Tax and market reforms are transforming the economy

Over the past decade, the Philippine government has implemented pivotal tax and market reforms to drive economic growth, ensure fiscal sustainability, and enhance business competitiveness. Landmark legislation — including the Tax Reform for Acceleration and Inclusion (Train) Act, Corporate Recovery and Tax Incentives for Enterprises (Create) Act, Ease of Paying Taxes Act (Eopta) — all played a transformative role in modernizing the country's tax system and strengthening its financial markets.

Enacted in 2017 and implemented in 2018, the Train Act (Republic Act [RA] 10963) was the first package under the Comprehensive Tax Reform Program. The groundbreaking reform aimed to simplify taxation, promote equity, and generate revenues to fund infrastructure and social programs.

It led to higher disposable income for low- and middle-income earners by reducing personal income tax rates and exempting individuals earning P250,000 or less annually. Adjusted tax brackets lowered the burden on middle-income earners, resulting in higher take-home pay, increased consumer spending, and economic growth.

It also increased government revenue for development programs.

To offset lower income tax collections, Train imposed higher excise taxes on fuel, automobiles, sugary beverages, and cigarettes. The additional revenue funded major government initiatives such as the Build Build Build program, free college tuition, and universal health care.

Greater consumer spending and improved government infrastructure investments contributed to business expansion, enhancing logistics, connectivity, and overall economic activity. The introduction of a flat 6-percent tax rate on estate and donor's taxes, meanwhile, replaced the complex tiered system, making wealth transfers more efficient and equitable.

While Train improved revenues, however, higher excise taxes contributed to inflation, particularly in fuel and food prices. The government mitigated this through safety nets like the unconditional cash transfer program.

The law played a transformative role by balancing tax relief for low- and middle-income earners with enhanced government revenue. While inflationary concerns arose, the long-term benefits of fiscal sustainability, economic growth, and investment confidence positioned the country for further development.

To counteract the economic downturn from the Covid-19 pandemic, meanwhile, the Create Act (RA 11534) was enacted in 2021. The law provided tax relief to businesses while modernizing investment incentives.

Among others, it reduced the corporate income tax for large corporations to 25 percent from 30 percent, while that for micro, small, and medium enterprises with net taxable income of P5 million or less and total assets below P100 million was lowered to 20 percent.

Fiscal incentives were rationalized and modernized to be performance-based, time-bound, and targeted incentives. Also included in the law is an income tax holiday of four to seven years, a five-percent special corporate income tax for export enterprises, enhanced deductions for domestic and export enterprises and sunset provisions for existing incentives.

VAT exemptions and incentives, meanwhile, cover sales of medicines for cancer, diabetes, and kidney disease and a VAT zero-rating for exporters to maintain global competitiveness.

The minimum corporate income tax was reduced to 1 percent from 2 percent until July 1, 2023, easing the burden on struggling businesses, while the percentage tax for non-VAT registered businesses was lowered 1 percent from 3 percent, effective until July 1, 2023. Incentives were also provided for investments in less-developed regions and priority industries.

Create lowered corporate tax rates, bolstered business recovery, and improved the Philippines' attractiveness to investors. The restructured tax incentives encouraged strategic investments, fostering economic revival and job creation.

The Eopta Act (RA 11976), signed into law in 2024, modernized tax compliance by reducing administrative burdens and aligning tax processes with global best practices. Among others, taxpayers were categorized into small, medium, and large, streamlining compliance processes, and tax filing and payment were simplified via fewer forms, improved e-filing/e-payment systems and nationwide payment options.

It also streamlined the VAT system, ensuring refunds within 90 days, and VAT-exempt transactions were made clearer to reduce compliance complexities. Greater use of technology in tax processes was also mandated, reducing errors and improving efficiency.

The Eopta has made tax compliance more accessible, particularly for small and medium enterprises. By integrating digital solutions, it enhances efficiency, transparency, and global competitiveness.

Meanwhile, the anticipated Capital Markets Efficiency Promotion Act (Cmepa) seeks to modernize Philippine capital markets by reducing tax barriers, encouraging investment, and enhancing market liquidity.

Among others, it aims to lower the stock transaction tax to 0.1 percent from 0.6 percent in line with regional markets. The documentary stamp tax for original issuances will also be lowered to 0.75 percent from 1 percent and unit investment trust funds and mutual funds will be exempted from the tax, making them more attractive. The tax treatment of long-term deposits and investments will also be standardized, broadening the tax base.

