Finance Assistant Secretary Paola Alvarez has asserted the legality of Package 2 of the Tax Reform for Acceleration and Inclusion Act (TRAIN), claiming that there are no vested rights in the grant of tax incentives to certain businesses because these are “mere statutory privileges, and as such, its granting may be modified or withdrawn at the will of the granting authority, that is, the Congress.”
Debunking the claim by certain critics that the TRAIN Package 2 is “unconstitutional” because it supposedly seeks to invalidate existing government contracts with investors on the grant of tax incentives, Alvarez said that “the non-impairment clause may not be invoked in this instance.”
“Jurisprudence supports this,” said Alvarez, who is also the Department of Finance (DOF)’s spokesperson.
Said Alvarez: “In Republic of the Philippines vs. Caguioa, the Supreme Court held that while the tax exemption contained in the SBMA Certificates of Registration of private respondents may have been part of the inducement for carrying on their businesses in the Subic Bay Freeport, this exemption, nevertheless, is far from being contractual in nature in the sense that the non-impairment clause of the Constitution can rightly be invoked.”
“In addition, the same non-impairment clause cannot be invoked in the case of revocations of tax incentives under ‘registrations’ or ‘licenses to operate’ as it must necessarily yield to the government’s police power and power to tax.” she said.
With regard to the business process outsourcing (IT-BPO) industry, she said that while the government recognizes its major contribution as a driver of economic growth, export generation, and job creation, “the best way for this sector to grow is not to rely on incentives and exemptions but to begin to raise their productivity.”
“The government believes that tax subsidies are not the best way to help the industry move forward. Instead, the government will labor to ensure that complementary measures are put in place to improve productivity and ease of doing business, such as through targeted training and skills development,” she said. “In the end, a person, a firm, or an industry grows and becomes prosperous, not because of exemptions and subsidies, but because of higher productivity.”
Alvarez pointed out that, “Everyone and every entity has the duty to pay taxes. Tax exemptions are not an entitlement, but a privilege meritoriously granted, which should be earned. When we went around the country to consult with stakeholders on package 2, we learned that many small firms pay the regular tax and do well because they work hard. Perhaps other firms can learn a thing or two from them.”
Contrary to the claim by certain critics, “incentives are not being removed, but being made more fair and accountable” under the TRAIN Package 2, she said.
Alvarez said in the DOF’s roadshows on Package 2 in 10 key cities around the country, there has been an overwhelming support from local chambers whose members comprise the small and medium entities, majority of which are under the regular tax regime. In fact, many small firms that pay the regular 30 percent tax supply to large firms that pay zero or 5 percent.
She said that the current dual corporate tax income tax system has created an unfair structure wherein those who are paying the regular rate pays 30 percent of their net taxable income, while those receiving incentives pay much less, at around 6 to 13 percent.
“This is very unfair, as corporations under the regular regime are contributing just as much as those which are under the special regime,” she said.
“In Package 2, we propose to correct this inequity in our corporate tax system once and for all. We are logically expanding what the previous administration has started with the TIMTA(Tax Incentives Management and Transparency Act (TIMTA), and if anyone should oppose this, then they can blame the previous administration, but they did not,” she said.
She added that, It is high time we use this important reform to revisit if what we give away in tax incentives is really generating jobs, stimulating the economy in the countryside, and promoting research and development. In the end, only incentives that are performance-based, targeted, time-bound, and transparent will remain.”