Former Finance Secretary Cesar Purisima has underscored the necessity of instituting long-overdue reforms in the corporate tax system to bolster the country’s competitiveness as he expressed his full support for the proposal to modernize incentives for businesses and reduce the corporate income tax (CIT) rate to improve the collection efficiency of revenue agencies.
Purisima also congratulated his successor, Finance Secretary Carlos Dominguez III, for the enactment into law of the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the first package of the Duterte administration’s comprehensive tax reform program, which, he said, “was a resounding victory for our economy and has set us on a path to fairer and faster growth.”
“I am happy to see the credit watchers have noted the decisiveness with which the government—with your leadership—further strengthened our fiscal base in preparation for a surge of public investments,” Purisima said in his letter to Dominguez dated April 17. “I wish you even more success as you shepherd the passage of Package 2.”
This Package 2 of the CTRP, which is now pending in the House of Representatives, aims to lower CIT rates while modernizing investment incentives to level the playing field for 95 percent of business enterprises in the country.
“While corporate income tax rates are relatively high in the Philippines, tax efficiency is quite low. Thus, lowering rates while expanding the tax base and improving (through simplifying) compliance is indeed the best way to address this challenge,” said Purisima, who is now the Asia fellow for the California-based economic think tank Milken Institute.
Purisima said, “the DOF’s (Department of Finance’s) proposals for Package 2 come from a sound understanding of our remaining constraints to growth and reasoned judgment on what needs to be done to overcome them.”
He noted that the reforms proposed by the DOF under Dominguez’s leadership “have been a long time coming, and are critical for the country to bolster our competitiveness.”
The former finance chief told Dominguez he was express(ing) on record his “full support (for)) the administration’s efforts to make the tax system fairer, simpler and more efficient.”
“I am proud to continue supporting the government’s comprehensive tax reform program,” Purisima said.
According to DOF spokesperson Assistant Secretary Paola Alvarez, reducing the CIT rate and modernizing business incentives will level the playing field for over 800,000 registered local corporations that have been paying regular taxes.
Of the estimated 5,000 companies with registered activities in the 14 investment promotion agencies (IPAs) in 2015, about 3,000 firms registered under the Philippine Export Procession Zone Authority (PEZA), claimed tax incentives amounting to more than P300 billion combined, not including estimates of potential leakages and cost of local tax incentives.
In contrast, over 800,000 other corporations registered in 2015 paid the regular taxes, which means, she said, that the PEZA only covers the relatively privileged few, mostly large firms, that have been enjoying incentives and will continue to enjoy them in perpetuity without the TRAIN’s Package 2 reforms, Alvarez said.
She said Package 2 aims to lower the CIT 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.
Alvarez also asserted the legality of Package, claiming that there are no vested rights in the grant of tax incentives to certain businesses because these are “mere statutory privileges, and as such, its granting may be modified or withdrawn at the will of the granting authority, that is, the Congress.”
Debunking the claim by certain critics that the TRAIN Package 2 is “unconstitutional” because it supposedly seeks to invalidate existing government contracts with investors on the grant of tax incentives, Alvarez said, “the non-impairment clause may not be invoked in this instance.”
Said Alvarez: “In Republic of the Philippines vs. Caguioa, the Supreme Court held that while the tax exemption contained in the SBMA Certificates of Registration of private respondents may have been part of the inducement for carrying on their businesses in the Subic Bay Freeport, this exemption, nevertheless, is far from being contractual in nature in the sense that the non-impairment clause of the Constitution can rightly be invoked.”
In addition, the same non-impairment clause cannot be invoked in the case of revocations of tax incentives under ‘registrations’ or ‘licenses to operate’ as it must necessarily yield to the government’s police power and power to tax,” she said.
With regard to the business process outsourcing (IT-BPO) industry, Alvarez said that while the government recognizes its major contribution as a driver of economic growth, export generation, and job creation, “the best way for this sector to grow is not to rely on incentives and exemptions but to begin to raise their productivity.”
Alvarez said in the DOF’s roadshows on Package 2 in 10 key cities around the country, there has been overwhelming support from local business chambers whose members comprise the small and medium entities, majority of which are under the regular tax regime. In fact, many small firms that pay the regular 30 percent tax supply to large firms that pay zero or 5 percent.
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