Tax settlement to help meet unexpected costs of calamities

Finance Secretary Carlos Dominguez III said the settlement of the tax obligations of one cigarette manufacturer that will amount to about P30 billion will significantly boost the national coffers at a time when the government is meeting the unexpected costs of several calamities.

Dominguez said settling Mighty Corporation's tax deficiency will also keep the company out of the cigarette business, which will be taken over by the Japan Tobacco International (JTI), a development that is expected to increase sin tax collections by P1 billion a month that can be used to improve health care facilities and enable the Department of Health (DOH) to procure additional medicines and provide services that will help prevent and control the deadly diseases caused by tobacco use.

In his second State-of-the-Nation Address (SONA) last month, President Duterte ordered the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) to accept Mighty's settlement offer of P25 billion, which Dominguez said will go up to P30 billion because of another P5 billion from the Value Added Tax (VAT) charges arising from the sale of the company to JTI.

This will be the largest sum of taxes collected ever from a single taxpayer in Philippine history. It brings windfall revenues for government during a time when calamities inflicted unexpected spending burdens for the government, said Dominguez at this morning's briefing by the Development Budget Coordination Committee (DBCC) for the Senate committee on finance.

Mighty will be out of the cigarette manufacturing business. Our future sin tax collections are expected to rise by at least P1 Billion a month. This can be used to pay for additional medicines, commodities and services that will prevent and control the deadly diseases caused by tobacco use, and improve our health care facilities, Dominguez said.

In his second SONA, the President said this windfall will aid the government in its rehabilitation efforts for the conflict-hit city of Marawi and the quake-devastated Ormoc City.

Last July 20, the BIR collected from this cigarette company the amount of P3.4 billion as the first tranche of the settlement of its tax liabilities.

Dominguez said the date of the full collection of the remaining P21.5 billion and the other P5 billion for the VAT will depend on how swift the Philippine Competition Commission (PCC) can approve the sale of Mighty to JTI, of which a third is controlled by the Japanese government.

He recalled that in 2011, sin taxes from tobacco and alcohol products brought in revenues equivalent only to 0.5 percent of gross domestic product (GDP).

Dominguez noted that after the new excise tax schedule was enacted into law in 2012, revenues from sin taxes doubled to about 1.0 percent of GDP in the succeeding years, but dropped in 2016 to a 0.01 percentage point as percent of GDP, owing mainly to the proliferation of fake stamps and implementation of graphic health warnings on cigarettes.

But we expect said revenues to maintain its growth momentum in the coming years, he said.

In the DBCC briefing for senators, Dominguez said that between now and 2022, the government aims to improve the ratio of revenues to GDP from the current 15 percent to 17.7 percent by 2022 through reforms in tax policy and administration.

Dominguez said the country's fiscal position is strong enough to enable the Philippines to lead Southeast Asia in growth over the next few years even as the government on the Duterte watch reshapes growth to make it more inclusive.

Tax revenues-to-GDP will increase from 13.7 percent in 2016 to 17 percent in 2022. This will bring our tax effort to about the regional average, Dominguez said.

Dominguez likewise assured senators that despite the Duterte administration's aggressive spending plan to close the infrastructure gap and expand social services, the budget deficit will remain at an average of 3 percent of GDP between now and 2022.

This is doable, Dominguez said, because the National Government (NG) aims to raise total revenues of P2.8 trillion, or 16.3 percent of GDP in 2018, which will include revenue measures of P133.8 billion.

With the yields from the revenue measures and the continued implementation of administrative reforms by revenue collecting agencies, the government expects revenues to grow by 17 percent in 2018, he noted.

The tax effort, meanwhile, will increase to 15.3 percent of GDP next year to be able to finance needed social expenditures.

The consolidated public sector financial position estimated for this year and for 2018 shows a deficit well within 2 percent of GDP. It is not true that the ambitious infrastructure program will lead to reckless borrowing and undermine our fiscal stability, Dominguez said.

He explained that even if the government needs to borrow to finance the deficit, it will commit, as a matter of policy, to an 80-20 borrowing mix in favor of locally sourced, peso-denominated debt to reduce foreign exchange risks and help utilize excess liquidity in the financial system.

We benefit tremendously from the prudent financial management of the last decade. The prudence paid off in the form of decreasing National Government debt-to-GDP ratio. Even with the programmed increase in the deficit-to-GDP ratio to enable pump-priming of the economy, we expect the national debt-to-GDP ratio to become even more benign by 2022, Dominguez said.

Compared to 2012 when the national debt was 51.5 percent of GDP, this year, the ratio has come down to 40.6 percent of GDP, he said. We project that by 2022, the national debt should have climbed down to only 37.7 percent of GDP, he added.

The debt has become more manageable by the day, he said.

As a percentage of NG revenues, interest payments declined from a high of 36.9 percent in 2005 to only 13.8 percent in 2016, Dominguez said.

Interest payments as a portion of expenditures declined from a high of 31.1 percent in 2005 to only 12 percent in 2016, he added.

Source: Department of Finance

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