Finance Secretary Carlos Dominguez III has expressed confidence that the Congress could pass this year the remaining packages of the comprehensive tax reform program (CTRP), which he considers not only a”foundational plank” of the government’s socioeconomic agenda but also an indispensable element in bankrolling President Duterte’s priority programs such as infrastructure modernization and Universal Health Care (UHC).
As a source of a reliable and recurrent revenue stream for state programs to achieve inclusive growth and build a more competitive workforce, the CTRP is key to the President’s ultimate goal of providing a better future for all law-abiding Filipinos, Dominguez said.
He told his fellow Rotarians that completing the CTRP will also secure, for the first time ever, an “A” credit rating for the Philippines and, more importantly, guarantee the country’s fiscal stability long into the future.
“The task of pursuing game-changing reforms is a long and arduous one as we have to deal with the vagaries of our politics, the inertia of the bureaucracy, and the resistance of those who would rather have things stay as they are. But we remain confident that the pending tax reform packages will be approved by the Congress this year,” Dominguez said during the joint lunch meeting of the Rotary Club of Makati West and the Rotary Club of Manila, which was held Thursday at the PhilamLife Tower in Makati City.
Dominguez said he hopes the Congress could pass Package 2 of the CTRP–the proposed Corporate Income Tax and Incentives Rationalization Act (CITIRA)–in the first quarter, so that it could be signed into law by March. The Congress will resume session on Jan. 20 following its yearend recess, and then adjourn for its Lenten Break on March 13.
“The sooner Congress passes the bill, the quicker potential investors will discard their wait-and-see attitude and bring more business to the country. This will have incalculable benefits for our economic growth,” Dominguez said.
The other CTRP packages seek to reform the land valuation system, and the financial sector.
“Taken together, the packages of the comprehensive tax reform program will dramatically alter the business environment in the country, removing the remaining hindrances to investment flows that make us a laggard in the region,” Dominguez said. “This program will help us create better jobs for our people. It will surely enable this administration to deliver on its ultimate goal, which is to reduce poverty incidence from 23.3 percent in 2015 to 14 percent or lower by the end of the President’s term in 2022.”
Dominguez said the government is on track towards achieving this goal, as seen by the significant reduction in poverty incidence to 16.6 percent in 2018, which means around 5.9 million Filipinos lifting themselves from poverty in the first three years of the Duterte presidency.
He said President Duterte’s popularity as shown by his unprecedented 87 percent approval rating in the second half of his term, along with the supermajority in both chambers of Congress as a result of the electoral triumph of pro-administration candidates, will lead to the passage of more people-oriented reforms at the soonest possible time under this administration.
CITIRA, for one, aims to lower over time the corporate income tax (CIT) to 20 percent from the current 30 percent, which is the highest in the Association of Southeast Asian Nations (ASEAN).
This reform will also rationalize a badly tangled fiscal incentives system to create a level playing field, especially for new businesses coming into the economy, and generate around 1.5 million new jobs.
It will also overhaul the current system that has given away P441 billion of tax perks in 2017 alone to only 3,150 companies that enjoy discounted CIT rates of between 6 and 13 percent, while almost a million other firms, including small and medium enterprises (SMEs) that employ a majority of Filipino workers, pay the regular rate of 30 percent, Dominguez said.
He said the government was also cheated of about P63 billion in 2017 by firms that either abused transfer pricing rules or shifted profits and costs to reduce their tax liabilities.
Combining this loss with the P441 billion in tax perks given away to favored companies, he said the government’s foregone revenues reached a staggering P504 billion in 2017 alone, which was already around 93 percent of the budget of the Department of Education (DepEd) and more than five times the budget of the Department of Health (DOH) for that fiscal year.
Moreover, some companies have been receiving incentives from 15 to more than 40 years now without the government being able to determine if the perks they have been receiving are actually benefiting the economy.
“The old tax system entrenched established businesses and discouraged new enterprises from coming in. It gave some businesses tax protection in perpetuity regardless of whether they improved their competitiveness or not,” Dominguez said.
He said CITIRA aims to change this grossly unfair system by making incentives timebound and performance-based, like in Singapore where incentives are given up to 40 years but subject to a performance review every five years.
CITIRA will also ensure that incentives are specifically targeted and more transparent, like in Thailand where the names of incentive recipients are published on its Board of Investment (BOI) website, he said.
Thailand also installed a good system to target industries by giving more tax incentives and longer availment periods to high-priority sectors that are pre-identified under its investment priority plan, he added.
To correct the current chaotic system of 13 separate agencies independently awarding incentives, he said that CITIRA aims to follow the practice in Malaysia, where the grant of incentives is centralized in the National Committee on Investment.
CITIRA will also lead to the creation of new jobs because companies are expected to reinvest at least 50 percent of their additional money from the reduction of the CIT rate toward growing their businesses, he said, while the new menu of incentives will likewise encourage job creation, upskilling, and linking up SMEs into export value chains.
Dominguez also expressed optimism on the congressional approval of the other proposed tax reforms, such as Package 3, which aims to adopt globally benchmarked valuation standards and inculcate a higher degree of professionalism in real property valuation to promote investor confidence, enhance the revenue-generating capacities of local government units (LGUs) and help clear right-of-way (ROW) issues currently hobbling many key infrastructure projects.
Package 4 or the Passive Income and Financial Intermediary Taxation Act (PIFITA), meanwhile, is expected to be a gamechanger in encouraging long-term investments, as this will make the country more attractive for capital and investments, which are urgently needed to finance large-scale infrastructure projects, including those under the “Build, Build, Build” program.
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