Package 2 COMPREHENSIVE TAX REFORM PROGRAM Corporate income tax and - - PowerPoint PPT Presentation

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Package 2

COMPREHENSIVE TAX REFORM PROGRAM

Corporate income tax and incentives reform

Why reform is needed

As of 12 August 2019

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Table of contents

1. Ten reasons why we need to reform the corporate income tax and incentives system

A. Problems B. Solutions

2. Summary of reform 3. Responding to top ten concerns of stakeholders

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Ten reasons why we need to reform the corporate income tax and incentives system:

Problems and solutions

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Ten reasons why we need to reform the corporate income tax and incentives system

1. To lower the CIT rate to make it regionally competitive; 2. To grant incentives more judiciously to reduce fiscal cost amounting to 441 billion pesos (2.8 percent of GDP) in 2017; 3. To grant tax incentives that are performance-based; 4. To grant tax incentives that are targeted to priority industries; 5. To grant tax incentives that are targeted to priority areas; 6. To grant tax incentives that are time-bound; 7. To grant tax incentives that are transparent; 8. To reduce the abuse of transfer pricing; 9. To improve governance in the grant of tax incentives through the FIRB;

• 10. To regularly evaluate the impact of incentives on the economy through cost-benefit

analysis.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Source: Asian Development Bank and PWC

Problem 1. Highest corporate income tax rate in the region.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Solution 1. Lower the corporate income tax rate to make it regionally competitive.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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In 2017, over PHP 441 billion (2.8% of GDP) was granted to 3,150 firms.

Source: DTI, TIMTA, and DOF estimates

Problem 2. PHP 441 billion in foregone revenue in 2017, many of which are unnecessary incentives.

1.

Firms with no incentives pay the regular rate of 30% of net taxable income.

2.

For example, almost all of the 90,000 SMEs pay the regular 30% rate.

3.

Firms with incentives pay between 6% and 13% effective tax.

In 2017, 989,166 registered firms. In addition, PHP 63 billion (0.4% of GDP) was lost due to possible abuse of transfer pricing.

Total: PHP 504 billion (3.2% of 2017 GDP)

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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441 billion pesos of foregone revenues in 2017 could have funded… 33,000 public markets or 46,000 kilometers of roads or 130,000 daycare centers or 450,000 classrooms.

Source: DOF estimates

Problem 2. PHP 441 billion in foregone revenue in 2017, many of which are unnecessary incentives.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Solution 2: Package 2 promotes a fair and accountable tax incentives system.

Every peso granted as tax incentive is a peso off the budget that could have been spent for infrastructure, health, education, and social protection that benefit all, and not only a few.

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Problem 3. Incentives are not performance-based.

• 1. No monitoring of firm

performance on its “commitment” to increase export, create jobs, or raise productivity.

• 2. Counterfactual analysis shows

no significant difference in the performance between firms receiving incentives and those that do not receive incentives.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Outcome Indicators Panel 2012/2015 2014 2015 Employment and compensation Total employment / total assets Total employment / total sales R&D employment / total employment Total compensation Total compensation / total expenses Average compensation to workers Total salaries / paid workers R&D =1 if establishment has R&D spending R&D expenses / total expenses Total investments / total assets Capital investments Land assets / total assets Total fixed assets / total assets Building assets / total assets Machineries / total assets Exports Direct exports / sales Productivity Average hours worked Sales / total employment Sales / paid workers

Summary of counterfactual analyses

Note: Panel data used the 2012 CPBI and the 2015 ASPBI with the 2015 TIMTA Source: PSA, TIMTA, DOF estimates

= Registered firms performed significantly higher than non- registered firms

Problem 3. Incentives are not performance-based.

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Solution 3: Package 2 offers a more competitive incentives menu that rewards performance with more incentives.

1.

Depreciation allowance of qualified capital expenditure:

a.

10% for buildings

b.

20% for machineries

2.

Additional deduction of up to:

a.

100% for research and development (R&D)

b.

100% for training

c.

100% for country-wide infrastructure development

d.

50% for labor expense

e.

50% for domestic input expense

f.

50% for reinvestment allowance in manufacturing industry

3.

Enhanced net operating loss carry-

• ver (NOLCO) (3 years over 5 years)

4.

Exemption from customs duty on imported capital equipment and raw materials

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• 1. Application for incentives

shall constitute a contract to meet agreed targets such as job creation, export, and productivity.

• 2. Review of firm’s performance

every two years by the FIRB.

Image source: flaticon.com

Solution 3: Package 2 offers a more competitive incentives menu that rewards performance with more incentives.

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Problem 4. Incentives are not targeted to priority industries.

