The Department of Finance (DOF) is pushing reforms in the corporate income tax (CIT) system, including the lowering of the tax rates and the expansion of the functions of the Fiscal Incentives Review Board (FIRB) as an “overall administrator” to oversee all investment promotion agencies (IPAs) in the country, to generate more investments, improve collection efficiency and correct inequities that benefit only large, highly profitable businesses.
Finance Undersecretary Karl Kendrick Chua said the DOF will also ask the Congress to repeal 150 special laws that complicate the grant of fiscal incentives to businesses, and replace it instead with an omnibus law that would provide a single menu of incentives applicable to all IPAs, when it presents Package 2 of the Duterte administration’s Comprehensive Tax Reform Program (CTRP).
Following the enactment of the Tax Reform for Acceleration and Inclusion Act (TRAIN), which slashes personal income tax rates while raising additional revenues for infrastructure and social services, the DOF submitted this January to the House of Representatives its proposal on corporate taxation and the modernization of fiscal incentives. This proposal is Package 2 of the Duterte administration’s Comprehensive Tax Reform Program (CTRP).
Chua said reducing the CIT rate can be done in two ways: either cut it by 1 percent per year over five years or reduce it by 1 percent the following year if the revenue trigger of P26 billion–which is equivalent to additional revenues of 0.15 percent of GDP–is reached the previous year by broadening the tax base and rationalizing fiscal incentives.
“We will propose the second method to ensure that this tax reform, which is Package Two of the CTRP, will be revenue neutral. Every one percent reduction requires P26 billion in counterpart revenues to keep revenue neutrality,” Chua said during last Thursday’s Thanksgiving lunch tendered by the DOF for government officials and the various sectors that have supported and pushed for, the passage of the TRAIN in the Congress.
Finance Secretary Carlos Dominguez III said, meanwhile, that the corporate income tax can only be lowered if there is a corresponding correction in the grant of fiscal incentives to businesses.
”Our plan is to lower the tax rate for corporations from 30 percent to 25 percent. But our proposal to the Congress is to allow us to do that only if there’s a reduction in the amount that we provide for incentives,” he said at a recent Management Association of the Philippines (MAP) event.
Chua said that along with paring the CIT rate, the DOF will ask the Congress to modernize the country’s fiscal incentives system to ensure that these are “performance-based, time-bound, targeted and transparent.”
“All tax incentives should not be perpetual because the government cannot go on subsidizing business forever. If a firm continues to be a losing firm, it has no business being in business,” Chua said.
To improve compliance, Chua said the DOF is proposing simplifying tax rules for corporations, by among others, cutting the number of tax forms and procedures; reviewing the National Internal Revenue Code to improve general anti-avoidance regulations and transfer pricing and costs; and reducing the optional standard deduction from 40 percent to 20 percent of gross income.
As for incentives, there should be clear measures of actual investment, job creation, countryside development, exports, and research and development to ensure that these are performance-based, he said.
Incentives should also be targeted to minimize leakages and distortions in the tax system and, more importantly, time-bound so that tax perks are not granted forever to businesses, Chua added.
For companies enjoying incentives of more than 10 years, the DOF is proposing a grandfathering provision of two years, which means it will continue to enjoy incentives for two more years once the law rationalizing fiscal incentives is enacted into law.
“Grandfathering” exempts certain persons or entities from restrictive provisions in a new law.
For businesses enjoying incentives of between five and 10 years when the law is passed, the grandfathering is for three years, while those with incentives less than five years old will continue to enjoy them for five more years.
To ensure transparency, the monitoring of tax incentives should be institutionalized and regularly reported by the government, Chua said.
“We should realize that the proliferation of incentivized activities creates distortions in the tax system which lend a greater burden to the taxpaying community. That is, those who are required to pay taxes bear the burden of those who we allow not to pay taxes,” Chua said.
To govern the grant of incentives, Chua said the DOF is proposing that the function of the FIRB be expanded to serve as the overall administrator to oversee all the IPAs.
“So rather than creating a new body, we will just expand the existing body that is chaired by the Secretary of Finance who currently grants incentives only to government-owned and controlled corporations (GOCCs),” Chua said.
Chua said that, ironically, the DOF, whose mandate is setting tax policies, is outside the decision loop in terms of granting tax incentives, contrary to the practice in most countries, notably in ASEAN (Association of Southeast Asian Nations), Japan and South Korea, where their respective Ministries of Finance approve the grant of tax incentives.
Under an expanded FIRB, the DOF as chair shall have veto power and will serve as co-chairs of the Board of Investments and the various IPAs to ensure a balance between promoting investments and fiscal responsibility.
“The Secretary of Finance can cancel or suspend the grant of incentives upon the review and recommendation of the FIRB,” Chua said.
Chua said that with so many sectors and activities receiving tax incentives, the tax base is significantly narrowed, as proven by data showing that even with a high CIT rate of 30 percent, the Philippines’ corporate tax efficiency rate is only 12.3 percent, which is remarkably low compared to Thailand with a CIT rate of 20 percent but collects almost triple, with a 30.5 percent efficiency rate.
“There is discrimination among different types of businesses that create distortion and inequity. For instance, companies with same profit levels pay different tax rates because of the incentives enjoyed by some but not by others and taxpayers with more profitability may be paying less than those with lower profits, also because of our overly generous incentives,” Chua said.
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