Taxwise Or Otherwise

“Get the tracks ready. I’m on my way.”

— Package 2

While the implementation of the recently enacted Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law is in progress, Package 2 of the government’s Comprehensive Tax Reform Program has begun to warm up its engine in preparation for a challenging journey ahead.
On March 21, with the support of the Department of Finance, the Chair of the House of Representatives’ committee on ways and means Dakila Carlo E. Cua, together with Deputy Speaker Raneo E. Abu and Deputy Majority Leader Aurelio D. Gonzales, filed House Bill No. 7458 (HB 7458) or the proposed Corporate Income Tax and Incentives Reform Act.
With the aim of enhancing fairness, improving competitiveness, plugging tax leakages, and achieving fiscal sustainability, HB 7458 seeks to lower the corporate income tax rate and reform the corporate income tax system by proposing the following amendments, among others:
1. Reduction of the 30% corporate tax rate for domestic and foreign corporations by one percentage point every year beginning Jan. 1, 2019, provided that the corporate income tax rate shall not be lower than 20%
2. Removal of the preferential 10% income tax rate currently granted to non-profit proprietary educational institutions, nonprofit hospitals, offshore banking units and regional operating headquarters
3. Removal of the special income tax rates granted to nonresident cinematographic film owners, lessors or distributors, non-resident owners or lessors of vessels chartered by Philippine nationals, and non-resident owners or lessors of aircraft, machinery, and other equipment
4. Increase in the capital gains tax rate from 5%/10% to a flat rate of 15% on the sale of shares of stock outside the stock exchange by foreign corporations
5. Increase of the final withholding tax rate from 7% to 15% on interest derived by resident foreign corporations from a depository bank under the expanded foreign currency deposit system
6. Adjustment of the optional standard deduction from 40% to 20% of gross income for both individuals and corporations
Moreover, HB 7458 proposes to broaden the tax base by modernizing investment tax incentives, removing excessive tax exemptions and privileges given to certain industries, and limiting the tax incentives to strategic industries that provide positive contributions to the economy. Thus, the bill seeks to consolidate the provisions on tax incentives that will be granted to qualified and eligible activities and investments through proposals, such as, but not limited to:
1. Maximum income tax holiday (ITH) period of three years
2. 15% preferential tax rate on taxable income in place of the 5% gross income tax (GIT)
3. Maximum combined period of five years to avail of the ITH and 15% preferential income tax rate
4. For enterprises currently availing of ITH, continuation of ITH availment for the remaining ITH period or for a period of five years, whichever comes first
5. For enterprises currently enjoying the 5% GIT, continuation of 5% GIT based on the schedule below:
Package 2
6. Allowance of additional tax deductions such as double deduction for research and development expenditures related to the registered and approved activity and for costs of training given to employees for skill development identified and approved by the appropriate government agencies, 50% additional deduction for wages corresponding to the increment in number of direct labor, etc.
7. Customs duty exemption on importation (including consignment) of capital equipment, machinery, spare parts exclusively used for these capital equipment and machinery, raw materials used in manufacturing or processing of products, and source documents for a maximum of five years
The proposal under HB 7458 to consolidate the investment tax incentives in the Tax Code will effectively amend 70 laws and repeal certain provisions in 62 laws. These laws cover a number of industries, such as agriculture and fisheries, banks and financial institutions, export-oriented industries, infrastructure, construction and other related industries, micro, small, and medium enterprises (MSMEs), oil, gas, energy, public utilities, tourism, etc.
We cannot undermine the obvious. The proposed income tax reduction can boost the Philippine tax competitiveness index to a certain extent by placing the Philippines on a level playing field with neighboring countries in the ASEAN region. The proposed maximum reduction will set the Philippines at par with Thailand, Vietnam, and Cambodia with existing standard corporate tax rates of 20%. At that rate, the Philippines will be in a competitive position against Laos and Malaysia with standard corporate tax rates currently pegged at 24% and Indonesia at 25%.
However, the question is — who will bear the cost of the proposed corporate tax reform for the state to recoup the reduced tax rate? The hospitals and their patients? The private educational institutions and the parents who are working hard to send their children to these private schools? The regional operating headquarters whose employees have been recently stripped of the 15% preferential income tax rate? The MSMEs, and foreign investors with enterprises in the preferred industries? The entities providing public utilities and the massive population of Filipinos using these utilities?
Would it be fair if the proposed changes to the preferential tax regimes were to be given immediate effect on the stakeholders adversely affected by the revisions? Wouldn’t it be fairer if the affected enterprises are given reasonable transition terms and periods?
Given the potential backlash arising from the reduced corporate tax rate, will the proposed corporate tax amendments really help the government improve competitiveness, enhance fairness, plug tax leakages, and achieve fiscal sustainability?
Moreover, will Package 2 redeem some oversight in the TRAIN law, such as the reversion of the old VAT threshold exemptions for real estate, and the retention of the capless tax exemption on Philippine Charity Sweepstakes and lotto winnings of nonresident aliens engaged in trade or business in the country? It may be worthwhile to step back and take a second glance at the myriad of implications that may be considered at this point.
Nevertheless, we cannot disregard the government’s efforts in realizing the Comprehensive Tax Reform Program. Like all policy formulation, there are pros and cons and contrasting interests that need to be weighed to arrive at the most beneficial outcome. HB 7458 and the other bills that will form Package 2 are works in progress that remain under the scrutiny of our legislators. Thus, they deserve consideration by keeping in mind the government’s ultimate goal — to improve the lives of the Filipinos and to uplift the economic status of the Philippines not only in Asia but in the global arena.
The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Noelie Kristine M. Tagle is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
+63 (2) 845-2728