Going for the best tax incentive package

Lowering corporate income taxes as proposed in the draft of the second package of the Comprehensive Tax Reform Program (CTRP) by the Department of Finance (DOF) would be cinch.

More than being a campaign promise by the elected President in 2016 to the business community, it would simply bring the 30 percent CIT paid by businesses operating in the Philippines to 25 percent, a figure that comes closer to what other countries in the region impose.

In fact, the proposed 25 percent CIT will still be higher than Malaysia’s (24 percent) and Thailand’s (20 percent), but it already gives the Philippines a fighting chance as a more attractive haven for foreign investments in Southeast Asia and the ASEAN.

The proposed second package is now going through the legislative mill, and while there will be little or no opposition to gradually bring down CIT to 28 percent in 2019 and 25 percent in 2021, the battle lines are being drawn on the plan to reform incentives given to companies.

Principles guiding reform

Finance Undersecretary Karl Kendrick Chua has often referred to four key words that would accompany the planned reforms on what he considers are leakages in the given incentives to businesses operating in the country: “performance-based, targeted, time-bound and transparent.”

Translated in more tangible terms, the reformed tax laws given to businesses would be measured against metrics such as job generation, investments in the countryside and on research and development, adherence to sunset provisions for incentives, and accurate reporting of tax perks.

Chua said that incentives such as income tax holidays and other business inducements that are not time-bound have cost the government over P300 billion annually in foregone revenues, and have undermined benefits to the economy.

To undergo review will be 123 investment laws and 192 non-investment laws that have become avenues for a weak corporate income tax collection system.

Susceptible to misinterpretation

Based on historical data, VAT (value added tax) exemptions on imports were seen to account for 53 percent, or more than half of the foregone revenues, followed by 29 percent from income tax holidays and special rates, 12 percent from local VAT exemptions, and the remaining six percent from local VAT.

By law, all imports to the Philippines are slapped a 12 percent VAT based on the total value as determined by the Bureau of Customs. However, exemptions to the 12 percent VAT on imports are numerous and susceptible to misinterpretation.

Among the imported products that are VAT exempt are agricultural and marine food in their original state, livestock and poultry for human consumption or used in the manufacture of finished feeds. However, exempted are fighting cocks, race horses, zoo animals and other animals generally considered as pets, including the specialty feeds for them.

More VAT issues

The Philippine Exporters Confederation Inc. (Philexport) has filed its opposition, asking that all exports be given zero VAT exemption as well as input VAT refunds under the proposed new VAT refund system.

Philexport also objected to the CTRP Package 2 proposal classifying exporters according to a performance record of three years and ability to export 90 percent of its production over the past three years, citing the classifications are anti-development and anti-MSME (micro, small and medium enterprise).

Philexport also demanded that an enhanced VAT refund system must be able to grant refunds of creditable input tax within 90 days of the VAT refund application.

Modernizing incentives

Congress will be busy dealing with the various lobbies that businesses will organize, including pressure from government agencies like the Department of Trade and Industry and the Board of Investments, to tackle what is considered as a diminution to the perks that businesses already enjoys.

An example of this would be the income tax holidays (ITH).

The DTI and BOI feel that a longer ITH of 10 years should be part of the incentives modernization that the DoF is proposing. Currently, most ITH are up to four years only, other countries in the region give up to a decade.

On the other hand, the DTI feels the ITH given to companies operating in export zones should be time bound from 20 to 25 years, but not for indefinite periods as what is currently in effect.

From its successful implementation of the Comprehensive Automotive Resurgence Strategy (CARS) Program, the DTI cited other modern initiatives developed to attract additional investments in the country that were performance-based.

Examples of these new incentives are tax deductibility on specific activities such as research and development, accelerated depreciation, and net operating loss carry over (Nolco) that could be tapped by companies registered with the Board of Incentives (BOI) once the income tax holiday lapse.

Other areas touched in the tax incentives reform include the sunset provision; here, the DoF is proposing a maximum period of five years. The DoF also wants to replace the five-percent gross income earned tax to a reduced corporate income tax rate of 15 percent.

Just how effective and efficient the various government agencies and the legislative arm will work together to come up with a truly inspired tax incentives package will depend on many things.

Definitely don’t hold your breath for the ideal, because, as what usually happens, last minute surprise changes to the final version – not necessarily for the better – will likely happen when you’re not looking.

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