By Melito Salazar Jr.
The long awaited tax reform package (Tax Reform for Acceleration and Inclusion) of the Duterte administration has begun to be rolled out with the signing into law of Package 1, the goal of which was to create a more just, simple, and effective system of tax collection where the rich will have a bigger contribution and the poor will benefit from the government’s programs and services.
RA 10963 is meant to lower the personal income tax, simplify the estate and donor’s tax, expand the value-added tax base, increase the excise tax of petroleum products, and increase the excise tax of automobiles and the excise tax of sweetened beverages.
Overall, the recommendations of the Department of Finance (DOF) were accepted by the legislature except for a few glaring changes – some sectors retained their value added tax exemption, the excise tax for luxury cars were effectively lowered and sweetened beverages using sugar were subjected to a lower excise tax.
That is the danger of the legislative process where the vested interests of legislators disguised as responding to their constituencies’ concerns can take precedence over the common good.
The concern is that the balancing act of lowering government revenues from personal taxes and filling the gap by rationalizing other taxes will fail.
I recall during the Ramos administration when the need to allow BOI registered firms to import tax and duty free power generators was presented to Congress, the final legislation that emerged covered not only the BOI registered projects but a number of favorite enterprises of the congressmen.
This January, the DOF formally submitted to the House of Representatives TRAIN 2, the second package of the tax reform initiative which aims to reduce corporate income tax (CIT) rates and modernize fiscal incentives to investors.
Designed to be “revenue-neutral,” it proposes to lower the CIT from 30 to 25 percent while making incentives to companies “performance-based, targeted, time-bound and transparent.”
Reforming incentives has been a favorite ambition of the DOF, at times pitting it against the Department of Trade and Industry, especially the Board of Investments. Recently, DOF Undersecretary Karl Kendrick Chua estimated that income tax holidays and other perks with no time limits were costing the government over R300 billion in foregone revenues annually.
The tracking of these incentives was made possible with the passage of the Tax Incentives Management and Transparency Act (TIMTA) in 2016.
The lowering of the CIT will not be a contentious issue in Congress seeing how the Philippine CIT rate of 30 percent compares with Vietnam’s CIT rate of 25 percent, Thailand’s 20 percent and Malaysia’s 24 percent.
However, the lowering to 25 percent seems too timid and certainly not competitive with our ASEAN neighbours and quite distant from the 18% of other jurisdictions.
In fact as early as the mid-80’s when we were debating on the tax reform initiatives I had already proposed a drastic 18% CIT coupled with the removal of the income tax holiday incentives for BOI registered firms.
The removal of the minimum CIT of 2% of gross income beginning the fourth taxable year immediately following the year in which a corporation commenced its business operations is also worth considering.
The battle in TRAIN 2 will be on the “modernization” of incentives which is really an attempt to rationalize the existing system.
We can expect the various industries affected to lobby in the legislature to maintain their incentive laden status. Will DOF be able to hold the line or will we see a highly diluted incentive reform? The answer may mean the derailing of TRAIN 2.