Philippine mid-term elections give Duterte administration leverage to enact constitutional and tax reforms

President Rodrigo Duterte emerged invigorated from the May 2019 mid-term elections after his party dominated the polls, marking an endorsement of his policies and the administration’s performance since 2016. Nine out of 12 Senate seats were won by pro-Duterte candidates, with the remaining three taken by independents. The ballot gave the president a mandate to push through constitutional and tax reforms, which are intended to fund infrastructure development, boost job creation, lower inflation and further expand an economy that posted growth of 6.2% in 2018.

Federalism

One of the most notable proposed reforms is a transition to a federal government structure. Under this system, the Philippines would be divided into 18 regions, each operating under its own economic jurisdiction with the authority to determine tax incentives. Concerns have been raised that the country’s lower-income areas would not be economically or logistically prepared for the autonomy of federalism. However, President Duterte has asserted that, by lessening the influence of politicians in Manila, the neglected regions would be able to assume control of their resources and create tailored economic development models that are more effective.

The National Economic and Development Authority estimated that adopting federalism could incur additional costs of between P156.6bn ($2.9bn) and P243.5bn ($4.5bn) in the first year. With the move already facing opposition, it may be challenging for the president to enact this reform before his term ends.

Taxes

The second part of President Duterte’s comprehensive tax reform programme, the Tax Reform for Attracting Better and High-Quality Opportunities ( TRABAHO) bill, stalled in Congress prior to the mid-terms. Elevated inflation – which reached 6.7% in October 2018 – and the potential repercussions of TRABAHO’s directive to rationalise fiscal incentives in special economic zones (SEZs) were significant sticking points in efforts to gain approval. However, a strengthened Senate and cooling inflation, which fell to 3.2% in May 2019, bode well for the likelihood of TRABAHO being signed into law in the second half of 2019.

Critics of the bill argue that limiting tax holidays for corporations will eliminate a major incentive for businesses to invest in the Philippines. In order to offset these potentially negative effects, TRABAHO proposes to gradually lower corporate income tax (CIT) from 30% in 2019 to 20% by 2030. Given that the current incentive scheme exclusively benefits enterprises within SEZs, lowering CIT would provide welcome relief for businesses outside these zones.

Nevertheless, there are some concerns that the uncertainty surrounding TRABAHO could deter investors. Figures from the central bank, Bangko Sentral ng Pilipinas, showed that overall foreign direct investment inflows decreased by 15.1% year-on-year in the first quarter of 2019, from $2.3bn to $1.9bn, which was largely attributed to declining equity placements. However, according to the Philippine Statistics Authority, total foreign investments approved by the Department of Trade and Industry reached P46bn ($855.6m) that quarter, more than triple the P14.2bn ($264.1m) posted in the same period of 2018.

Infrastructure & Agriculture 

The government plans to invest $170bn in its flagship Build, Build, Build modernisation programme. Changes to the tax framework are central to these efforts, and up to 70% of revenue generated by the reforms has been earmarked for investment in infrastructure. Funding is also being sourced through development assistance, with the administration favouring this option over public-private partnerships. Infrastructure disbursements were equivalent to 5.1% of GDP in 2018, and the government has forecast that the figure will rise to 7% by 2022. By investing in logistics and transport, President Duterte hopes to drive down production costs, increase rural incomes and reduce the price of basic items such as food, which was a significant cause of inflation in 2018.

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The Report: Philippines 2019

Country Profile chapter from The Report: Philippines 2019

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