• 1. There are 342 investment and

non-investment laws that provide incentives outside the tax code.

• 2. The IPP covers up to 64 percent of

all industries.

• 3. As a result, up to 69 percent of

the country’s GDP can potentially be given incentives.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Solution 4. A strategic investment priority plan (SIPP) will be formulated to prioritize incentives.

A 3-year SIPP shall be formulated by BOI and approved by the President.

1.

BOI shall ensure a more targeted list covering activities with significant positive externalities.

2.

Only the President may propose activities or projects not in the SIPP that may be granted tax incentives

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CTRP – Package 2: Cost of tax incentives (as of July 31, 2019)

Source: PEZA, IPAs, and DOF staff calculations

IPA

• No. of ecozones

AFAB 1 APECO 1 BCDA 1 BOI

• CDC

1 CEZA 1 PEZA 531 PIA 1 PPMC 1 TIEZA 8 SBMA 1 RBOI-ARMM 1 ZCSEZA 1 TOTAL 549

As of 2018, there are 549 ecozones, all of them are separate customs territory, meaning they are exempt from all taxes.

Problem 5. Incentives are not targeted by area.

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Solution 5. The SIPP shall also improve targeting of more incentives to priority areas.

1. There is currently an administrative order that provides for a moratorium on the proclamation of new economic zones in Metro Manila (AO 18). 2. Additional two years of incentives for:

A.

Registered activities relocating outside Metro Manila and selected urbanized areas adjacent to Metro Manila

B.

Agribusiness projects of registered enterprises located outside Metro Manila and urban areas

C.

Projects located in less developed areas or those recovering from armed conflict or a major disaster 3. All future ecozones must be based on a country-wide cost-benefit analysis to determine appropriateness of zones.

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Problem 6. Incentives are not timebound.

We grant the most generous fiscal incentives since they are in lieu of all taxes and given forever. All other countries have a maximum duration and it applies only to very few highly targeted industries and are not automatically given.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Number of firms enjoying incentives for at least 10 years: 1,169

1,169

Source: 2017 masterlist of registered enterprises, TIMTA

Time, in years Years AFAB BCDA BOI CDC CEZA PEZA PPMC SBMA Total 40-45 1972-1976 1 1 36-40 1977-1981 5 5 31-35 1982-1986 4 4 26-30 1987-1991 45 45 21-25 1992-1996 207 32 239 16-20 1997-2001 1 2 272 58 333 11-15 2002-2006 1 434 107 542 6-10 2007-2011 2 378 3 31 783 161 1,358 0-5 2012-2017 96 6 845 506 189 1,353 5 394 3,394 Total 98 6 1,225 511 220 3,104 5 752 5,921

Problem 6. Incentives are not timebound.

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Dividends declared were equivalent to 133% of income tax incentives received.

Source: SEC, TIMTA

Problem 6. Incentives are not timebound.

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Solution 6. Approved activities shall be given incentives for a 5 to 7 year period, renewable if they meet the criteria.

Special rate (2020)

18% on net taxable income after ITH for up to 5 years including the ITH

• 1.5% to province
• 1.5% to municipality

Income tax holiday

Up to 3 years plus 1 year extension if investing in agribusiness, or in less developed areas, or if relocating outside Metro Manila and adjacent urban areas

Year Special rate (%) National government (%) Province (%) Municipality (%) 2020 18 15 1.5 1.5 2021 17 14 1.5 1.5 2023 16 13 1.5 1.5 2025 15 12 1.5 1.5 2027 14 11 1.5 1.5 2029 13 10 1.5 1.5

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Sunset provision for existing incentives

For RBEs which availed of ITH: Continue until remaining period ends

• r for a period of 5 years, whichever

comes first. For RBEs enjoying existing 5% GIE: Number of years enjoying 5% GIE Number of years allowed to continue 5 years below 5 5 to 10 years 3 Above 10 years 2

Solution 6. A sunset provision shall be given to existing incentives. After the period ends, they can reapply again for the new incentives.

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Problem 7. Incentives are not transparent.

1. Investment promotion agencies (IPAs) do not publicly disclose the names of firms and amounts of incentives given. 2. Likewise, firm-level benefits, such as exports, investment, and employment figures are not submitted as part of TIMTA.

Image source: flaticon.com

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Solution 7. An enhanced monitoring system of the incentives, including the collection of detailed information on the cost and benefits of incentives.

1. Integrate tax expenditure reporting into the budget process. a. Submission of the DOF to the DBM of the amount of fiscal incentives availed, including estimated claims and programmed fiscal incentives for the following years. b. Incentives will not be budgeted but should be reported as a tax expenditure for transparency purposes 2. The FIRB shall publish the names of the recipients

• f incentives and other related information on their

costs and benefits to assure the public that incentives are used properly.

