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The Department of Finance expressed their concern on the Senate version of the second tax reform package that cuts corporate income tax rates and streamlines fiscal perks may result in bigger loss of revenues compared with the bill approved last week by the Congress under House Bill No. 8083, or the “Tax Reform for Attracting Better and High-quality Opportunities” (TRABAHO).
Finance Undersecretary Karl Kendrick Chua said that the Senate’s version could result in an estimated “P130-billion loss” in the first year of implementation, compared to the P62-billion foregone revenues from the House measure.
The Senate’s versionfiled by Senate President Vicente Sotto III, proposes an immediate,unconditional reduction in the corporate income tax (CIT) rate to 25% next year from 30% currently, while rationalization of incentiveswhich scraps those deemed redundant and sets stricter eligibility criteriawould come two years after.
“The DoF version is reflected mostly in the Sotto bill except the 25% automatic [reduced rate]. That’s why the Sotto bill is sure loss, because you reduced immediately P130 billion without rationalization at the same time. You have to wait two years,” Chua said at the Finance department’s headquarters in Manila.
Both chambers of Congress did not adopt the DoF’s proposal of making the CIT reduction conditional on incremental revenues to be collected from reduced fiscal incentives.
“The problem is rationalization means no removal of incentives. Everyone can still apply. If they meet the conditions, they can get the incentives. So it’ not a guaranteed neutral revenue,” said Mr. Chua.
“Most want automatic but that may not be revenue-neutral. Once the Senate deliberates the budget and sees the vast needs [for development funding], they have to consider the revenue implication,” he added.
While Senate President Sotto had yet to respond to queries as of late Wednesday afternoon, Undersecreatary Chua said that the Senate President “wanted more immediate impact… but I also informed him of the revenue implication.”
Credit raters Fitch Ratings and Moody’s Investors Service have flagged that such impact of watered-down tax reform could weigh on state revenues needed to fuel the government’s infrastructure drive that will need more than P8 trillion until 2018, when President Rodrigo R. Duterte ends his six-year term.
The TRABAHO bill which was approved by the House on final reading on Monday seeks to cut the CIT rate gradually to 20% by 2029 from 30% currently via a two percentage-point reduction every other year starting 2021 in a bid to put the Philippines at par with Southeast Asian peers in attracting foreign investors on this count.
The Fiscal incentives will be given to businesses in industries identified in the Strategic Investments Priority Plan that satisfy performance indicators. Such perks include a three-year income tax holiday (ITH) after which businesses may apply for a special 18% CIT rate starting 2021, going down to 13% in 2029; allowable deductions on labor, research and development, training and infrastructure development costs and import duty exemption for up to five years, before being subjected to the regular corporate tax scheme.
Currently, the eligible companies enjoy an ITH up to nine years and, after that, a five percent tax on gross income in lieu of all other taxes among other incentives that are not time-bound.
The senior official of DoF said his department still hoped that discussions in the Senate Ways and Means committee starting next week would lead to a version that would be more consistent with the DoF’s proposal.
“Everything is hopeful.”
The Executive aims to implement the measure next year. Mr. Duterte said in his third State of the Nation Address in July that he hopes to have all tax reform packages on his desk by year end for signing into law.
The first of up to five planned tax reform packages — Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion Act — slashed personal income tax rates and either added or increased taxes on a host of items besides removing several value added tax exemptions when the law took effect in January.
Chua said that there is still “ample time” for at least the second tax reform package to secure legislative approval before lawmakers shift their attention towards year end to preparations for the May 2019 mid-term elections.
Meanwhile, Finance Secretary Carlos G. Dominguez III had said early last month that “there is now more political resistance to succeeding tax reform packages.”
“Part of the reason for this resistance is the proximity of elections. Tax policy, as we know, is never the best way to be reelected.”