The tax package passed last week by the Philippines' House of Representatives should widen the tax base and boost revenue, says Fitch Ratings. It also demonstrates the administration's commitment to broader tax reforms that have the potential to improve fiscal stability and support an ambitious public investment programme.
This package is the first component of a planned overhaul of the tax system that aims to raise revenue and achieve a simpler, more equitable and efficient system.
A key goal of the overall tax reforms is to lower personal and corporate tax rates while expanding the tax base, resulting in a net positive gain to government revenue.
The government has previously estimated that the full set of tax reform packages will together boost revenue by 2% of GDP by 2019, and it expects administrative measures that simplify tax bureaucracy to add another 1% of GDP to revenue over the same period.
Low government revenue is currently a key weakness in the Philippines' fiscal profile - general government revenue was equivalent to just 22% of GDP at end-2016, compared with a median 30% for 'BBB' rated countries.
The potential passage of proposed tax reforms was listed as a positive rating sensitivity when Fitch last affirmed the Philippines' BBB-/Positive rating in March.
Some of the revenue-enhancing measures contained in this first bill were watered down to secure legislative passage, as was widely expected, and it still faces hurdles in passing the Senate, which could result in further compromises.
Nevertheless, reported statements by the finance secretary imply the bill in its current form will add around 0.8% of GDP to revenue in 2018, not far from the government's original estimates of around 1% of GDP.
Key provisions in the bill include a lowering of personal income tax rates, which should be more than offset by an increase in excise taxes on petroleum products and automobiles, an expansion of the VAT base, and the introduction of excise tax on sugar-sweetened beverages.
Among the areas to be covered in subsequent planned reform bills are corporate, property and capital income taxes. The corporate tax rate is set to be reduced from 30% to 25%, which would bring it more into line with regional standards, while corporate tax provisions will be simplified in an attempt to increase compliance.
The speed with which this first bill passed through the House - and President Duterte's intervention to give it a push over the line - suggests that tax reform is a priority for government.
Indeed, tax reform is crucial to the rest of the administration's "10-Point Socioeconomic Agenda," which includes plans to ramp up investment in infrastructure, health, education and social protection.
Infrastructure spending is targeted to rise by two percentage points to 7.4% of GDP by 2022. It will be difficult to fulfil these plans - and also keep the budget deficit within the 3% of GDP target - without a medium-term rise in the revenue/GDP ratio.