Features Philippines Economy

ANALAYSIS: Philippines’ economic reform seen advancing as Duterte allies control senate

28, May. 2019

The 12 winning candidates in the race for the Philippine senate proclaimed on May 22 after mid-term elections. Photo courtesy of newly elected senator Cynthia Villar.
The 12 winning candidates in the race for the Philippine senate proclaimed on May 22 after mid-term elections. Photo courtesy of newly elected senator Cynthia Villar.

By Darlene Basingan

MANILA, NNA – Economic and fiscal reform is expected to continue in the Philippines, with allies of President Rodrigo Duterte holding a majority of senate seats after May 13 mid-term elections, but there are doubts the upper house can pass two priority government bills before the current session ends on June 7.

While most of the business community are in favor of Duterte’s reforms, some want the government to reconsider parts of its controversial tax reform bill, and the bill proposing a shift to a federal system of government.

Duterte’s party has held a majority of seats in the House of Representatives since 2016, but several of the administration’s reform bills have floundered in the 24-member senate, traditionally regarded as independent and the last bastion of checks on the government.

“With more lawmakers or legislators who are allied to the administration winning more slots at the House of Representatives and Senate, the greater the chances of support in the enactment of more economic, fiscal, and other reform measures, in a more expeditious manner, over the remaining or next three years of the Duterte Administration,” Michael Ricafort, economist at the RCBC bank, told NNA.

“With administration allies dominating Congress, there could be smoother sailing of business-friendly laws,” said Maria Alegria Limjoco, president of the Philippine Chambers of Commerce and Industry.

Political analyst Ramon Casiple, said both houses of congress dominated by allies of Duterte would ensure political stability in the government, which is positive for investors.

“[It] would eliminate political factors in the decisions of investors, unless there are other political challenges outside of the elections,” said Casiple, executive director of the Institute for Political and Electoral Reform.

“It would confirm the president is fully in command of the political tide, and therefore, can readily make decisions on the economic sphere that would be consistent throughout his term,” he added. “He doesn’t have to compromise.”

The business community here welcomed the elections results.

“We hope they will continue to sustain reform measures anchored on the national agenda for global competitiveness and higher levels of growth,” said Limjoco.

One of the key economic and fiscal measures the administration is pushing is further easing of foreign ownership requirements. Another is to increase competitiveness among firms, and improve the ease of doing business.

“In doing so, more foreign direct investments can yield further economic growth and increase job creation. We urge the incoming legislators to work towards this direction and further improve the Philippines' investment climate,” Florian Gottein, executive director of the European Chamber of Commerce of the Philippines (ECCP), said.

Philippine law restricts 100 percent foreign ownership in many sectors, but the government has already opened up some industries to foreign investment, the latest being internet business.

The World Bank ranks the Philippines 124th out of 190 countries in terms of ease of doing business due to higher business registration costs, among other factors.

But the most controversial of the government’s economic and fiscal measures is the second package in its comprehensive tax reform program, the Tax Reform for Attracting Better and High-Quality Opportunities or TRABAHO Bill. Some blamed the spike in inflation last year on the first tax package.

The TRABAHO bill proposes a reduction of corporate tax rates, currently among the highest in Southeast Asia, from 30 percent to 20 percent over a decade. The bill also “rationalizes” what the government describes as redundant and convoluted tax incentives given to firms registered with 14 investment promotion agencies.

Currently, eligible companies enjoy an income tax holiday of up to eight years, followed by a 5 percent tax on gross income. Under the TRABAHO bill version in the lower house, eligible companies could apply for a tax holiday of up to 3 years. After that, they can re-apply for a special tax rate of 18 percent, which can be lowered to 13 percent in 2029.

The senate has yet to pass the bill. The European businesses here want a speedy lowering of the corporate tax rate, but are hoping the government will reconsider its plan for tax perks.

“We encourage legislators to speed up the scaling down of the CIT (corporate income tax) in order to reach the 20% target, as well as improve efficiency of the tax collection system,” Gottein said.

“The ECCP urges the Philippine government to consider the economic contributions of Investment Promotion Agencies (IPAs), such as the board of investment and the Philippine Economic Zone, in creating measures regarding fiscal incentives rationalization,” he added.

Japanese businessmen are among the most vocal against the tax perks provision of the bill.

“Japanese businessmen are very supportive of [president Duterte’s] policies. But on the TRABAHO bill, removing the incentives, we don’t agree on that,” Nobou Fujii, deputy president and executive director of the Japanese Chambers of Commerce and Industry of the Philippines, told NNA.

He said Japanese businessmen may hold off on expansion plans here if the tax perks are removed.

Despite the senate win for Duterte allies, some believe it will take time before the tax and federal system bills pass the senate. The lower house passed its own version of the federal system bill, but the government body tasked to draft the proposal strongly opposed the house version.

The business community has already raised a red flag on the economic impact of the bill.

The government’s economic team also warned last year that the shift to a federal form of government would lead to an estimated 1.2-trillion-peso ($23 billion) budget deficit in its first year of implementation, or 6.7 percent of the country’s gross domestic product, reducing funds for the government’s ambitious infrastructure program, according to local news reports.

The Philippines’ budget deficit stood at 558.3 billion pesos in 2018, equal to 3.2% of GDP.

“Unless these are thrashed out and a more thorough analysis on the impact and effect is made, the proposed measure will continue to face an uncertain future,” Limjoco noted.

“We are cautiously optimistic that the government will thoroughly evaluate the costs and risks of this proposed measure,” Gottein said.

The lower house has urged the senate to pass the administration’s priority bills before the congress adjourns, but time is tight. The bills may also not win congressional approval before the president summarizes his achievements in his State of the Nation Address on July 22.

Some analysts said the senate’s independence is unlikely to be undermined despite being dominated by the administration’s allies.

“In the senate, you can choose your battles and really stand out from the rest,” Malou Tiquia, a Manila-based political strategist, said.

“You’re electing senators for six years, so the senators will stay there longer than the president…so there is no assurance…the senate will be accommodating to the administration,” said Edmund Tayao, a Manila-based political analyst.