Qualified enterprises can benefit from an improved set of investment incentives under the second package of the Duterte administration’s comprehensive tax reform program (CTRP) that may bring down their tax payments while creating jobs or meeting export targets, according to the Department of Finance (DOF).
Finance Undersecretary Karl Kendrick Chua said that Package 2 offers firms registered with investment promotion agencies (IPAs) a better and more attractive set of incentives that are not present in the current tax regime.
These new incentives under Package 2 include additional tax deductions on labor, training, infrastructure, domestic input, and research and development.
“This tax reform allows qualified firms to make deductions based on whether they generate more jobs, provide additional training to workers, source their goods domestically, introduce innovations or reinvest their profits,” Chua said.
“Provided they meet the criteria to avail of these deductions, it may be possible for firms to pay lower or zero tax under this incentives regime proposed under Package 2,” he added.
Package 2 of the CTRP aims to reduce the corporate income tax (CIT) and modernize the fiscal incentives system.
The House of Representatives approved its version of Package 2, dubbed the Tax Reform for Attracting Better and High-Quality Opportunities Act (TRABAHO) last September. The Senate is still discussing in its ways and means committee its version filed by Senate President Vicente Sotto III and called the Corporate Income Tax and Incentives Reform Act.
Citing an example, Chua said a business process outsourcing firm that is labor-intensive, may get to pay zero tax under Package 2 if it is able to maximize up to 50 percent additional deductions on labor and 100 percent on workers’ training programs. Citing another example, Chua shows that a BPO company’s effective tax rate need not change even under the new incentives regime if it uses the additional deductions to create jobs.
The manufacturing industry may also benefit from this pro-incentive tax reform program when manufacturers make good use of the following additional deductions: 50 percent on domestic inputs; depreciation allowance of up to 20 percent; and 100 percent on training, Chua said.
Finance Assistant Secretary Antonio Joselito Lambino II, meanwhile, said that apart from the regular five-year maximum period for the grant of incentives, Package 2 will also give an additional two years of incentives to firms that will relocate outside Metro Manila and provide job opportunities in rural areas.
Lambino said that once this tax reform is approved and enacted into law, the additional tax incentives would be available for new projects starting 2019.
He said the TRABAHO bill of the House is expected to bring relief to over 90,000 small and medium enterprises (SMEs) by lowering the corporate income tax (CIT) rate. Moreover, hundreds of thousands of microenterprises organized as small corporations can also benefit.
Starting in 2021, the current CIT rate of 30 percent will gradually be lowered to only 20 percent until 2029 under the TRABAHO bill.
A lower CIT will make the Philippines more attractive to investors, and could free up more capital for firms to invest and hire more workers, which, in return, could create a million jobs for Filipinos over the medium term, Lambino said.
With regard to firms enjoying the existing 5 percent tax on gross income earned (GIE), they would be allowed a transition period in which they can continue to benefit from this incentive for 2 to 5 years.
Upon the expiration of these sunset provisions, the same firms may seek to apply for incentives under the new system.
In Package 2, the proposed Strategic Investment Priority Plan (SIPP) will identify activities that can qualify for tax incentives for a reasonable amount of time. The list of activities will be reviewed by the Board of Investments (BOI) every 3 years.
Lambino said incentives will be performance-based, time-bound, transparent and targeted under the new system.
“We recognize that incentives are necessary to attract investors to our economy, but this is not the only factor that we need to improve on to bring in more investments. In fact, President Duterte’s policy to attract foreign investments is to provide a conducive climate for businesses by maintaining peace and order and by curbing corruption,” Lambino said.
He also added that the recently enacted Ease of Doing Business Law is a welcome development that will help reduce red tape in the bureaucracy and thus further boost investor confidence in the domestic economy.
Earlier, the Department of Labor and Employment (DOLE) expressed its support for Package 2, as this will sharpen the competitiveness of small and medium-sized businesses and create more jobs, especially outside Metro Manila.
DOLE Secretary Silvestre Bello III has pointed out that removing redundant incentives now enjoyed by favored corporations will not lead to job losses, because these firms will remain profitable anyway even if such perks are removed.
Bello pointed out that, “as a result of the significant reduction in the CIT rate that will free up more capital for firms to invest and, in turn, create jobs, the DOLE expects this tax reform to spur employment opportunities especially in the countryside.”
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