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Economy

Philippine tax reform fills Duterte's infrastructure war chest

Plan lifts excise levies and lowers income tax while raising $2.5bn yearly

Philippine President Rodrigo Duterte at the country's army headquarters in Manila on Dec.13   © AP

MANILA -- The Philippines has paved the way for a massive infrastructure program, as parliament on late Wednesday formally approved the first phase of President Rodrigo Duterte's tax reforms.

The country's Senate and House of Representatives ratified a reconciled version of their respective tax bills after concluding deliberations Monday night. Duterte is expected to sign it into law this month, with the reforms taking effect in January.

Sen. Sonny Angara, who chairs the Senate's Ways and Means Committee, on Tuesday said the bill will raise 130 billion pesos ($2.58 billion) in additional revenue yearly. Finance Secretary Carlos Dominguez said the government now can "begin a really serious infrastructure program."

Duterte hopes to spend around $160 billion during his six-year term into 2022 to usher in what his economic managers call the "golden age of infrastructure." His administration expects the program to slash the nation's poverty rate from 21.6% to 14% over that time.

The legislation reduces personal income tax, but raises excise taxes on coal, petroleum, cars, sugar-sweetened beverages, cosmetic surgery and other items. An average taxpayer would gain around 20,000 pesos annually from the income tax cuts, Dominguez said, more than the minimum monthly salary in Manila.

The Finance Department last year designed a bill to generate over 150 billion pesos in additional revenue. But the amount was reduced by special-interest lobbying and lawmakers' wariness of imposing unpopular taxes, such as a 12% value-added tax for mass-market housing. The bill ratified on Wednesday serves as the first of five phases toward the Philippines' most comprehensive tax changes in 20 years, known as Tax Reform for Acceleration and Inclusion -- or "TRAIN."

Businesses and investors backed the reforms, and expectations for the bill's passage helped the benchmark Philippine Stock Exchange index hit multiple record highs this year. The additional revenue to be generated equals 0.7% of the Philippines' gross domestic product, but analysts warn that inflation could rise.

Ushering in the Philippines' "golden age of infrastructure" will see Duterte spend in the region of $160 billion by 2022. (Photo by Ken Kobayashi)

Real estate stocks like Ayala Land and SM Prime Holdings should benefit from the tax reform as the construction of roads, bridges and airports improves connectivity to their projects, BDO Nomura Securities said. Retailers and consumer-oriented companies like Jollibee Foods are seen to gain from the higher disposable income. But food and beverage producer Universal Robina might take a hit from the higher levy on sweetened beverages.

"But looking at the big picture, the tax reform is part and parcel of efforts to make the Philippines an attractive destination," said Dante Tinga, head of research for BDO Nomura Securities.

Fitch Ratings upgraded the Philippines' sovereign debt rating by a notch Monday due to steady, robust economic growth and the country's fiscal policies, including the tax reform proposals.

The Finance Department looks to submit the second tax package early next year. That phase would slice the corporate income tax rate to 25% over time from the current 30%, while streamlining fiscal perks and incentives to some businesses in order to compensate for the lost revenue.

Southeast Asian nations are moving to rewrite their tax laws, seeking to bankroll much-needed infrastructure upgrades. Indonesia eyes comprehensive reform after a successful tax amnesty that let the country track assets of its wealthy citizens, while Vietnam looks to boost state revenue by increasing value-added taxes and imposing higher levies on cigarettes and a 10% consumption tax on soda.

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