Taxation plays a vital role in the economic growth of a country. Taxes, apart from raising revenue to finance government expenditures, can influence the patterns of consumption, production and distribution. Taxes, therefore, affect the economy in various ways.
Just a few months after the effectivity of Republic Act (RA) No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN), the peso has depreciated against the dollar and inflation rose to 5.2% in June. While some economists have said that TRAIN has had a minimal influence on the recent rise in prices, the ordinary person seems to associate these economic phenomena with the effects of TRAIN.
The apparent negative effects of TRAIN have also made many apprehensive about subsequent packages of the tax reform program. For Package 2, there have been reports of reluctance in the Senate to sponsor the tax bill. Eventually Senate President Vicente C. Sotto III filed his own version of Package 2 in the form of Senate Bill 1906, or the “Corporate Income Tax Reform and Incentives Reform Act.”
It has been reported that Senate Bill 1906 seeks, among others, to lower the corporate income tax from the current 30% to 25% while expanding the tax base, to repeal 123 special laws on investment tax incentives and consolidate them into a single omnibus incentives list, and to repeal the National Internal Revenue Code exemptions or incentives for government-owned and controlled corporations (GOCCs), proprietary educational institutions and hospitals, regional or area headquarters (RHQs), and regional operating headquarters (ROHQs). It was further reported that the bill also seeks to rationalize tax incentives, simplify the tax system to cut down on tax evasion, and impose higher penalties on tax offenders.
Given the above, the Senate version appears to be in line with the objectives of the versions of the House of Representatives with respect to the tax incentives under the latter’s own proposed Package 2 bills, which call for incentives to be transparent, targeted, time-bound, and performance-based. These attributes are briefly described as follows:
Transparent. The monitoring of tax incentives is institutionalized and reported by the government. The name of registered enterprises or beneficiaries and their estimated tax incentives are reported by the Fiscal Incentives Review Board (FIRB), an independent body tasked to review and evaluate the grant of tax incentives.
Targeted. To minimize leakages and distortion in the tax system, tax incentives are given to activities with significant positive externalities, as specified in the Strategic Investment Priority Plan (SIPP). These activities cover both foreign and domestic firms (with no nationality bias) and those serving export and domestic markets. Thus, it shall be neutral in terms of nationality and market. Preference shall also be given to activity in lagging regions.
Time-bound. Sunset provisions shall be in place in the grant of tax incentives. A five-year Income tax holiday (ITH) and/or reduced corporate income tax rate of 15% with no extension, except for customs duties for capital equipment imported by a qualified enterprise.
Performance-based. Tax incentives shall be based on the clear attainment of performance targets set forth in the SIPP such as export sales, actual investment, actual job creation, investment in lagging regions, and employment in research & development, among others. This is in line with the various measures under the Tax Incentives Management and Transparency Act (TIMTA), which allows the government to analyze whether the tax incentives that reduced government revenue have delivered employment, income, and export growth.
With these guiding principles for rationalizing tax incentives, it is hoped that taxes foregone will be given to the companies that will help improve the country’s economy and not to just any company that wishes to invest. Rationalization will plug revenue leaks by ensuring that tax incentives are given to the proper sectors. The measure also intends to level the playing field, such that similar entities face similar tax rates, creating a fairer business climate with a view to attracting more investment.
Despite the laudable objectives of rationalizing tax incentives, businessmen remain wary of the effects of removing tax incentives and perks. To them, changes in the tax incentive regime create uncertainty for their businesses and operations, possibly causing them to leave.
There also reports that businessmen are concerned about the conditional lowering of corporate income tax, subject to the achievement of certain revenue benchmarks. To executives, subjecting the reduction of corporate income tax to certain conditions will not only create uncertainty but will make everything unstable – making it difficult to plan, project and make solid business decisions. Let us hope that, in the Senate version of Package 2, the corporate income tax rate reduction to 25% is given at the onset. The cut in the corporate tax rate will give the Philippines a competitive advantage, as our tax rates are among the highest in Southeast Asia. A lower corporate income tax rate translates to more after-tax profits that may help businesses flourish and grow.
While the rationalization of tax incentives may create positive results in terms of economic growth, lawmakers must always strike a balance between the benefits of revenue foregone and the benefits of retaining key investors and attracting new ones. The removal of tax incentives previously enjoyed by companies mean they incur additional costs, which may be passed on to consumers, which eventually will lead to an increase in prices. Whatever course of action is taken to pursue the objectives of tax reform, there will always be trade-offs. The challenge now for lawmakers is to weigh the pros and cons of each proposed measure. Senate Bill 1906 still has a long way to go, and is expected to face rough sailing before it becomes a law. Let us hope that both houses of Congress work hand in hand to align various bills to come up with a tax law that benefits every Filipino.
May the lessons brought by the TRAIN 1 push our lawmakers to be more meticulous in reviewing the bills so that inclusive growth will be felt sooner by our kababayans. Tax reform is entering its second phase, where the risks of derailing TRAIN must be carefully managed.
Farrah Andres-Neagoe is a senior manager of the Tax Advisory and Compliance of P&A Grant Thornton.