Approval of the Cmepa law is expected to enhance market liquidity, encourage investment, and strengthen the Philippines' competitiveness in global financial markets. The coming years will reveal its effectiveness in expanding investor participation and deepening capital markets.

Train, Create, Eopta and Cmepa demonstrate the government's commitment to tax modernization, investment promotion, and ease of doing business. While each law addresses distinct aspects of economic development, together they create a comprehensive strategy for long-term growth.

As these reforms continue to evolve, businesses, investors, and taxpayers must stay informed and capitalize on emerging opportunities. Ultimately, these policy changes aim to build a more competitive, inclusive, and resilient Philippine economy that can navigate global challenges and sustain prosperity.

Source: Business World

Inflation still top risk to PHL growth

A reacceleration of inflation is still the biggest headwind to the Philippines’ economic outlook this year, which may pose a risk to the central bank’s easing cycle, a Moody’s Analytics economist said.

“The acceleration in inflation is the biggest risk for the Philippine economy and these are coming from both domestic and external factors,” Moody’s Analytics economist Sarah Tan said in an interview on Money Talks with Cathy Yang on One News on Wednesday.

“Domestically, I think the risk is that food inflation remains elevated due to frequent weather disruptions that could hurt domestic supply,” she said.

In January, inflation remained steady at 2.9% although food inflation alone accelerated to 4% from 3.5% in December.

Several storms hit the country late last year, which resulted in billions of pesos worth of agricultural damage.

“Externally, I think we worry that the tariffs imposed by the US could cause global inflation to rise due to the disruptions to supply-chain networks,” Ms. Tan said.

However, she said that the impact of the US President Donald J. Trump’s restrictive trade policies on the Philippines will likely be minimal.

“If we take a step back and look at the trade relationship between the Philippines and the US, it is quite clear that the Philippines’ trade deficit with the US is rather small, especially when you compare that with other economies, be it globally or with ASEAN (Association of Southeast Asian Nations) economies.”

“That really means that the Philippines is unlikely to be high on President Trump’s list,” she added.

Since taking office in January, Mr. Trump has already slapped a 10% tariff on Chinese goods as well as duties on all steel and aluminum imports beginning March.

On the other hand, Mr. Trump’s plan to impose reciprocal tariffs on all countries that charge duties on US imports may have a more significant impact on the Philippines.

“If there’s a universal reciprocal tariff that’s going to be imposed by the US, then that will hurt the Philippines because the duties that are levied on US imports into the Philippines is higher than the other way around,” she said.

“If there is a matching of tariffs, then that will make Philippine goods to the US more costly and less competitive, which will ultimately hurt our Filipino manufacturers and exporters.”

The US is typically the top destination for Philippine-made goods. In 2024, exports to the US were valued at $12.12 billion or 16.6% of total export sales.

“I believe the impact on the Philippines is rather small given the low trade exposure with the US. That said, there are indirect channels of impact on the Philippines,” Ms. Tan added.

RISKS TO EASING

Inflationary pressures from these risks could prompt the Bangko Sentral ng Pilipinas (BSP) to be more cautious about further easing, Ms. Tan said.

“If we have inflation accelerating again beyond the BSP’s target, that could delay the timing and magnitude of a potential policy easing in the Philippines,” she said.

“If that is the case, then the combination of borrowing costs and inflation staying higher for longer will be a recipe for further weakening in private consumption which is not great for the economy, given how it’s the main driver of growth.”

The BSP surprised markets after it left the benchmark unchanged at 5.75% at its Feb. 13 meeting. This after the central bank cut rates at three straight meetings since it began its easing cycle in August.

“It is a balancing act that the BSP has played. They have to balance both inflationary risks as well as the strength of the peso.”

“But that said, we don’t expect the pause to be felt very long. In fact, the next rate cut could come as early as in April, which is the next time the Monetary Board will meet,” she added.

Despite the pause, BSP Governor Eli M. Remolona, Jr. has said that a rate cut is still on the table at the Monetary Board’s next rate-setting meeting on April 3.

He also said the central bank is still on an easing path, signaling the possibility of up to 50 basis points (bps) worth of cuts this year.

“With inflation now largely back on target, and GDP (gross domestic product) growth still slightly below the government’s expectations, these will prompt the next rate cut sooner rather than later,” Ms. Tan added.

The Philippines’ GDP expanded by a slower-than-anticipated 5.2% in the fourth quarter. This brought full-year 2024 growth to 5.6%, short of the government’s 6-6.5% target.

