The Duterte administration’s tax reform package that aims to lower the corporate income tax (CIT) and overhaul the country’s “convoluted” fiscal incentives system is projected to generate some 1.4 million jobs, mostly in small and medium enterprises (SMEs), over the next decade and create a business environment conducive to inclusive growth, according to Finance Secretary Carlos Dominguez III.
Dominguez said at a business forum that the proposed staggered cuts in the CIT from 30 to 20 percent over a 10-year period as provided under the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill will energize hundreds of thousands of SMEs and encourage them to use part of their saving from lower tax payments to expand their businesses and hire more workers.
He called on the captains of Philippine business gathered at the Wallace Business Forum Roundtable to thoroughly study the CIT reform proposal in its entirety, including “the more controversial component” on the rationalization of fiscal incentives, as he expressed the hope that they would “come to the same conclusion we did: that the reforms will be beneficial to our domestic economy.”
“We urge the business community to thoroughly read the measure, rather than base their positions on hearsay and opinions of uninformed people, so that you can work with the government in explaining the true benefits of the TRABAHO bill to the public,” Dominguez said at the event organized by businessman Peter Wallace held Thursday at the Makati Shangri-La Hotel.
Dominguez said that contrary to the perception poised by this proposed tax reform’s critics, the Duterte administration’s plan will not eliminate incentives for investors but would even improve them by offering a better set of perks that includes the following: 50 percent deduction on incremental labor costs; 100 percent deduction on training, research and development; and 50 percent deduction on purchases of local raw materials.
The set of incentives under Package 2 will be transparent, time-bound, targeted and performance-based, Dominguez said, to, among others, help eliminate corruption and cronyism, and “spare Filipino taxpayers from subsidizing the profits earned by a select group of corporations enjoying redundant incentives in a convoluted system.”
The proposed CIT cuts and reforms in the fiscal incentives system constitute Package 2 of the Duterte administration’s comprehensive tax reform program (CTRP).
The Package 2 version of the House of Representatives—the TRABAHO bill—was approved by the chamber last September, while the counterpart version of the Senate–SB 1906 or the Corporate Income Tax and Incentives Reform Act authored by Senate President Vicente Sotto III–is still being studied by the chamber’s ways and means committee.
He noted that the reforms being implemented so far by the Duterte administration on its end, including improvements in the ease of doing business, have helped raise net foreign direct investment (FDI) inflows by a hefty third or 31 percent to $7.4 billion in the first 8 months of the year from $5.7 billion during the same period last year.
Apart from pointing to deepening investor confidence in the Duterte administration, Dominguez said the FDI surge this year proves that investors are not being spooked by tax reform, as claimed by certain groups.
While FDIs are dramatically increasing, the Philippine Economic Zone Authority (PEZA) has claimed a slowdown in investments in areas under its jurisdiction, which, Dominguez said, “can only mean they are trying to attract investments that cannot be viable without unreasonable incentives.”
“These are not the investments we need to become a strong economy. The more meaningful investments are being made by competitive companies that do not ask for tax holidays and other incentives,” he said.
“Those who oppose the reform of the incentives program are arguing against the facts,” he added. “All over the world, fiscal incentives are less important in investor decisions than efficient infrastructure and a better-educated and healthier people. We cannot fully address these more beneficial concerns if we let bureaucrats give away revenue for private profit. We need to be fiscally responsible on this matter.”
Dominguez said the Duterte administration wants the incentives program under Package 2 to “work to the advantage of building a dynamic domestic economy, to create jobs, cause technology transfers, advance research and development, enhance linkages between enterprises and improve conditions for competition.”
“No longer will a favored group of businesses enjoy a permanent grant of 5 percent on gross income earned (GIE). Never again will the select group of 328 incentivized firms that received 86.3 billion pesos in tax breaks in 2015 declare 141.8 billion pesos in dividends while incurring only 104.6 billion pesos in direct labor costs during the same year,” said Dominguez.
Dominguez said Package 2 will “produce a transparent and even playing field for business” and “broaden the base of participation in wealth creation for our people.”
He said relying mainly on incentives to attract investments has produced “hardly spectacular” results for the economy, and has led to a program that is “confusing, contradictory, unaccountable and has unclear goals.”
These incentives are granted by 14 investment promotion agencies, with 25 more waiting to be legislated by the Congress, he said.
During the Wallace forum, Dominguez also explained the recent decision of the Development Budget Coordination Committee (DBCC) to recommend the reinstatement of the two-peso additional excise tax on fuel in 2019 under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, describing it as “the correct policy decision” amid the drastic drop in global oil prices, which will help push down inflation.
Retaining TRAIN’s fuel excise tax adjustment for 2019 will enable the government, he said, to sustain the high level of investments needed to rapidly grow the economy while maintaining fiscal discipline by keeping within the 3.2 percent budget deficit-to-GDP limit set for 2019, Dominguez said.
These investments include, in large part, the “Build, Build, Build” program that is being funded with the assistance primarily of China and Japan.
Dominguez, however, noted that some uninformed critics have made unfounded claims about the country falling into a so-called “debt trap” as a result of the official development assistance (ODA) financing extended by China and Japan, even though the Philippine government had secured these at the lowest interest rates and longest term arrangements possible.
He said that if project financing coming this year is included, the estimated project debt to China will constitute only 0.65 percent of the country’s total debt from the current 0.11 percent. Meanwhile, the project debt to Japan will increase from the current 3.17 percent to 8.90 percent of the total debt at the end of this year.
By 2022, when most of the financing for ‘Build, Build, Build’ will have been accessed, the Philippines’ project debt to China will constitute around 4.5 percent of the total debt, while the project debt to Japan will be around 9.5 percent of total debt, Dominguez said.
Dominguez said the Duterte administration has learned much from the past, blemished by the “scandalous mismanagement of Chinese financing” owing to the fact that “the previous leadership allowed Chinese state-owned enterprises to dictate what projects will be undertaken here.”
“I don’t have to mention the names, I’ll just mention some initials. ZTE, for instance,” Dominguez said.
He ticked off the safeguards that the government has put in place to ensure that only projects that need to be urgently implemented are proposed for concessional financing: 1) a feasibility is conducted on the project to determine its viability, sustainability and best means of financing; 2) approval by the Investment Coordination Committee (ICC) and the Board of the National Economic Development Authority (NEDA) that is chaired by President Duterte; and 3) internal vetting of Chinese contractors that would be recommended to implement the project, in order to ensure that each project would be financially viable and truly beneficial to the Filipino people.