The economy is in the doldrums, and with all its spending of late, the government is in dire need of money. The Department of Budget and Management has just submitted to Congress a proposed national budget of over P5 trillion for 2022. With the urgent and compelling need to fund this unprecedentedly humongous budget, it is all too clear that new taxes are inevitable.
They may not come this year, or from this Congress, but they will come. No administration will try to impose new taxes, or jack up old ones, right before an election. Unless it is desperate. Or so truly well-meaning that it will sacrifice and prioritize economic reform over political fortune. The burden of fixing fiscal issues usually falls on a succeeding administration, and a new Congress.
Even a national budget heavily funded by borrowings, local and foreign, will necessitate some manner of payment in the future. And those payments can come from more borrowings, or new or higher taxes. After all, any debt today is a probable tax tomorrow. Privatization is not much of an option nowadays, with asset prices depressed by prevailing economic circumstances.
As a consumer, I am not crazy about consumption taxes like sales tax and value-added tax. But I would rather be taxed on my consumption — on things I buy or services I secure — than on my income, which is not much. Admittedly, this sounds regressive rather than progressive. Higher consumption taxes hit everyone across the board, including the poor. Not necessarily the same case with income taxation.
However, with the tax reform measures put in place in the last three years, individual and corporate income tax rates are going down. And so is income tax collection. The slack or gap will have to be covered by consumption taxes. Congressional proposals include the imposition of a digital services tax, which is like a 12% value-added tax or VAT on digital services.
The proposed digital tax will be an amendment to current VAT regulations, so they will cover or include online or electronic transactions. Basically, it will be a 12% tax on sales by digital service providers of goods that are digital or electronic in nature, and on services electronically rendered locally. The tax will cover resident as well as non-resident service providers, or those with subsidiaries, branches, or a local office operating within Philippine territory.
According to digital tax proponents in Congress, the proposed Digital Services Tax is not a new tax, but just an administrative measure clarifying the coverage of the current VAT to include sales and services locally by local or foreign digital service providers. But while this may be the case, for most consumers, this will surely feel like an altogether new tax. The measure has been pending in Congress since 2020, and I doubt if it will get through in 2021.
However, as a consumer, I am more inclined to support a Digital Services Tax — which hits a certain demographic belonging to a higher income bracket — rather than an across-the-board VAT hike or higher taxes on motor vehicles or fuel. In fact, among possible calibrations in consumption taxes, I believe a digital services tax will be less painful for most consumers. At the same time, the tax potential is significant. However, its legislation by Congress remains unclear.
Asia, including the Philippines, is estimated to have about two billion internet users. And in a blog published Sept. 14, experts from the International Monetary Fund (IMF) noted that “new global reforms will change where tech giants pay taxes in Asia, and make the international tax system more robust.”
“A new set of agreed global tax reforms will change where these tech giants and other global giants pay taxes,” wrote Era Dabla-Norris, division chief in the IMF’s Asia Pacific Department and mission chief for Vietnam; Ruud De Mooij, advisor in the IMF’s Fiscal Affairs Department; Andrew Hodge, economist in the IMF’s Western Hemisphere Department; and, Dinar Prihardini, an economist in the IMF’s Fiscal Affairs Department.
“More than half of all services trade in Asia is digitally delivered, making it hard to collect value-added taxes when these services cross borders. Cross-border e-commerce sales of goods have also been exempt from value-added taxes when shipped internationally in small parcels. Resolving these challenges pays off. Requiring nonresident suppliers of digital services and e-commerce marketplaces to register with local tax authorities and remit value-added taxes on their sales could raise revenue between 0.04 and 0.11 percent of GDP in some countries in Asia, translating to an additional $166 million in Bangladesh, $4.8 billion in India, $1.1 billion in Indonesia, $365 million in the Philippines, and $264 million in Vietnam,” the experts wrote in their blog.
“As Asian consumers and businesses increase their online activity in the coming years, tech giants will expand further into Asian countries, making taxation in a digitalizing economy even more important. Countries in Asia, in particular, can invest in ways to harness digitalization for tax administration helping to reduce tax evasion, boost revenue mobilization, and make tax collection more efficient. With countries further shaping the agreement in the OECD-led IF, the fundamental reforms that lie ahead may make the international tax system more robust for the digital age,” they added.
The challenge locally, however, is that it will be difficult to convince an incumbent legislator, more so one running for reelection, to pass any tax-related legislation now. Last year would have been better timing, but to do so would have seemed insensitive to the plight of consumers locked in their homes and relying on digital services for entertainment and essential purchases.
How to best go about this situation requires a thorough examination of the tax’s potential. Data and analysis should present a compelling case in favor of this particular consumption tax. Perhaps the economic benefits significantly outweigh even the political risks to an outgoing administration. A strong push from the top may yet see this reform measure get through.
Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council