Meanwhile, Ms. Tan said the upcoming midterm elections in May could provide a boost to spending.

“In general, elections, whether it’s national or midterm, they have to give a boost to the economy, especially through the consumption channel.”

“So, we will see spending on campaign-related goods and services increase. But at the same time, you know, all that increase in demand could also signal bad news for inflation,” she added.

Source: Business World

Consumer spending to drive growth this year

Robust household consumption is seen to prop up the economy this year, Fitch Solutions’ unit BMI said, but warned that inflationary pressures and other risks could dampen this outlook.

“We hold a positive outlook for consumer spending in the Philippines in 2025. For 2025, we expect it to be driven mostly by strong economic growth and its feed-through into higher disposable income, as well as a stable labor market,” BMI said in a report.

BMI expects Philippine gross domestic product (GDP) to grow by 6.3% this year and 6.7% in 2026. These projections are within the government’s 6-8% target for both years.

The Philippine economy grew by 5.6% in 2024, missing the government’s 6-6.5% target. 

“A deteriorating external demand will likely be a drag on the Philippines’ GDP. However, the private final consumption expenditure will be positive,” BMI said.

Household spending is seen to accelerate to 5.3% this year, it said. Private consumption, which accounts for about three-fourths of the economy, grew by a lackluster 4.8% in 2024.

Consumer confidence has also shown “upward momentum,” amid the continued recovery from the pandemic, BMI said.

In the central bank’s latest consumer expectations survey, an improvement was seen in consumer confidence for the first quarter of this year and the next 12 months. This, amid a more upbeat outlook on higher income, additional sources of income and more available jobs.

“Easing inflationary pressures will provide relief to real household incomes and enable growth in spending,” BMI said.

“A tight labor market will support spending, as real wage growth returns to positive territory, which will support purchasing power over the year,” it added.

On the other hand, BMI noted that risks continue to weigh on private consumption, such as prolonged high inflation and weaker remittances.

“These risk factors will adversely affect household purchasing power, while geopolitical tensions have also emerged as a risk that is likely to impact inflation and interest rates.”

“Although inflationary pressures have largely eased in many markets, price levels remain high, and many households have not yet experienced real wage growth sufficient to restore purchasing power to their pre-2022-2024 inflationary shock levels.”

BMI expects inflation to average 3.3% this year, in line with the Bangko Sentral ng Pilipinas’ (BSP) own forecast. Headline inflation remained steady at 2.9% in January.

“If nominal income growth does not keep pace with inflation, the purchasing power of consumers will deteriorate, which would be a drag to their spending.”

“Prolonged inflation, particularly in relation to food, will mean that consumers will have to increasingly allocate more of their disposable income towards meeting necessities,” it added.

Meanwhile, the peso is seen to “depreciate slightly” this year and settle at P58 against the dollar.

“Despite the roughly 1.7% depreciation of the peso, this is still a relatively positive outcome compared with the depreciation of 11% seen in 2022 and the 2% seen in 2023.”

“The weaker rate in 2025 is due to the combination of a higher expected consumer price index in the Philippines as well as the US Fed’s hawkish tilt,” it added.

In 2024, the peso weakened by 4.28% to close at P57.845 versus the dollar from its end-2023 finish of P55.37. The local currency sank to the record-low P59-per-dollar level thrice last year.

“While persistent intervention by the BSP in the forex market will help to curb depreciatory pressures on the peso, earlier rate cuts by the BSP relative to the Fed will continue to weigh on the currency.”

“Nevertheless, the relatively stable rate will mean that the Philippines, which remains heavily reliant on imports to meet local demand, will see relative stability in import inflation,” BMI added.

Elevated household debt also poses a risk to consumer confidence, BMI said.

“It not only constrains future borrowing capacity but impacts current disposable income levels. This is particularly true as debt servicing costs rise in response to increases in interest rates.”

“In many markets, central banks rapidly hiked interest rates during the 2022-2023 high inflationary period, reaching levels to which most households have not been accustomed over the past decade,” it said.

From mid-2022 to late 2023, the BSP was the most aggressive central bank in the region as it hiked key rates by 450 basis points (bps) to tame inflation.

The BSP began its easing cycle in August last year, lowering borrowing costs by a total of 75 bps by end-2024. 

“While interest rates will not reach the previous historical lows of the last decade, easing monetary policy will alleviate some debt servicing cost pressures,” BMI said.

Source: Business World