So the TRABAHO Bill — or, Tax Reform for Attracting Better and High-Quality Opportunities, also known as TRAIN 2 — failed to pass Congress. Its intent was to rationalize investment incentives by making them more time-bound and performance-based. What seems most controversial in the bill is the removal of the preferential 5% gross income earned (GIE) currently offered by Investment Promotion Agencies such as the Philippine Economic Zone Authority (PEZA).
The Department of Finance (DoF) has stated that the realignment of incentives and reduction of income tax will benefit small and medium enterprises by generating more jobs. Moreover, the bill will not result in the loss of potential revenues. Based on news reports, the DoF reported that of the 915,000 firms registered in 2015, only 2,844 firms were able to avail of tax incentives worth P301 billion. Juxtapose the fact that firms with no incentives pay 30% regular corporate income tax, while firms with incentives pay only 6% to 13%, the disparity becomes more apparent.
At face value, the bill appears promising. However, what is troublesome with the proponent’s arguments is that the intended benefits are not shared by other stakeholders, particularly the investing sector. Naysayers warn that the bill, instead of generating revenue, will likely lead to large-scale revenue reduction and job losses caused by besmirched investor confidence.
In a survey conducted last year by the Japanese Chamber of Commerce, 62% of its members expressed concern that if seriously affected by the bill, they may consider closing down their businesses, relocate to other countries, or scale down their production. On the other hand, if the incentives are retained, 85% of the respondents will still choose the Philippines as a venue for expansion. In the same light, the American Chamber of Commerce said that midstream changes impacting costs in a major way can affect the positive perception of the Philippine business environment and will influence, in an irreversible way, decisions to remain, expand, or set up new companies in the country.
PEZA has recently disclosed that PEZA-registered investment fell 41% in 2018, that investment pledges worth P140.24 billion, down 40.97% from a year earlier. The agency blamed the decline on the uncertainty stemming from the upcoming elections and the tax reform bill that proposes to overhaul the incentives system. With stakes raised high, the new Congress must formulate the right bill that will address the government’s funding requirements, without discouraging the needed foreign investment.
My two cents’ worth is that before we crucify the 5% GIE, one should consider the upsides of the PEZA incentives, such as the economic contributions of several sectors benefitted by PEZA investment. One is the food sector which created establishments operating 24/7. Another is the real estate sector which resulted in the rapid construction of office and residential condominiums. Then there are the other local suppliers that produced a robust number of manpower agencies and transport companies.
One should also take into account the foreign currency inflows and the non-fiscal benefits such as massive employment generation, which translated to 1.15 million jobs for the Business Processing Outsourcing sector from January to November 2017 (Reuters, 2017), and 670,000 for the manufacturing sector from January to June 2017 (PEZA Report, 2018). PEZA firms also provide work opportunities for out-of-school youth and senior citizens.
From the tax and incentives perspective, naysayers argue that the Philippines is merely catching up to its ASEAN neighbors. For instance, the current corporate income tax (CIT) rate of 30% is higher than Singapore — 17%, Vietnam/Thailand — 20%, Malaysia — 24%; and Indonesia — 25%. Further, the current income tax holiday (ITH) incentive of four to eight years is shorter than Malaysia’s 10 years, Singapore’s 15 years, and Indonesia’s 20 years. Some countries even offer extremely attractive menus of incentives, such as a longer ITH with reduced CIT, and thereafter with indefinite renewals, free land, and new roads.
Naysayers also claim that the 5% GIE, although best in ASEAN, merely compensates investors for the higher cost of doing business (such as electricity cost, which is considered one of the highest in the region). The current scheme also allows ease of doing business for the investors as they are only dealing with one government agency (i.e. PEZA).
Reducing business incentives may also impact negatively on the Philippines, which is ranked only 124 out of 190 economies (down from 113 in 2017 and 99 in 2016) based on the World Bank’s annual Doing Business survey for 2019. In contrast, the country’s ranking pales in comparison to Singapore (2), Malaysia (15), Thailand (27) and Indonesia (73).
Of course, let’s not forget that we invited the investors through the PEZA incentives. Accordingly, the government should not easily renege on its promise to restore investor confidence. In keeping with its covenant of good faith and fair dealing, it may be worthwhile for Congress to consider the following:
1. Reduce the cost of doing business;
2. Retain (or improve) current incentives, or provide a longer transition period of 10 to 15 years; and/or
3. Apply the new rules to new investments.
While we should commend the DoF for its effort to generate the needed revenue for the “Build, Build, Build” infrastructure program of the Duterte administration, overtaxing may eventually kill the goose that lays the golden egg. The risk of investment moving to our ASEAN neighbors offering more attractive (and stable) incentives is imminent and must be taken seriously, as the impact of high unemployment and economic stagflation will create a deleterious effect on our economy.
Let’s hope that, when the 17th Congress resumes on May 20, our legislators will not hastily pass the TRAIN 2 bill and instead undertake a thorough cost-benefit analysis and all-inclusive sectoral consultation to help formulate a bill that would truly benefit all stakeholders. This is definitely possible with an independent Congress, one that will be defined by the mid-term elections on Monday.
Let’s vote wisely!
The views or opinions expressed 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.
Carlos Hilario R. Mateo is a Director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.