Reversed effects

In our Kapihan sa Manila Bay last Wednesday, we invited leaders of local and foreign companies representing Philippine industries which are subject of the proposed corporate tax reform bill. Now in advance stage at the legislative mills at the 17th Congress, this is the second tranche of the Tax Reform Acceleration and Inclusion or TRAIN Law that President Rodrigo Duterte endorsed for approval by the 17th Congress. 

Invited as guest panelists were John Forbes, president of the American Chambers of Commerce (AMCHAM); Rey Untal, president/chief executive officer of Information Technology & Business Process Association of the Philippines (IBPAP); Danilo Lachica, president of the Semi-conductor and Electronics Industries in the Philippines Inc. (SEIPI); and F. Francisco Zaldarriaga, president of the Philippine Ecozones Association (PHILEA).

All four top business executives previously attended the Senate committee on ways and means, which is currently reviewing TRAIN-2 as part of the five-point fiscal reform program that President Duterte endorsed during his second state of the nation address (SONA) in Congress last July.

The TRAIN-1 already took effect starting Jan. 1 this year. It cut the personal income tax of salaried workers but also imposed the so-called “sweet” tax on beverages and imposed excise taxes on gasoline and other refined oil products. Thus, TRAIN-1 was largely blamed for pushing the country’s inflation rates now at 6.8 percent as of September based from tentative figures of the BSP.

Given the growing unpopularity of TRAIN-1, authors of the second tax reform bill has renamed TRAIN-2 as TRABAHO bill to project a more positive impact that it will generate jobs for Filipinos. It is an acronym that stood for Tax Reform for Attracting Better and Higher Quality Opportunities.

The TRABAHO bill, which seeks to significantly broaden the tax base, is the rationalization of tax incentives by making them performance-based, targeted, time-bound, and transparent. Currently, the list of activities qualified for availment of tax incentives are mandated in various Philippine laws.

The bill carried the Department of Finance (DOF) proposal to rationalize and consolidate fiscal incentives under a single omnibus incentive code. Under the TRABAHO bill, only those activities included in the one Strategic Investment Priorities Plan (to be issued once every three years) may be granted tax incentives. There will also be a single menu of tax incentives (income, customs duty, and value-added tax incentives) to be contained in the Tax Code itself.

Currently, the corporate income tax rate in the country is pegged at 30 percent. In the TRABAHO bill, the rate will gradually be reduced by 2 percent every two years starting 2021 until 2029, when the rate will only be 20 percent. A DOF study shows a reduction by two percent annually could result in revenue loss for the government estimated at around P62 billion when its tax rate reduction starts in 2021.

“We do not want disruption of the government’s projections of more revenues,” Forbes told us during our Kapihan sa Manila Bay news forum. But while the industry captains are generally supportive of the bill, Forbes echoed their specific concerns on certain provisions of the House-approved version.

At the Senate hearing, ways and means chairman Sen. Sonny Angara found it unusual for Labor Department officials to not provide projected job losses as feared from the passage into law of the TRABAHO bill and as echoed by these industry leaders. Also at the same time, they noted, Labor officials could not respond to questions on how many new jobs will be created as promised in the TRABAHO bill.

The House of Representatives approved on third and final reading the TRABAHO bill last Monday. Albay Congressman Joey Salceda, vice chairman of the House committee on ways and means, who authored and helped shepherd the passage into law of the TRAIN Law, is also the principal author of TRABAHO bill.

In broad strokes, Salceda described the proposed TRABAHO bill as a package of many features geared to enhance the existing fiscal incentives to companies and enterprises, including those registered at the Philippine Economic Zone Authority (PEZA) and at the Board of Investments (BOI). Salceda clarified that TRABAHO bill does not intend to take away these tax holidays and other “perks” and fiscal incentives but make them based on productivity and efficiency.

According to the authors of the TRABAHO bill, it will level the playing field for all and give a fair share, especially to Micro and Small and Medium Enterprises (MSMEs), many of which do not enjoy such tax holidays and fiscal incentives.

In May this year, the AmCham submitted a 38-page position paper detailing their specific concerns on the TRABAHO bill draft pending before the 17th Congress. “Without PEZA and other special zones preserving their unique reputation as efficient locations for doing business, more investors will no longer make the Philippines their first choice,” AmCham warned.

In a survey among its multinational companies accredited with AmCham, mostly ecozone locators, it showed 61 percent of these enterprises may no longer push through with their expansion plans in the Philippines if the rules of the games of doing business here would be changed again for the nth time.

Speaking for the semi-conductor and electronic industry, the SEIPI president pointed out the significance of expansion plans for these companies that must continue to find new innovations and advancement in technology to remain competitive or face obsolescence. “If you throttle expansion, we will end up with legacy factories that come up with products that are obsolete while our competitors produce improved and advanced products,” Lachica stressed.

“Let’s not tie the hands of investors,” the business leader urged.

The industry leaders, in general, are very wary of the intended benefits of the TRABAHO bill which may produce the reversed effects of job and income losses instead for Filipinos.