It has been months since the Tax Reform for Acceleration and Inclusion (TRAIN) 1 took effect, on Jan. 1. There were mixed sentiments from taxpayers with respect to TRAIN 1. Some were happy with more take-home pay for their families; others believe that the increase in take-home pay was more than offset by the spikes in the prices of oil, as well as basic and prime commodities. While there is unending debate and analysis about TRAIN 1, everyone is now looking at another tax reform bill: TRAIN 2 is fast approaching. Are we excited to board?
TRAIN 2 proposes to gradually lower the corporate income tax rate from 30% to 25%. TRAIN 2 also aims to revisit the tax incentives granted to companies.
ON THE 25% CORPORATE INCOME TAX RATE
While there are contentious discussions on the timing and possible conditions for lowering the corporate income tax rate in the Philippines, the reduction of tax is definitely a welcome development. While the Philippines imposes a corporate income tax rate of 30%, other countries impose lower rates. In Malaysia, the rate is 25%; in Singapore, 17%; in Thailand, 20%. Thus, the reduction of the Philippine corporate income tax rate will enhance the country’s competitiveness and will, consequently, encourage more multinational companies to invest in the Philippines.
The increase in investors and companies in the Philippines will create more jobs for our citizens, and this impact could be seen as the most concrete positive effect on Filipinos. Further, a lower corporate income tax rate leaves more after-tax profits on the table, creating a pool of profit for possible additional compensation that companies and workers can bargain over.
More employment and higher compensation can result in more spending for goods and services, which could help boost the economy.
ON TAX INCENTIVES FOR COMPANIES
TRAIN 2 also discusses modernizing tax incentives for companies. The Philippines has more than 200 laws granting various types of tax incentives. In relation to this, the government is considering limits and other parameters to granting tax incentives to companies. One of the items being considered in the proposed Package 2 of TRAIN is to limit Philippine Economic Zone Authority (PEZA) incentives to a maximum of 10 years and to change the 5% tax on gross income earned to a 15% tax on net income.
This tax incentive issue is crucial, as the government has admitted that some companies and individuals will be hit by the proposed changes to the incentive system.
As an example, PEZA grants an income tax holiday (ITH) of maximum of 8 years, a “perpetual” 5% tax on gross income earned (GIE), and zero value-added tax (VAT) on local purchases, among others. With TRAIN 2 pushing its way in, a complete overhaul of the incentives regime that could reduce the tax benefits is expected.
With this overhaul, many businesses could be discouraged from investing or expanding in the Philippines. Several organizations may plan for or experience business restructuring or, at worst, may leave and close their businesses depending on the magnitude of the tax incentive reduction. Consequently, layoffs will be inevitable.
The challenge for our government is to prevent the possible negative impact of the proposed changes on granting tax incentives. We trust that the government’s economic advisors will fully evaluate the pros and cons of shaking the tax incentives status quo.
While the tax incentives are being analyzed, our government should think of other ways to keep investors or companies engaged in the Philippine economy.
We already have TRAIN 1. TRAIN 2 is fast approaching. We don’t know how the other TRAIN packages will develop. Let’s hope that all these tax reforms would contribute to our country’s economic growth and to the people’s welfare.
Maricel P. Katigbak is a manager with the Tax Advisory and Compliance Division of Punongbayan & Araullo.