The next target of the Duterte administration in the tax reform program are reduction of the corporate tax and the streamlining of fiscal incentives that pose a drain on the government finances.
Finance Secretary Carlos Dominguez III said the Department of Finance (DOF) will submit to the Congress this month the second package of the government’s Comprehensive Tax Reform Program (CTRP) after the first package was signed into law by President Duterte last month.
Mr. Duterte signed the Tax Reform Acceleration and Inclusion Act (TRAIN) into Republic Act (RA) No. 10963 last Dec. 19 in Malacanang.
Upon signing of the landmark law, the Chief Executive instructed the DOF to ensure its effective implementation and to immediately submit to the Congress in early 2018 the CTRP’s Package 2, which aims to lower corporate income taxes and modernize fiscal incentives in a bid to complement the expected incremental revenues from the first package.
Dominguez said in terms of revenue potential, the Package Two would be neutral.
Income tax holidays and other incentives with no time limits enjoyed mostly by large businesses is costing the government over P300 billion annually in foregone revenues, Finance Undersecretary Karl Kendrick Chua said.
Citing 2015 data, Chua said income tax holidays and special rates account for P86.25 billion of the revenue losses, while custom duty exemptions account for P18.4 billion.
Exemptions from paying the value-added tax (VAT) on imports led to P159.82 billion in foregone revenues; and local VAT, P36.96 billion, although part of this tax will eventually have to be refunded because these are imposed on exporters, he said.
He said these incentives totaling P301.22 billion do not yet include exemptions from the payment of local business taxes and the estimates on tax leakages.
In terms of income tax incentives, the government, in effect, gave away P61.33 billion to companies in 2011, which went up to P88.17 billion in 2014.
Customs duty exemptions, however, have gone down from P82.97 billion in 2011 to P38.04 billion in 2014 owing to the various free trade agreements signed by the Philippines with other countries.
“So on average, we gave away up to 1.5 percent of our GDP in income tax and custom duties exemptions,” Chua said.
The enactment of the Tax Incentives Management and Transparency Act (TIMTA) in 2016 has allowed the DOF to track incentives systematically, Chua said.
TIMTA data show that in 2015, income tax holidays accounted for P53.77 billion in foregone revenues; special rates, P32.48 billion; and import duty incentives, P18.14 billion or a total of P104.40 billion in tax incentives given away by the government, which would have accounted for almost 5 percent of national government revenues and 0.78 percent of GDP, Chua said.
Data for the VAT and local business taxes are not mandated under the TIMTA.
“So in general, we are giving almost 0.8 percent of GDP so far on tax incentives from these income tax holidays and custom duty exemptions. Together with the VAT, it is P301 billion, or 2 percent of GDP. These are only the investment incentives,” Chua said.
Under Package Two, the DOF aims to lower the CIT rate to 25 percent, while rationalizing incentives for companies to make these performance-based, targeted, time-bound, and transparent.
Through this proposal, the government would be able to ensure that incentives granted to businesses generate jobs, stimulate the economy in the countryside and promote research and development; contain sunset provisions so that tax perks do not last forever; and are reported so the government can determine the magnitude of their costs and benefits to the economy.
Chua has pointed out that the government collects income taxes from large corporations and other private firms representing only 3.7 percent of the country’s Gross Domestic Product (GDP), or a collection rate of a low 12 percent because of 360 laws that grant businesses tax breaks and other perks.
He said that compared to other economies in the Association of Southeast Asian Nations (ASEAN), the Philippines imposes the highest CIT rate but is among those at the bottom in terms of collection efficiency, resulting in a high rate but narrow tax base.
The Philippines, he said, currently imposes a CIT rate of 30 percent but with a tax collection efficiency rate of only 12.3 percent, while Thailand’s CIT rate is only 20 percent but it collects almost triple–a 30.5 percent efficiency–that represents 6.1 percent of its GDP.
Vietnam’s CIT rate is 25 percent but it collects even more with a 29.2 percent tax efficiency rate representing 7.3 percent of GDP. Malaysia’s 24 percent CIT generates a 27.1 percent efficiency rate in terms of collecting taxes, which is 6.5 percent of GDP.
Chua said a flawed and outdated system that provides tax incentives to companies under 150 investment laws and 210 non-investment laws is the reason for the country’s low CIT collection efficiency.
Under the Philippine tax code, all corporations, unless receiving fiscal incentives, have to pay a regular CIT rate of 30 percent or a minimum CIT rate of 2 percent of gross income beginning the fourth taxable year immediately following the year in which a corporation commenced its business operations, when the minimum income tax is greater than the regular tax. The optional standard deduction for corporations is 40 percent of gross income under the tax code.
“So clearly, we have the classic problem of a high rate but narrow base. That is why the efficiency is problematic,” Chua said in his discussion of the proposed second package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP) at a recent meeting of the Development Budget Coordination Committee (DBCC).
Chua said “a flawed and outdated system that provides tax incentives to companies under 150 investment laws and 210 non-investment laws is the reason for the country’s low CIT collection efficiency.”
Chua said that in terms of revenue, the country’s CIT has been increasing over time as a share of GDP and will continue to go higher because of the strong growth of the economy.
“However, I think this is deceiving because despite a 30 percent rate, we are at the bottom in terms of revenue efficiency,” Chua said. LUIS LEONCIO