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Problem 8. Transfer pricing is one of the top abuses of tax incentive regimes, resulting in substantial revenue loss for the government.

1.

Export zones – leakages into domestic economy

2.

Regional investment incentives and enterprise zones – diverting activities to outside the region or zone

3.

Transfer pricing schemes with related entities (through sales, services, loans, royalties, and management contracts)

4.

Disguising or burying non-qualifying activities into qualifying activities

5.

Churning or fictitious investments (lack of recapture rules)

6.

Schemes to accelerate income (or defer deductions) at the end of a tax holiday period

7.

Overvaluation of assets for depreciation, tax credit, or other purposes

8.

Employment and training credits – fictitious employees and phony training programs

9.

Domestic firms restructure as foreign investors

• 10. Existing firms transform into new entities to qualify for incentives

Source: Harvard Kennedy School

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Problem 8. Transfer pricing is one of the top abuses of tax incentive regimes, resulting in substantial revenue loss for the government.

In 2017, an estimated 63 billion pesos in government revenues was lost due to possible transfer pricing abuse and misallocation of profits and costs.

A company under three tax regimes can shift costs among activities to minimize taxable income and thus tax liability.

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Solution 8: Shift to net income tax system and enhanced anti-avoidance rules

• 1. The shift from gross income taxation to

net income taxation can limit transfer pricing abuse since it reduces the number of tax regimes.

• 2. Enhancement of Section 50 of the NIRC
• f 1997, as amended.
• a. Authority of the Commissioner to

distribute, apportion, allocate, and impute income and deductions to disregard and counteract tax avoidance arrangements.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Problem 9. There are multiple investment promotion agencies with the power to grant incentives, and the DOF has little say.

13 Investment Promotion Agencies (IPAs)

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IPA DOF board membership Aurora Pacific Ecozone (APECO) None Authority of the Freeport Area of Bataan (AFAB) None Bases Conversion and Development Authority (BCDA) None Board of Investments (BOI) None Clark Development Corporation (CDC) None Cagayan Economic Zone Authority (CEZA) None Philippine Economic Zone Authority (PEZA) Member (1 voice out of 13 members) PHIVIDEC Industrial Authority (PIA) Member (1 voice out of 10 members) Poro Point Management Corporation (PPMC) None Subic Bay Metropolitan Authority (SBMA) None Tourism Infrastructure and Enterprise Zone Authority (TIEZA) None Zamboanga City Special Economic Zone Authority (ZCSEZA) None Regional Board of Investments - ARMM (RBOI-ARMM) None

Problem 9. There are multiple investment promotion agencies with the power to grant incentives, and the DOF has little say.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Solution 9. The FIRB will have oversight function

• ver all IPAs. The DOF secretary chairs the FIRB.

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Problem 10. No regular cost benefit analysis (CBA) has ever been conducted to determine the impact of incentives on the economy.

• 1. There has been little to no

effort to do a regular CBA analysis.

• A. AFAB only started

working on a CBA starting 2018.

• B. PEZA wants to begin one

after decades of existence.

July 2, 2019

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Summary of first-ever CBA results by DOF

Solution 10. Initial CBA analysis has been undertaken by DOF. Going forward, FIRB to regularly conduct CBAs under Package 2.

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Solution 10. Initial CBA analysis has been undertaken by DOF. Going forward, FIRB will regularly conduct CBAs under Package 2.

• 1. The FIRB shall “…conduct regular

monitoring and evaluation of investment and non-investment fiscal incentives in accordance with section 306 of this act, such as using cost- benefit analysis (CBA), to determine their impact on the economy and whether agreed performance targets are met.”

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Package 2 promotes a fair and accountable tax incentives system

Every peso granted as tax incentive is a peso off the budget that could have been spent for infrastructure, health, education, and social protection that benefit all, and not only a few.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Package 2 promotes a fair and accountable tax incentives system

Fair and accountable tax incentives system with enhanced FIRB functions including regular CBA and IPA

• versight.

Lower corporate income tax rate to 20 percent by 2029.

Provide incentives to attract industries consistent with development priorities through additional deductions and a more targeted SIPP.

