The administration’s legislative priority is now focused on the second phase of its tax reform program.
To reduce the corporate tax rate and to revitalize investment incentives. The main objective of this phase of tax reform is to reduce the corporate income tax rate by aligning it with some Southeast Asian countries and with international trends concerning the tax.
Accompanying the reduction of the corporate tax is the delicate task of reforming the investment incentives that stimulate the country’s industrialization efforts.
Tax and investment incentives are intricately related to the corporate income tax. Tax incentives are designed to reduce the cost of capital to investors – both domestic and foreign – to entice them to invest.
Such inducements involve tax holidays and special treatments of capital goods acquisitions (such as favorable depreciation treatment) which are in the nature of reducing the taxable income to enable investments in particular industrial and economic projects.
Tax incentives also include the waiver of customs duties and other forms of income or commodity taxation, including local taxation.
A much more complex reform process. TRAIN II is the toughest of the tax reform components of the administration’s comprehensive tax reform package.
For one, the current stakeholders – mainly the recipients of tax incentives – include important investors who are powerfully connected members of the business community.
The main idea of the reforms in TRAIN II, however, is not to abolish investment incentives. It is to produce a more effective trade-off between subsidizing capital and attracting new employment and economic growth opportunities for the nation.
Reforming the tax and investment incentives system is, therefore, a more complicated enterprise.
One effect of placing TRAIN II high on the government’s legislative agenda is to create some uncertainty on the nature of the succeeding framework of investment incentives.
Such uncertainty poses a threat to the government’s efforts to attract more foreign direct investment at a time when it needs more of it.
A prolonged debate during the legislative process could, therefore, become counter-productive. The government needs to impress upon Congress that the sooner it is able to pass this tax reform package, the sooner certainty in the investment climate is fostered.
Some arguments supporting package II of TRAIN. The government offers a number of important reasons for adopting the package of reforms in TRAIN II.
(1) Reduction of the corporate income tax rate. The Philippine corporate tax rate at 30 percent is the highest in the region. The corresponding rate in Thailand is 20 percent; in Vietnam 25 percent, and in Indonesia, 28 percent. China and Singapore have rates at 14 percent and 17 percent, respectively.
Despite the high tax rate, the country’s corporate tax does not perform well in relation to revenue yield. The yield of Thailand from corporate tax is 6.1 percent of GDP and Vietnam 7.3 percent of GDP. The Philippines collects only 3.7 percent of GDP with the tax rate of 30 percent.
Only this year, the US adopted a major tax reform law which reduced, among others, the corporate tax rate from 35 percent to 21 percent. This move will likely lead to new reductions in the corporate tax rates in the Southeast Asian region.
The plan under TRAIN II is to reduce the corporate tax rate to 25 percent from 30 percent. Should the Philippine corporate tax rate be higher than the corporation tax rate of the United States? Under normal circumstances, that would be unlikely.
(2) Time-bound incentives. Tax and investment incentives need to be time-bound. There is a need to assess further grants on conditions that they still remain relevant.
Philippine tax incentives have been repetitious in many cases with prolonged extensions granted to investors. Proper monitoring of performance would make investors work harder.
The government has found that there are many recipients of tax incentives with very long periods of continued access to the same set of perks.
The number of firms receiving incentives for 15 years and above are many. Those enjoying incentives from 15 to 20 years number 540 firms; 21 to 25 years, 131 firms, and those with 26 to 29 years, 13 firms.
According to the estimates of the finance department, and based on the 2015 tax year, the taxes foregone amount to P301 billion. Of these, P86.5 billion were incentives from the income tax, P18.1 billion from customs duty, and from the import VAT P159 billion and local VAT, P37 billion.
A major principle of the grant of incentives is that these should be time-bound, both for income tax holidays and for the grant of a special tax on gross income earned. How this will be achieved is part of the mission of the proposed tax package.
(3) Harmonization of tax incentives. Aside from the BOI (Board of Investments) and PEZA (Philippine Export Zone Authority), there are 12 other investment promotion authorities that grant investment incentives to industrial locators.
However, there is a need to assure that the incentives are relatively uniform, or are in harmony with each other. This will be achieved with the creation of a Fiscal Incentives Review Board (FIRB). The new board will serve as the final authority and coordinating board for the grant and continuation of certain fiscal and investment incentives.
The reform proposal is to provide a uniform menu of tax incentives focused on income tax holidays (including allowable deductions from the corporate income sales) and the grant of a special tax rate of five percent tax on gross income earned (GIE). This tax will be used in lieu of income, VAT, and local taxes to simplify the tax regime.
It is the objective of the government to assure that incentives given as tax expenditure by the government produce the proper results in terms of jobs, income, and productivity.
(4) Monitoring of fiscal and investment incentives. The monitoring of incentives is already specified under the TIMTA (Tax Incentives Management and Transparency) law which was passed in 2015.
The effective use of information derived from this law is essential, especially in providing useful information concerning the effectiveness of the incentives received in promoting jobs and expanding markets.
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