high growth, eradicating extreme poverty, and growing the economy to upper middle-income status by 2022. SERG is assigned to craft the CTRP bills and coordinate closely with the Congress in finetuning this reform proposal, including fiscal implications of the government's priority programs.

Update as of 30 March 2020

Under output 1, 44 specialized experts on tax policies and public communications were mobilized in response to the DOF's needs for technical advice for crafting the Tax Reform for Acceleration and Inclusion (TRAIN). The support of legal, technical, and communication experts has led to the passage of Packages 1A and 1B of the CTRP and helped the DOF design and craft the remaining packages. For the remaining packages of CTRP, the TA mobilized experts to conduct: (i) in-depth, sector-specific studies on major recipients of tax incentives to support the corporate income tax reform (Package 2); (ii) assessment of the various economic and financial impacts of real property tax reform (Package 3) under the Valuation Reform Act (VRA); and (iii) a comprehensive policy review of the Philippines' passive income taxation and the draft bill of passive income tax reform (Package 4). The TA also provided strategic expert advice to develop the DOF's engagement and policy advocacy strategy for passage of the remaining packages.

Under output 2, the capacity of the DOF to formulate tax and fiscal policy was institutionalized. The TA helped the DOF organize tax policy-related training courses and bilateral consultations with international organizations and foreign governments for DOF's permanent staff and government officials from relevant agencies, including procurement of information technology (IT) equipment and statistical software. On 28 June 2017, President Duterte signed Executive Order 31 to create the SERG of the DOF. SERG is mandated to provide strategic advice on tax and fiscal policies in support of the administration's socio-economic reform agenda. This agenda focuses on sustaining high growth, eradicating extreme poverty, and growing the economy to upper middle-income status by 2022.

Under output 3, the TA helps the DOF communicate the CTRP with stakeholders and the public clearly and effectively, while building reform coalitions to generate support in the legislative process. Two communications firms were engaged to: (i) develop social media strategies to inform and engage the public on the tax reform proposals; (ii) prepare and implement concepts and branding for social media engagement; and (iii) conduct opinion surveys to help the DOF better assess and understand the sentiments of the general public towards the tax reform.

Under output 4, the TA strengthened tax administration capacity of the DOF and its attached agencies such as the Bureau of Internal Revenue (BIR). Three business process review and IT experts were mobilized to undertake a review of business processes for tax administration and business registration, and research on implementation of standardized deadline for government transactions, zero-contact policy and single unified business registration forms. The deliverables under this output have served the DOF as a groundwork for the BIR's digital transformation initiatives, especially the Online Registration and Update System (ORUS). The DOF envisages ORUS to be a comprehensive taxpayer-oriented system to enable taxpayers to access their own data, including tax filing and payment records, which BIR has and will eventually integrate with the existing e-filing and e-payment systems.

Geographical Location

Nation-wide

Summary of Environmental and Social Aspects

Environmental Aspects

Involuntary Resettlement

Indigenous Peoples

Stakeholder Communication, Participation, and Consultation

During Project Design

During Project Implementation

Contact

Responsible ADB Officer

Chongvilaivan, Aekapol

Responsible ADB Department

Sectors Group

Responsible ADB Division

Public Sector Management and Governance Sector Office (SG-PSMG)

Executing Agencies

Department of Finance

Timetable

Concept Clearance

23 Nov 2016

Fact Finding

06 Oct 2016 to 11 Nov 2016

MRM

-

Approval

29 Nov 2016

Last Review Mission

-

Last PDS Update

30 Sep 2020

Funding

TA 9250-PHI