Indonesia, Philippines pin hopes on tax reforms

Reeling from the impact of the pandemic, Indonesia and the Philippines are banking on tax reforms to spur economic recovery and address bottlenecks that have long constrained growth.

By Sunday, Indonesia had reported 1,850,206 confirmed cases of COVID-19, with 51,449 deaths－figures from the World Health Organization that mark it out as the worst-hit country in Southeast Asia. The Philippines, with 1,262,273 confirmed cases and 21,732 deaths, comes next in the region.

Indonesia's economy－the biggest in Southeast Asia－shrank 2.07 percent last year, its worst performance since the 1997 Asian financial crisis. The Philippines plunged to its deepest recession since World War II as its GDP contracted 9.5 percent that year.

But the two countries are hoping that tax reforms will generate more revenue and investment, financing an economic rebound. Indonesia is looking to impose carbon taxes and raise value-added tax rates. In the Philippines, the government has moved to cut corporate tax rates in a bid to entice more foreign investment.

"This is the biggest stimulus measure for the Philippines," said Michael Ricafort, chief economist of the Rizal Commercial Banking Corporation, referring to the Corporate Recovery and Tax Incentives for Enterprises Act, or CREATE Act, that President Rodrigo Duterte signed into law on March 26.

The tax reform package cuts the corporate income tax rate to 25 percent, from 30 percent, for large corporations, and to 20 percent for micro, small and medium-sized enterprises.

Ricafort said that while the reforms will reduce tax collections, such losses will be offset by the inflow of more foreign investments.

The Philippines drew just $6.4 billion in foreign direct investment, or FDI, in 2020, according to data from United Nations Conference on Trade and Development. That's dwarfed by Indonesia's $18 billion haul.

Jose Maria Clemente Salceda, chairman of the Ways and Means Committee of the Philippine House of Representatives and author of the CREATE bill, has estimated that the tax reforms will help bring in at least $90 billion in FDI and create 1.8 million jobs over the next 10 years.

Ruben Carlo Asuncion, chief economist of Union Bank of the Philippines, said the tax overhaul will encourage more business process outsourcing firms to set up operations in the Philippines.

Different approaches

While the Philippines is using tax cuts to drive its recovery from the pandemic, Indonesia is doing the reverse by imposing new taxes. According to a document released on May 21 by the finance ministry, these taxes can be levied on carbon-intensive industries.

Yustinus Prastowo, executive director of the Center for Indonesia Taxation Analysis think tank in Jakarta, said enforcing a carbon tax will not only support economic recovery, it can also spur the development of renewable energy sources and fulfill the country's commitment to the Paris climate accord.

Nicholas Antonio Mapa, senior economist at Dutch investment bank ING, said that apart from fulfilling climate commitments, tax reforms can help the Indonesian government reduce its fiscal deficit to 3 percent of gross domestic product by 2023. The country posted a record 6.1 percent fiscal gap in 2020.

Muhammad Edhie Purnawan, professor of economics at Gajah Mada University in Yogyakarta, said the tax reforms will bring improvements in tax administration, more stringent regulation and an expansion in the tax base.

Leonardus Jegho in Jakarta contributed to this story.