THE HOUSE ways and means committee approved the second tax reform package on Tuesday in a form that left the Department of Finance (DoF) “not confident” about its revenue prospects.
The unnumbered substitute bill, which has been rebranded as the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO), is going up for plenary debate at the House of Representatives after the legislation hurdled the committee yesterday following six public hearings.
The bill proposes to cut the corporate income tax rate gradually to 20% from 30%, via a 2 percentage-point reduction every other year beginning 2021.
It also proposed to limit investment incentives to a single menu and restricted availment of the perks to five years. It also limited the incentives to industries listed in the annual Strategic Investments Priority Plan (SIPP) and beneficiaries also need to meet performance targets as determined by the Board of Investments. The bill also included a sunset period of two to five years depending on the time they have enjoyed incentives under their current contracts with investment-promotion agencies (IPAs).
Finance Undersecretary Karl Kendrick T. Chua said that each 2 percentage-point reduction in the corporate income tax rate will cost the government about P62 billion, and added he was uncertain that the government can generate enough savings to offset the foregone revenue.
The substitute bill did not incorporate the DoF’s proposal to make the corporate income tax cuts conditional on the savings generated by rationalizing the tax incentives.
“I’m not confident. (Each cut is) a loss of P62 billion. We hope to (offset lost revenue) from the rationalization of fiscal incentives beginning with those industries that are considered sunset where incentives are unnecessary. That’s why originally we introduced conditions so that we are fully confident that we will not have any losses. We will do our best to offset it somehow,” Mr. Chua told reporters after the hearing, noting that the DoF will ensure a robust mechanism for identifying those who need incentives.
“By that time we hope that we can recover by having more competitive incentives, and only sectors that are targeted will benefit from them, not almost everyone,” he added.
Nevertheless, Mr. Chua claimed some wins because the substitute bill “achieved the most important points,” which include making incentives time-bound, targeted, performance-based, and transparent.
The proposed incentives in the bill include: a three-year income tax holiday; an 18% preferential rate on net taxable income with 15% paid to the national government, and the balance paid to local governments at the provincial, municipal, or city level where the enterprise is located, in lieu of local business tax.
The current incentive scheme provides for a 5% tax on gross income in lieu of all other national and local taxes granted by various Investment Promotion Agencies, enjoyed in perpetuity.
The bill “sends the signal now that the government is not driving away investments given the fact that we will allow reapplication for incentives, the investors, as long as they want to expand their business, can continue to enjoy their incentives longer than the transition period,” Rep. Dakila Carlo E. Cua (Quirino), who chairs the ways and means committee, said after the hearing.
“That’s a big change that (companies) can and will survive and I hope those who are really performing and creating jobs will expand and therefore enjoy incentives for longer,” he added.
The bill proposes the establishment of a Fiscal Incentives Review Board with oversight functions over IPAs. The board will be headed by the DoF.
Asked whether the change in House leadership affected the deliberations, Mr. Cua said: “(Speaker Gloria M. Arroyo) was very determined… and ensured that we made this our top priority.”
Julian H. Payne of the Canadian Chamber of Commerce said that he was “disappointed” by the timetable of the corporate income tax reduction.
“We would have liked it to come into effect more quickly like the personal income tax. In fact we thought it’s going to be in 2019,” he said during the hearing.
He noted that he was “pleased” with the general direction of lower corporate taxes to 20% from the original proposal of 25%, but added that reductions every two years “reduce its attractiveness to business.”
“If it was done more quickly, that would be a big message to businesses. It would stimulate more investment and therefore increase the total tax take. We’re afraid that this is a little bit too late and a little bit too slow,” said Mr. Payne.
Mr. Cua, meanwhile, noted that the measure allows the President to accelerate the pace of tax reductions when adequate savings are realized from the rationalization of tax incentives.
The DoF”s Mr. Chua, however, said that instant implementation of rate cuts would “very badly” affect the country’s fiscal position.
Rey E. Untal of the Information Technology and Business Process Association of the Philippines, meanwhile, sought a longer transition period of 10 years for weaning companies off incentives.
“It is still our position that our global competitiveness is at risk given the fact that we will transition to a model that we will be more expensive right now compared to India,” he said.
Finance Undersecretary Chua replied to this concern that the funds have been allocated to help with the upskilling of the industry.
Albay Representative Jose Ma. Clemente S. Salceda also noted that the industry can tap upskilling programs offered by the Technical Education and Skills Development Authority, which has only disbursed P1.3 billion of the P7 billion set aside for the program.
Semiconductor and Electronics Industries in the Philippines President Dan C. Lachica, meanwhile, asked the panel to retain preferential corporate tax rates in lieu of local business and property taxes. He added that he prefers that industry be insulated from bureaucratic process at the local government unit (LGU) level.
“The concern is not so much in the money, but having to deal with LGUs,” he said. — Elijah Joseph C. Tubayan