The Department of Labor and Employment (DOLE) supports the proposed reforms in corporate taxation and fiscal incentives under the second package of the Duterte administration’s comprehensive tax reform program (CTRP), as this will sharpen the competitiveness of small and medium-sized businesses and will create more jobs, especially in the countryside.
DOLE Secretary Silvestre Bello III has also pointed out that removing unnecessary incentives now enjoyed by a few favored corporations will not lead to massive job losses, contrary to claims. These are excessive perks and the few firms currently enjoying them will remain profitable.
“As a result of the significant reduction in the corporate income tax (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,” Bello said. “Package 2 is a positive impact on the economy that will make smaller firms more competitive and will allow them to expand faster.”
Some 90,000 active small and medium enterprises (SMEs) and more than a hundred thousand microenterprises that pay the regular corporate income tax (CIT) rate of 30 percent, which is the highest in the region, stand to benefit from Package 2, the Department of Finance (DOF) said, as it welcomed the DOLE’s support for this job-generating tax reform proposal.
The DOF is pushing the congressional approval of a measure rationalizing incentives for corporations because, under the now-convoluted system, a select group of mostly big firms enjoys tax breaks plus other perks that let them pay discounted rates of between 6 and 13 percent, while the rest pay the regular CIT.
Finance Secretary Carlos Dominguez III said, “the Duterte administration wants to level the playing field for SMEs under the current corporate tax system in which more than 300 laws enable a favored group of large enterprises—many of them on the list of the country’s Top 1,000 corporations—to pay the discounted rate.”
These corporations enjoying tax holidays and other incentives are registered with any of the country’s 14 investment promotion agencies (IPAs). Most other countries only have one IPA under their respective finance ministries governing tax incentives.
The House of Representatives has 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.
“Some industry players claim that the TRABAHO bill will result in hundreds of thousands of job losses. These statements are meant to sway public opinion against the reform, but do not have a sound basis,” Dominguez said.
“The reality is that the current incentives regime protects the interests of a select few highly profitable and large enterprises to preserve the special treatment they have been enjoying for decades without limits. The current system of granting incentives breeds unfairness and lack of accountability,” he added.
Dominguez said the new “targeted, time-bound, performance-based and transparent” set of incentives under Package 2 will include perks such as more tax deductions for firms hiring more workers, and longer tax holidays for those that would set up shop in areas outside Metro Manila, especially in post-conflict and post-calamity areas.
Moreover, Package 2 will allow additional tax deductions in incremental spending on labor, research and development (R&D), reinvestment, and domestic input expense, among other factors.
Finance Undersecretary Karl Kendrick Chua said that after three years of income tax holidays, qualified firms can enjoy two more years of reduced CIT or the following deductions:
· Additional 50 percent deduction on incremental labor, which will encourage enterprises to hire additional workers;
· Additional 100 percent deduction on R&D, creating better jobs and promoting innovation;
· Additional 50 percent deduction on domestic input expense, which will benefit domestic producers, mostly micro, small, and medium enterprises (MSMEs), because this will encourage firms to source their inputs locally, thus creating even more jobs; and
· Allowable deduction for manufacturing firms of 50 percent for profits that are reinvested, further boosting demand for labor.
On top of these perks, Chua said firms that will invest in agribusiness, post-conflict and calamity-stricken areas, and outside Metro Manila or neighboring urbanized areas will be given two more years of incentives, one year of which may be an additional income tax holiday.
“This attractive set of new incentives under Package 2 are absent in our current incentives system,” Chua said. “Package 2 favors investors that support our development objectives, which are: to create more and better jobs, promote R&D, encourage innovation, stimulate domestic industries, promote countryside development, and diversify our product base to higher-value exports.”
Chua said the Duterte administration wants to create a fairer and more accountable tax incentives regime, “because every peso granted as a tax incentive is a peso that could have been spent for infrastructure, health, education, or social protection.”
DOLE will work closely with the DOF to ensure that performance measures in granting incentives will include commitments not only to generate more jobs but also to encourage fair labor practices, he said.
Bello, for his part, said that while the DOLE does not expect any mass layoffs, it is ready to assist workers transitioning between jobs through several labor market programs such as labor market information services, referral and placement services, and employment guidance and counseling services through the Public Employment Service Offices.
“With the proposed appropriated fund under Package 2, the DOLE can expand these programs to extend assistance and interventions that will further enhance employability and competitiveness through skills upgrading of those who will be transitioning between jobs,” Bello said.
Under the current system, incentives are not time-bound and are granted forever, which thwarts accountability and leads recipients to be complacent and disregard performance standards. The government, in turn, is constrained from granting incentives to new players that want to contribute to national development, the DOF said.
The DOF said that because the current system is not performance-based, the Philippines’ foreign direct investment (FDI) inflows remain low compared to most ASEAN economies, and exports relative to our strong economy is consistently declining, despite the creation of new economic zones and the increasing amount of incentives being granted.
Incentives are also granted to highly profitable firms that pay far more dividends than the incentives they receive under the current unfair system, the DOF said.
Under this setup, the government, in effect, is subsidizing these highly profitable firms at the expense of vulnerable sectors that should have been the recipients of these subsidies in the form of better access to education and training, healthcare and other forms of social services.
The DOF also said the current system is not transparent because it does not allow the reporting of firms and the corresponding amount of incentives they received, in violation of the right of Filipino taxpayers to know which corporations they are subsidizing—and by how much.
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