Finance Secretary Carlos Dominguez III has sought the support of the country’s eminent economists behind the Duterte administration’s second tax reform package that aims, he said, to improve the corporate tax system in which a small select group of top enterprises enjoy preferential corporate income tax (CIT) rates of just six (6) to 13 percent while an overwhelming majority comprised mostly of small- and medium-scale enterprises (SMEs) pay the regular rate of 30 percent.
Dominguez said that aside from having the highest CIT rate of 30 percent in the region, the country’s corporate tax system is also plagued with structural defects, such as having 14 investment promotion agencies (IPAs) and 315 laws outside the national tax code that grant both investment and non-investment incentives to businesses.
These incentives, Dominguez, said are enjoyed only by a select few that pay much less—around six to 13 percent only in terms of CIT. Worse, they get to enjoy such perks “forever.”
With 123 laws that grant investment incentives and 192 others that provide non-investment incentives to this elite group, the system has become “fundamentally unfair” especially for SMEs which pay the regular CIT rate, he said.
“Our fiscal incentives regime gives so much to a select few and asks so little from them, like promising forever to neglectful partners while the country fails to provide enough to secure the future of its own children,” said Dominguez during his lunch meeting on Wednesday with economists representing various multilateral and local institutions.
The lunch was attended by Yasuyuki Sawada, chief economist of the Asian Development Bank (ADB); Luis Breuer, division chief of the International Monetary Fund (IMF); former Department of Finance (DOF) Undersecretary Romeo Bernardo; Prof. Dante Canlas of the University of the Philippines (UP) School of Economics and president-CEO of the Philippine National Oil Co. (PNOC) Alternative Fuels Corp.; Gerardo Sicat, professor emeritus of the UP School of Economics and the first director-general of the National Economic and Development Authority (NEDA); Gilberto Llanto, board member and former president of the Philippine Institute of Development Studies (PIDS); Renato Reside, assistant professor of the UP School of Economics; Monetary Board members Prof. Felipe Medalla and Bruce Tolentino; and Arsenio Balisacan, chairperson of the Philippine Competition Commission (PCC) and a former director-general of NEDA.
Undersecretary Karl Kendrick Chua and Assistant Secretary Ma. Teresa Habitan were also at the meeting.
During the lunch he hosted at the Philippine International Convention Center (PICC), Dominguez also sought the guidance of these economic experts in finetuning the DOF’s proposal to lower CIT rates and modernize investment incentives, which comprise the second package of the Duterte administration’s comprehensive tax reform program (CTRP).
“It is in this historic moment that a statement of support from you, our country’s eminent economists, for the second tax reform package would be most welcome as those who benefit from the status quo are quite active and vocal in their opposition (of this reform),” Dominguez said.
He said the DOF needs the support of the economists present during the meeting behind five basic proposals under Package 2 of the tax reform program. These are:
· Lowering the CIT rate while reorienting the fiscal incentives regime to attract the “industries of tomorrow;”
· Amending the tax code to improve tax compliance, harmonize the governance of incentives through the Fiscal Incentives Review Board (FIRB), and repeal some exemptions. The DOF is also proposing improvements in the Tax Incentives Management and Transparency Act (TIMTA). to ensure transparency and accountability of incentives;
· Repealing 123 special laws on investment incentives and consolidating them in one omnibus incentive law;
· Keeping the income tax holiday and other income-based incentives, while replacing the 5 percent Gross Income Earned (GIE) tax in lieu of all taxes with a 15 percent tax on net taxable income to narrow the gap between those under the standard rate and incentives recipients; and
· Rethinking the current practice of the 5 percent GIE “in lieu of local taxes”, which is unfair to local government unite (LGUs).
Deputy Speaker Raneo Abu, Deputy Majority Leader Aurelio Gonzales and Rep. Dakila Carlo Cua, who chairs the House ways and means committee, have introduced their version of the DOF’s proposed Package 2 under House Bill No. 7458.
This bill is set to be deliberated upon by the House ways and means committee after the Congress reopens on July 23.
Dominguez said the Duterte administration’s economic reform program “is the succeeding chapter” of the past reform efforts under the previous governments that many of the economists present during the event had either supported or co-authored.
“The current version of our comprehensive tax reform package actually is just a natural offshoot of what has been passed by the previous administrations. It continues the overarching narrative of our fight for sustained and inclusive growth,” the finance chief said. “If we are successful, we will harvest the fruits of reform over the next few decades, reaping the rewards of our demographic dividend.”
He was referring to the country’s young and productive workforce, which, “coupled with the right institutions, will finally place the reality of inclusive growth within our reach.”
Dominguez said the DOF is encouraged by the successful passage of the first tax reform package-the Tax Reform for Acceleration and Inclusion (TRAIN) Law—but is likewise aware that it needs to redouble efforts as the Congress deliberates on Package 2.
“Your efforts in this and in previous administrations have laid the foundations of a corporate tax system that will be fairer to all and more beneficial to our fellow Filipinos.” Dominguez told the economists present at the meeting. “The TIMTA law, a legislative victory of our immediate predecessor, has started to illuminate the dark corners of our labyrinthian incentives regime.”
Dominguez said data made available through the TIMTA show that in 2015 alone, about P301 billion in income and value-added taxes, along with customs duty incentives were given to enterprises registered with the various IPAs. Preliminary data for 2016, meanwhile, show that the government gave away P75 billion more in income and customs duty incentives compared from the previous year.
He said these billions of pesos in tax perks do not yet include foregone local taxes and estimates on revenue leakages.
“These initial findings underscore the importance of what we seek to achieve with Package 2. We should reorient our incentives regime to put into place the key ingredients of inclusive growth—the creation of good jobs for the Filipino worker; stimulating local economies, especially in lagging regions; and promoting research and development,” Dominguez said.
Incentives should be given to enterprises willing to take risks “in order to do well and do right by the Filipino people,” Dominguez said.
“The time has also come for those who do not seek to achieve these aims, and who have been enjoying more than their fair share for two, three, or even four decades, to share, in turn, with those who are committed to generating social returns,” he added.
According to Dominguez, the best time to carry out such reforms is now, when the country is not compelled to undertake them because of some crisis or external influence.
“We pursue tax reform not to narrow the deficit or reduce our debts, but to sustain our growth in a manner that benefits all Filipinos,” he said.