No trabaho with TRABAHO bill

The second installment of the Comprehensive Tax Reform Package (CRTP) meant to introduce better incentives for investors in the country is now turning out to be a revenue-generating proposal which could even repel new investors from entering the Philippines.

Just judging by the number of negative comments by the business sector about Tax Reform for Attracting Better and Higher Quality Opportunities (Trabaho) bill, the proposed law that will usher the CTRP’s second package, there is more harm than good that may come out from this.

Ironically, the bill may not bring the job opportunities that it promises. If companies are not keen on expanding their portfolios in the country, or if investors will not want to set up their businesses here, then the promised job generation will not materialize.

If the proposed tax reform will not attract better and higher quality opportunities, then there’s going to be no trabaho for Filipinos.

The Department of Finance had earlier lauded the passage of the TRABAHO bill at the Lower House level by declaring that there would be as much as 1.4 million jobs generated over a period of 10 years starting 2021 as corporate income taxes (CIT) are gradually reduced by two percentage points every two years, also starting in 2021.

This will be possible, according to the finance department, because the proposed reduction in CIT will allow companies to free up more capital which they can then reinvest for expansion project, which consequently will create more employment opportunities.

Not acceptable

Unfortunately, the numbers don’t seem to make sense. The CIT reduction may be good news, but a miscalculation in the second part of the TRABAHO bill, which is suppose to reform the current tax incentives given by government to businesses, has raised a lot of apprehension.

Specifically, companies in the information technology and business process outsourcing (IT-BPO) sector, as well as locators in economic zones, have made it known to government that the proposed changes in the TRABAHO bill are not at all acceptable.

The Philippine Economic Zone Authority (PEZA), ably led by its executive director, Charito Plaza, has bravely registered opposition to the Lower House’s TRABAHO bill, citing adverse effects of a removal of the special tax rate of five percent on gross income earned (GIE) granted to locators.

Even exporters and members of foreign business chambers are voicing out opposition, even as a number of Senators have said that the discussion of their counterpart measure would not happen within the year because of next year’s elections.

Meeting ground

The delay could bode well for the proposed new law as this could become a period where the various players involved and affected by the legislative debates would be able to find a meeting ground that is beneficial to all.

The second component of the TRABAHO bill that seeks to rationalize and modernize fiscal incentives granted through past decades is truly needed, and the aim to move towards a performance-based incentive system aligned with the current government’s investment strategy goals is laudable.

But, as some locators have said, it would be more prudent to keep incentives that are effective while weeding out or fixing those that have not met government expectations. This refers to loopholes that have led to tax evasion and billions of lost revenues for the state.

‘Back-pack’ investors

Similarly, special incentives such as those given to locators and the IT-BPO sector should not be hastily swept into a “rationalization” scheme, especially if such are the main reasons why our export processing zones and call centers are popular among “back-pack” investors.

Most electronic component assembly exporters, for example, have very little assets on the ground, and their most valuable asset remains with Filipino workers’ dexterity, work attitude, and communication skills. This is the same with the IT-BPO sector.

The proposed introduction of sunset provisions to the five percent GIE currently enjoyed in perpetuity by IT-BPO companies and export zone locators will simply be factored in their respective annual planning review, and most likely putting a cap in their stay in the country.

The immediate impact of the sunset provision would be a loss of jobs that could affect millions of Filipinos, definitely not what the TRABAHO bill had promised.

VAT leaks

Definitely, something needs to be done with leaks that have sprung up from the implementation of the country’s value added tax (VAT) system. But to take it out on all exporters by raising the threshold be given VAT exemption on imports and zero-rating on domestic purchases may be too harsh.

The country needs to grow its exports, and needs the necessary perks that would make exporters, including those of small and medium-sized companies, competitive vis-à-vis those exported or produced by other countries.

There may be a better way of streamlining the VAT system so that leaks are plugged, but would continue to be beneficial to business. At the moment, it has become a burden because of the complicated and bureaucratic procedures to recover refunds.

Truly pro-investment

The TRABAHO bill, or whatever form it will take after the bicameral discussions, should be truly pro-investment – and this should happen at the soonest time. While the first part of the TRABAHO bill talks about reducing corporate income taxes to be competitive with other countries, it would take a decade before it actually happens.

The Philippines already is suffering from having the highest CIT rate in the ASEAN region, and as other countries move to even lower their income tax incentives, the TRABAHO bill, as it is now worded, may not matter much in attracting investment opportunities.

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