TRAIN 2, the kinder

I was listening to the conversation between my wife and our trusted household staff about the leftover change from the grocery money. Well, there is no change and our household staff was proud to say she made a big “abono” (advance payment). Inflation rate maybe six percent but the prices of vegetables increased from 20 percent to 50 percent.

If that is less exciting to you vs. the proposed new traffic schemes along EDSA, imagine the Christmas season prices. If the first versions of the TRAIN 2 (Tax Reform for Acceleration and Inclusion, Package 2) bills were unaltered, the season would really be felt and remembered like a bad chapter because of prices spiralling upwards like the beanstalk of Jack. This may not be the scenario if the draft Package 2 bill, now called the TRABAHO (or Tax Reform for Attracting Better and High-quality Opportunities) Bill, prospers.

Being the second installment of the government’s tax reform program, the TRABAHO Bill, with the hard labor by the Department of Finance (DOF) and the House of Representatives, brought about the following encouraging developments, among others:

Proprietary non-profit educational institutions and hospitals remain to be taxed at the preferential tax rate of 10 percent (not 30 percent) on taxable income. If these institutions do not comply with the performance criteria to be set by the Commission on Higher Education, the Department of Education, and the Department of Health, their tax rate could eventually increase up to 20 percent, which is still sensible and fair. The new bill would thus have no adverse impact on tuition fees and new classrooms.

Local water districts (LWDs) are retained in the list of income tax-exempt entities. Prices of commodities will certainly surge if LWDs will be obliged to pay income tax.

No more additional three percent franchise tax on telecommunication companies, which, if pushed, would have increased our mobile and data fees and set back access in many areas in the countryside.

No more separate and additional two percent franchise tax on airline revenue which, if imposed, could slow down domestic tourism and tourism-related businesses in the country.

In this version, income tax rates are projected to go down to 20 percent over a 10-year period. The revenue loss is not being sought to be recovered by new taxes but by reducing incentives to registered enterprises. An 18 percent net income tax is proposed, and that includes local and provincial taxes after the now shorter income tax holiday expires.

If there is anything strange in this bill, it would be that incentives are now included in the tax law, which the Bureau of Internal Revenue (BIR) is tasked to implement. This technically gives a strong premium to the BIR’s interpretation of incentive laws vis-à-vis that of the investment promotion agencies (IPAs) like the Philippine Economic Zone Authority and the Board of Investments. The question that must be asked now is, if the tax authorities implement the incentive law, who will take the side of the registered enterprise? Could the incentives given be set aside by small infractions if the BIR becomes very rigid, as is the case in tax refund cases?

Still, the bill on the overall, in my view, is a more perceptive version and one that shows that legislators can be sensible. In fact, we want to rely on the same sensibility on the anxiety that is federalism. It is comforting for the DOF and the National Economic and Development Authority (NEDA) to have their expressed independent opinion on federalism and its unwarranted costs – the same position that business groups have categorically and unequivocally supported.

The cost of federalism as estimated by the DOF and NEDA may steal more than a year’s revenue generated from the TRAIN laws. But an additional cause of anxiety is that the regions are expected to have additional taxing powers. What power would it give an autonomous region under a federal government if it will not be allowed to produce its own revenue? Would more power result to more fees and other transaction costs?

Well, for now, we all deserve a break from additional tax costs and inflationary legislations.  Going into “-ber” months, we deserve to afford our groceries, fruitcakes for recycling included.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the Chairman of the Tax Committee, and the Vice Chairman of EMERGE (Educated Marginalized Entrepreneurs Resource Generation) program, of the Management Association of the Philippines (MAP). Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.