A public advocacy group with former finance officials, economists and leaders in the banking industry as members has expressed its full support for the proposal of the Department of Finance (DOF) to base the grant of investment incentives on the performance of beneficiary firms and to limit such perks to those that create more jobs and exports.
The Foundation for Economic Freedom (FEF), which espouses economic reforms, political liberty, and good governance, has likewise expressed its support for the reduction of the corporate income tax (CIT), which is included in the second package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP).
“We, the Foundation for Economic Freedom, support the rationalization of fiscal incentives under Tax Reform for Acceleration and Inclusion (TRAIN 2). We commend the major principles proposed to rationalize fiscal incentives, namely, to link incentives to performance; and to limit the focus of incentives to sectors that will generate economic benefits such as employment, exports, etc.,” FEF said in a statement.
The Foundation’s board of advisers include former Prime Minister and Finance Minister Cesar Virata, former Socioeconomic Planning Secretary Gerardo Sicat, National Scientist Raul Fabella, and former World Bank Representative Thomas Allen.
Political economist Calixto Chikiamco is FEF’s president, with former Finance Secretary Roberto de Ocampo, Monetary Board member Felipe Medalla, corporate lawyer Perry Pe and investment banker Simon Paterno among the members of its board of trustees.
FEF also agreed that there must be a phase-out of all existing incentives, except for a subset of companies that are employment-intensive, and are likely to move to other countries without incentives.
It backed the proposal to grant new incentives outside of this small subset, which will be centralized in an Economic Development and Fiscal Incentives Review Board, where employment and contribution to economic development shall be the paramount considerations.
But FEF emphasized that the rules for the granting of incentives should be clear, transparent, and minimizes discretion from the government bureaucracy.
FEF also said that incentives for redundant investments must be phased out, or those investments that will likely be done anyway even without such perks, such as for mineral explorations. It said administrative reforms must accompany CTRP Package 2 to improve the professionalism, efficiency, and accountability of taxing authorities.
The group further said that it supports the retention of the 40-percent OSD (optional standard deduction), rather than a reduction to 20 percent, in line with the principle of making tax compliance easy and simple.
“We support the reduction in the corporate income tax rate to 25 percent or even lower, should government finances allow it, in order to align the country’s tax rates with the rest of ASEAN,” FEF said.
Package 2 seeks to lower the corporate income tax paid by some 95 percent of businesses, while at the same time retaining and providing new fiscal incentives for deserving recipients that will contribute to national development and help generate pro-poor investments and jobs.
Finance Assistant Secretary Paola Alvarez said that based on the requirements under Republic Act 10708 or the Tax Incentives Management and Transparency Act, the DOF estimates incentives granted to registered enterprises in Philippine Economic Zone Authority (PEZA) areas at P235.3 billion in 2015 alone, out of a total of P301 billion, which includes the incentives for 13 other investment promotion agencies (IPAs).
These perks consist of the income tax holiday, P25.9 billion; the 5 percent tax on Gross Income Earned (GIE), P25.8 billion; customs duties, P14.9 billion; import value-added tax (VAT), P147.8 billion; and local VAT, P20.9 billion.
The perks under the 5 percent GIE is computed as the difference between what they paid and what they would have paid under the regular 30 percent net income tax.
Alvarez said these hefty incentives were granted to registered firms that accounted for less than one percent of the businesses registered with the BIR in 2015 and for only 6 percent of total employment in the country for the same year.
“Enterprises that create good jobs, bring development to poorer areas of the country, and invest in research and development have nothing to fear, but the spread of misinformation and false claims have led to confusion,” said Alvarez, referring to reports earlier claiming that all fiscal incentives would be canceled under the CTRP Package 2.
Alvarez said Package 2 seeks to gradually reduce the Philippine rate to 25 percent, “but contingent on the modernization of the fiscal incentives regime toward one that rewards those who truly deserve it.”
This package includes provisions for a reasonable sunset period and new incentives for current players that expand their businesses or adopt new technologies, she said.
“At present, there are more than 100 special laws that result in an overly complex corporate tax system, impose a large administrative burden for the government and taxpayers, and give special treatment to a small minority of corporations that pays 6 percent to 13 percent, in contrast with the 30 percent tax rate the vast majority has to cover, Alvarez said.
Alvarez stressed the urgency for the government to modernize the tax incentives system for businesses in order to level the playing field, especially for the benefit of over 800,000 registered local corporations that have been paying regular taxes.
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