Saturday, August 13, 2022

First round of tax changes won’t bite, but second may sting


Philippine President Rodrigo Duterte late last year signed into law the first steps in a long-awaited tax reform program to raise funds to improve infrastructure, which analysts say will dampen consumer spending, but are unlikely to hurt the booming gambling industry.

However, a second round of measures, expected later this month, may contain more of a sting and operators are watching the bill closely.

Any policies that could affect spending power in the Philippines are significant, as the country has a strong mass market, dominated by local visitors.

Known as the Tax Reform for Acceleration and Inclusion (TRAIN) law, the program re-invents the country’s 20-year tax regime. The government claims it will be a simpler and fairer system, designed to shift the tax burden from the lower 99 percent of the community to the wealthiest 1 percent.

This is being rolled out in a series of packages across the year. The first package sees a reduction in personal income tax rates benefiting taxpayers earning above minimum wage and an increase in excise levies on items such as petroleum and automobiles, tobacco and sugar-sweetened beverages among others. These will be staggered and adjusted gradually in a bid to generate P130 billion ($2.53 billion) in additional revenues.

With the new income tax rates, the winners are Filipinos making an annual taxable income of P250,000 (around $5000) and below as they will no longer need to pay income tax from 2018 onwards. Meanwhile, those earning above P8 million ($156,000) annually will be slapped with 35 percent personal income tax, higher than the current 30 percent.

Small businesses are likewise expected to benefit from the TRAIN law, which offers an optional flat 8 percent tax based on gross sales or receipts in lieu of business and income taxes.

But not everyone is happy. According to Rosario Bella Guzman, research head and executive editor of IBON a non-profit development organization, the richest 10 percent will benefit from TRAIN, while there is a computed negative outcome for the lower 60 percent of income earners. Most of the country’s 22.7 million families do not pay income tax because they are engaged in informal work with low and erratic incomes so do not receive the benefit of lower income tax, but are hit with the burden of excise tax.

While the increased tax on sugary drinks in a country where there are high incidents of obesity and diabetes goes a long way in promoting a healthy lifestyle, many believe it will be the lower income earners who are most affected.

Commuters are also expected to feel the brunt of fuel increases with higher transportation fares. An increase in fuel prices is also expected to lead to a surge in the prices in freight, electricity and food.

With the significant rise in prices of commodities, consumers can also expect a rise in the inflation rate, but according to the Department of Finance this will only be a short term hiccup. Inflation is estimated to go up by 1 percent next year and 0.5 percent in 2019.

But while this could dampen overall consumer spending, it won’t affect spending habits among the middle class for luxury items such as shopping, or leisure activities such as gambling.

“Those who spend on these services are those who have the capacity to spend more. The impact might not be that huge on dampening the demand on these luxury services and products,” said an analyst from Action for Economic Reforms.

In fact a higher disposable income means higher demand for gaming and entertainment, benefiting the gaming industry says Richard Laneda of COL Financial.

“While some goods will be more expensive, I think it’s still better as consumers will have the choice on where to spend the higher take-home pay. They can choose not to purchase items whose excise tax has been increased thus resulting in a net positive impact on their disposable income. People who have suddenly a higher take-home will not spend more on food or necessities but will likely spend on discretionary items or even leisure activities like gaming and entertainment,” says Laneda.

“In that regard, we do not think there will be a slowdown in the mass market segment of casinos. If we look at last year, people were worried that the additional supply from Okada will have a negative impact on existing casinos but what we saw was a huge growth in the mass segment despite more supply in the market. This tells us that the gaming sector is still in a growth phase. Aside from higher demand from locals, tourism has also given the mass segment a boost. The share of foreign mass players increased last year compared to the year before. China is now the second biggest source of visitors for the Philippines and this is positive for the gaming sector,” he added.

Operators are also not concerned. Steve Wolstenholme, Managing Director of Okada Manila says “The TRAIN law will effectively reduce the income tax payments of most salary-earners. That will free up some disposable income, which can be spent for leisure activities including gaming. The new law can therefore have a positive impact on our mass gaming market.”

But what will affect the casino industry directly is the second tax package, which is currently under review. The proposal will be submitted to congress to be discussed before the end of February and is expected to come out mid to late 2018.

This package will cover corporate taxation and the modernization of fiscal incentives and look at taxes on tobacco, alcohol, mining, coal and casinos.

In a statement, Finance Undersecretary Karl Kendrick Chua said package two will include the removal of the value-added tax exemptions for coal and casino operations. The Department of Finance wants to lower the corporate-income tax to 25 percent, from the current 30 percent, and rationalize the fiscal incentives for businesses to make them performance-based, targeted, time-bound and transparent. The package is touted as revenue neutral.

While the exact details of the second package are not yet known, there is concern.

“If the Department Of Finance means to remove the tax exemption of casinos in TRAIN Phase Two, it is a proposal that needs serious consideration. It will have a significant impact not only on the existing operations but more importantly on the competitiveness of the Philippines as an investment destination for gaming and related leisure,” said Atty Arnold Salvosa, assistant vice president for corporate and legal services of the Philippine Amusement and Gaming. Corporation (PAGCOR).

The two leading gaming jurisdictions in Asia are taxed as follows: Macao imposes 39 percent of Gross Gaming Revenue (GGR). Singapore imposes 5 percent of GGR for premium players and 15 percent of GGR for other players. GGR is also subject to 7 percent Goods and Service Tax (GST) and Corporate Income Tax is 17 percent of taxable income.

In comparison, licensed casinos in the Philippines pay an average of 19 percent of GGR as license fees, which likely brings the gaming levy a little higher than Singapore, but much lower than Macau.

“If the existing tax exemption of gaming income from Value Added Tax (12 percent) and Corporate Income Tax (30 percent of taxable income) will be removed, the Philippines will likely become the most expensive jurisdiction to do gaming business,” Atty Salvosa added.

Francis Hernando, chief operating officer of Philippine gaming operator Leisure and Resorts World Corp (LRWC) says this continues to place the industry, which has seen a number of changes in regulation since Duterte became president, in limbo. But he does see it as a necessary move by the government.

“It seems like a comprehensive exercise into raising revenues for the government.  I think people will understand if it’s reasonably taxed,” he said.

 

 

 

Asia Gaming Brief is a news and intelligence service providing up to date market information for worldwide executives on relevant gaming issues in Asia.

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