Finance Secretary Carlos Dominguez III has called on lawmakers to proceed with approving the Duterte administration’s proposed reforms on corporate taxation and the modernization of investment incentives as he allayed apprehensions over the impact on prices of the first tax reform package, which contributed less than a half-percentage point to last month’s inflation rate.
Dominguez said the first package—the Tax Reform for Acceleration and Inclusion (TRAIN) Law—accounted for only four-tenths of a percent of April’s inflation rate of 4.5 percent, which means that for every peso increase in prices, only 9 centavos can be attributed to TRAIN.
“TRAIN has been unfairly blamed for the elevated inflation rate we are currently experiencing. By our estimates, fully two-thirds of last April’s 4.5 percent inflation rate is typical of a rapidly expanding economy. The remaining is due mainly to the sharp increases in key imported commodities specifically oil, the realignment of currency exchange rates and a robust increase in domestic demand,” said Dominguez during Tuesday’s first hearing called by the House Committee on ways and means to discuss House Bill No. 7458.
“At any rate, the inflationary impact of TRAIN is expected to diminish over the next few months,” Dominguez said.
Rep. Dakila Carlo Cua, the committee chairman, along with Deputy Speaker Raneo Abu and Deputy Majority Leader Aurelio Gonzales Jr. filed HB 7458 that aims to lower the corporate income tax (CIT) and reform the investment incentives system. This measure comprises Package 2 of the Duterte administration’s tax reform program.
Before proceeding to call on lawmakers to support Package 2, Dominguez thanked the leadership and members of the House for passing the TRAIN, which, he said, has brought immediate relief to, and increased the purchasing power of, 99 percent of the country’s salaried workers in the form of personal income tax (PIT) cuts.
Moreover, the TRAIN also allowed the Bureaus of Internal Revenue (BIR) and of Customs (BIC) to exceed their respective collection targets for the first quarter of this year.
Dominguez likewise pointed out that the biggest impact of TRAIN is not on the prices of basic goods, but on non-essential commodities like tobacco and sugary beverages, whose tax rates have been made intentionally “punitive” to help safeguard the health of Filipinos.
To cushion the effects of elevated inflation on vulnerable sectors, Dominguez said the government is implementing the unconditional cash transfer program while encouraging more investments to meet the surge in domestic demand driven in part by the monetary windfall from the PIT cuts in TRAIN.
With the first tax reform package providing the government the funds to help support its aggressive spending on infrastructure, education, health and social protection programs for the poorest of the poor, Dominguez urged lawmakers to approve Package 2 so as “not to stop the train from moving forward.”
“Revenue policies, after all, are not only about raising money to reduce deficits or meet our debt payments. More importantly, they are effective instruments for reducing poverty, investing in the future and fashioning a fairer society,” Dominguez said.
The finance chief said the “pro-business, pro-investments and pro-incentives” Package 2 will help the government build a fairer and more competitive business environment through reforms in the corporate tax system “that will deliver a more even playing field, simplify collection procedures, bring greater transparency and reward genuine efficiency.”
He said the overhaul of the corporate tax structure, particularly the system on the grant of investment incentives, are necessary given these defects that prevent the Philippines from attracting foreign direct investments (FDIs):
· A CIT rate of 30 percent, which is the highest in the entire ASEAN region, paid mostly by small and medium enterprises;
· A complicated tax incentive regime with 14 investment promotion agencies (IPAs) and 123 laws outside the tax code that grant various forms of investment incentives and 210 laws that grant non-investment incentives. “The situation cries out for rationalization,” Dominguez said;
· Generous tax incentives that are granted forever, and in lieu of all taxes—both local and national–while these perks are time-bound and performance-based when given out in other countries. “When we give out incentives without limit, the practice erodes both accountability and performance,” he said; and
· A total of P301 billion-worth of potential revenues given away by the government because of generous incentives in the form of exemptions from the CIT, VAT and customs duties in 2015 alone. Dominguez said verifying the data on these foregone revenues have been made possible because of the Tax Incentives Management and Transparency Act (TIMTA) that the former finance chief pushed for approval in the previous Congress.
Dominguez stressed that Package 2 will continue to grant incentives to businesses, but the government must now ensure “that every peso given up as an incentive must benefit the society in the form of better jobs, faster innovation and countryside development.”
He said some of the incentives granted to business under the current tax regime are “entirely unnecessary, given “the inherent attractiveness of our market size, our natural and human advantages and our freshly gained competitiveness.”
To ensure that these investment perks are “performance-based, tightly targeted, time-bound and transparent,” Dominguez said the Department of Finance (DOF) is proposing that:
· The CIT rate is lowered on condition that fiscal incentives are modernized;
· Incentives are harmonized through the Fiscal Incentives Review Board and the TIMTA improved to further ensure the transparency and accountability of incentives; and
· Some 123 special laws on incentives are either amended or repealed and consolidated into an omnibus code called the Strategic Investment Priority Plan (SIPP).
Dominguez said the DOF is also pushing for the following reforms to make the tax system more equitable:
· The 5 percent gross income earned (GIE) tax in lieu of all taxes be replaced with a 15 percent rate on net taxable income while keeping the income tax holiday and other income-based incentives;
· The VAT be treated as a purely consumption tax and not as an investment incentive, as reflected in international best practices; and
· A stop to the practice of committing local tax exemptions as an investment perk, which runs counter to the general economic strategy of enhancing countryside development.
Dominguez said the grant of incentives is not the only factor that drives investments, as he underscored President Duterte’s policy of attracting foreign direct investments (FDIs), which focuses on providing a safe place for businesses by maintaining peace and order, wiping out official corruption, and eliminating red-tape in the bureaucracy.
“The success we have so far achieved for the first tax reform package is encouraging, but we cannot and should not stop the train from moving forward,” Dominguez said.