The legislative agenda for business

President Rodrigo Duterte at his third State of the Nation Address (SONA) on July 23 urged lawmakers to pass Package 2 of the Tax Reform for Acceleration and Inclusion (TRAIN) law, while firmly saying no to proposals to reverse TRAIN Package 1 amid the high inflation rate recorded for the country this year (philstar.com July 26, 2018).
Package 1 of TRAIN was signed into law on Dec. 19, 2017 and officially implemented on Jan. 1, 2018. It cut personal income tax rates — no taxes for those earning P250,000/year and below — while also cutting certain exemptions to the value-added tax (VAT), increasing excise tax rates for fuel, coal and automobiles, and imposing a tax on sugar-sweetened beverages.
Package 2 concerns business taxes.
The Department of Finance (DoF) formally submitted to the House of Representatives on January 23 this second package that will reduce corporate income tax rates from 30 to 25% while “modernizing” incentives for companies to make these “performance-based, targeted, time-bound, and transparent” (www.dof.gov.ph/taxreform January 23, 2018). It is not fair that a small select group of top enterprises enjoy preferential corporate income tax rates of just six (6) to 13% while an overwhelming majority pay the regular rate of 30%, the DoF stressed.
Finance Undersecretary Karl Kendrick Chua said “tax incentives enjoyed mostly by big businesses such as income tax holidays and other perks with no time limits that are costing the government over P300 billion annually in foregone revenues not including exemptions from the payment of local business taxes and the estimates on tax leakages.” Per 2015 data, income tax holidays and special rates account for additional P86.25 billion of the revenue losses, while custom duty exemptions account for P18.4 billion more. “So on average, we gave away up to 2% of our GDP in income tax and custom duties exemptions,” Chua said (Ibid.).
And if the gut issue of an inflation rate of 5.2% (still rising) experienced after the sweet and sour offerings of Package 1 to individual taxpayers upset stomachs, incentives to certain businesses that the DoF wants to take away seem to make Package 2 unpalatable, despite the promised reduction of the corporate income tax.
Of course the Philippine Economic Zone Authority (PEZA) reacted to the cutting of investment incentives — which are the agency’s reason for being. “If the government gave away a total of P235.307 billion to PEZA companies in 2015 in the form of tax incentives, PEZA companies in return gave P3.317 trillion to the Philippine economy over its existence. In effect, for every P1 that the government gives to PEZA companies in terms of incentives, P14 is plowed back by our PEZA companies to the Philippine economy,” said PEZA Director-General Charito B. Plaza, author of the PEZA when she was congresswoman (business.mb.com.ph April 12, 2018).
It is not true, as the DoF says, that PEZA grants perpetual incentives to investors. But companies continue to add new products and technology and for that they get additional incentives, Plaza clarified. “These incentives have been supported by four administrations already and it has worked,” she pointed out (Ibid.).
“We should also look at the social progress that was created by these industries and ecozones. Like the municipalities before are now cities. The poverty index, the crime index, the insurgencies, eradicated in these areas where there are economic zones and industries. And that will happen to all other communities that will soon have ecozones” (Ibid.).
Plaza said TRAIN Package 2 “has created a cloud of uncertainty among PEZA investors.” While the existing ecozone locators are staying put, Plaza said many potential investors, mostly in manufacturing, are putting on hold their plans because of the TRAIN 2. Some are even contemplating of leaving (Ibid.).
Yet as promised by the new Speaker, Gloria Arroyo, the House of Representatives has started to process Package 2. The DoF proposal has come endorsed by eight of the country’s leading economists, who said the “deficiencies” of the current corporate income tax system have hampered the country’s growth and competitiveness — and that maintaining them could make the government miss its long-term vision of transforming the Philippines into a prosperous, high-income economy by 2040 (www.dof.gov.ph/taxreform July 24, 2018).
“We express our support for the main principle of a corporate tax system that is broad-based and competitive relative to our peers in the region. More importantly, lowering the corporate income tax rate will help entrepreneurs and small and medium enterprises thrive. However, in the interest of fiscal prudence, the lowering of rates should be in conjunction with the rationalization of fiscal incentives,” the eight said in their joint statement of support after a discussion lunch hosted by the DoF to vet their Package 2 design.
But at the Senate, no Senator wanted to take the initiative to file the counterpart bill for TRAIN Package 2.
However, last week Senate President Vicente “Tito” Sotto filed Senate Bill 1906 for reforms in the corporate income tax and fiscal incentives in Package 2 of TRAIN.
“It could be good because it would not impose new taxes,” Sotto said. “But we have to be steadfast because some big corporations have started to lobby [against removing incentives]”(The Philippine Star August 1, 2018).
Will TRAIN Package 2 pass in the House and the Senate? Business, the front-line beneficiary (or victim?) of Package 2, holds its breath and (of course) quietly “lobbies” until the final workable form and substance shapes, in the boiling cauldron set upon the political fires of current in-fighting in the House and the Senate.
 
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com