CITIRA: More jobs or less?

Just last week, the Bangko Sentral ng Pilipinas (BSP), through Governor Benjamin Diokno, reported that it  “expects foreign direct investment (FDI) inflows to drop this year following a sharp decline in the first half due to uncertainties caused by the mid-term elections last May, as well as, the second package of the comprehensive tax reform program (CTRP).” This slowdown in FDI inflows, according to BSP, was “due to the uncertainty on how the second package would look like, while investors were in a wait-and-see mode because of the elections.”

We can’t help but just partly agree on these observations. First and foremost, while it is a fact that presidential elections bring about so much uncertainties, mid-term elections don’t.  However, we wholeheartedly agree that the second package of the CTRP has largely influenced it.

It all started with the first package of the “TRAIN” (or the Tax Reform for Acceleration and Inclusion). When inflation shoot up right after its implementation, a good number of our countrymen made sweeping conclusions that it was brought about by such reform. Collectively, they felt that they were literally overran by a train. True or not (as the main reason for the rise in prices then), the majority of the Filipinos point their accusing fingers to such first package.

Then, as the acronym “TRAIN” gave nothing but bad connotation, lawmakers called the second package “TRABAHO” (or Tax Reform for Attracting Better and High-Quality Opportunities) bill. Well, purposely, to deliver a positive message to our countrymen that this bill is intended to create more jobs. As both houses adjourned, the bill was refiled in the new congress and they now call it CITIRA (or Corporate Income Tax & Incentive Rationalization Act). However, the objective remains the same. That this bill, which was recently approved by the lower house, will help still generate more employment.

The government is aiming to pass this bill into law this year. Among others, this bill proposes to cut corporate income tax from 30% to 20% in ten years. Furthermore, taxpayers can also accelerate depreciation of qualified capital expenditures and shall be given additional deduction ranging from 50% to 100% on some expenses.

With this reduction, the government hopes to replace lost taxes through better tax administration or higher collection efficiency. Moreover, the government wishes to recover more by limiting the income tax holiday presently enjoyed by, mostly, investors in the economic zones.

One of the possibilities put forward by the proponents of this scheme is that those who are recently slapped with the 30% corporate income tax will use their savings to expand their businesses, thus, generating more jobs. Well, this could be true if they will not prioritize, instead, their dividends.

On the other hand, having in mind, again, that this bill intends to generate employment, will these incentives be enough to entice prospective foreign investors? Well, that remains to be seen. If it doesn’t work, then, forget about additional job generation coming from FDIs.

Probably, however, we can, at least, surmise what could be the probable responses from prospective foreign investors by looking into the reactions of the existing ones in the economic zones. As we all know, most existing registered companies in the economic zones enjoy a 5% income tax rate on its gross profit (sales minus direct costs).  With this bill, such incentives will only be enjoyed the next two years.  Purportedly, just to give them enough time to adjust to the new tax scheme. Henceforth, they shall be slapped with the new scheme.

In unison, the existing companies enjoying these incentives cried foul. The common question is, why is this government changing the rules at the middle of the game? Worse, most of these companies have insinuated that they will be transferring their operations to another country.

Inevitably, therefore, if they make true their threats, not only that we shall be starving for new investments and, therefore, new jobs, we shall also be losing existing ones. These job losses plus those coming from the mining industry on account of closures of some mining operations and from exporters due to waning exports brought about by the ongoing trade war between the USA and China, hundreds of thousands maybe be rendered jobless.

Indeed, there is one very important question that needs to be answered. Are we ready for this scenario?

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