Simplification and rationalization of the fiscal incentives system by the repeal and amendment of 167 special laws. 1 2 3 4

Year 2019 2021 2023 2025 2027 2029 CIT rate 30 28 26 24 22 20 47

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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Rationalize investment tax incentives

One menu of incentives applicable to IPAs No double registration

• f activities

Only new investment/ activities shall be granted income tax incentives Expansions can avail only of exemption from customs duty of capital equipment

Special VAT incentives for exporters: 90% of export sales are actually shipped out of the country Domestic firms allowed if included in the strategic investment priority plan Two-year additional incentives for firms moving out of Manila and adjacent areas Two years additional incentives for lagging regions, conflict, and calamity-stricken regions

Two years additional incentives for agribusiness projects of registered enterprises located outside Metro Manila and urban areas

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Skilled and hardworking talent pool that needs sufficient human capital investments Ambitious infrastructure development program that requires fiscal commitment Sizeable small and medium enterprise community that deserves to be treated fairly through easier doing business processes

More than tax incentives, we need...

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CTRP – Package 2: Top 10 (as of August 12, 2019)

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President Duterte’s policy to attract foreign investments

1.

Provide a safe place for businesses by maintaining peace and order

2.

Wipe out corruption

3.

Eliminate red-tape in the bureaucracy, to which the Ease of Doing Business Law is a welcome development.

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Progress in achieving the 10-point socioeconomic agenda is advancing strongly.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

Responding to top concerns of stakeholders

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Responding to top concerns of stakeholders

Package 2 will…

• 1. be inflationary;
• 2. result in massive job losses;
• 3. cause uncertainties;
• 4. impose new taxes;
• 5. make tax incentives less competitive;
• 6. violate sanctity of contracts;
• 7. expose investors to unnecessary red-tape and harassment;
• 8. create an added layer of bureaucracy with the FIRB;
• 9. scare investors away; and
• 10. kill the goose that lays the golden egg.

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CTRP – Package 2: Top 10 (as of August 12, 2019)

• 1. Package 2 will be

inflationary.

• A. Package 2 will gradually

lower the corporate income tax rate from 30% to 20%. This will ease the pressure for firms to increase prices.

• B. In fact, any inflation is

limited to 0.34 percentage points over the medium- term (or less than 0.1 ppt per year)

CONCERN 1 RESPONSE

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CTRP – Package 2: Top 10 (as of August 12, 2019)

• 2. Package 2 will result in

massive job losses.

A. Package 2 will lower the corporate income tax rate. This will incentivize firms to create jobs. Around 1.5 million jobs can be created. B. Package 2 will provide performance-based incentives to firms that really need them. This will promote the creation of jobs. C. Package 2 will remove unnecessary incentives. Even without incentives, these firms will largely continue to

• perate and retain jobs because there is a profitable

market or factors of production are abundant to warrant strong business growth. D. In summary, with lower taxes and performance-based incentives, firms are incentivized to expand and create high-value and better-paying jobs. Additional deductions for labor and R&D are examples of performance-based incentives that aim to promote employment and capacity-building.

CONCERN 2 RESPONSE

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CTRP – Package 2: Top 10 (as of August 12, 2019)

• 3. Package 2 will cause

uncertainties.

A. The main cause of uncertainty is the long delay of legislating the reform. Investors prefer to wait until Package 2 is passed before investing. The sooner we can pass Package 2, the faster investment will flow in. B. The DOF submitted the proposed package 2 last January 2018, immediately after the passage of TRAIN. The House approved and transmitted it last September 2018, but Senate has conducted only one hearing before the session adjourned last February 2019.

CONCERN 3 RESPONSE

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• 4. Package 2 will impose

new taxes.

• A. Package 2 does not raise

any new taxes. In fact, it lowers the corporate income tax rate and makes the grant of incentives fairer and more accountable.

CONCERN 4 RESPONSE

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• 5. Package 2 will make tax

incentives less competitive.

A. Package 2 provides even more competitive and performance-based incentives such as additional deductions for labor, training, R&D, infrastructure, depreciation, NOLCO, and so on. These additional options are available to qualified activities that are not present in the current incentives system. All these can incentivize good job creation. B. Moreover, firms can continue to avail of incentives every 5 or 7 years so long as they qualify and innovate.

CONCERN 5 RESPONSE

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CTRP – Package 2: Top 10 (as of August 12, 2019)

• 6. Package 2 will violate

sanctity of contracts.

A. Package 2 follows the country’s tax policy, which is determined by Congress. It is the inherent power of the State to tax. It is the responsibility of all taxpayers to pay taxes. B. Incentives are not entitlements, but privileges that must be earned. When firms apply for incentives, they do so under the prevailing incentive structure, which can be changed by Congress. C. If tax incentives, can never be changed, then it is telling Congress it has no power to change tax policy.

CONCERN 6 RESPONSE

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• 7. Package 2 will expose

investors to unnecessary red-tape and harassment.

• A. Package 2 does not remove the one-

stop-shop function of IPAs, such as PEZA and BOI. They will continue to promote and facilitate trade and investment and ensure ease of doing business in relation to investors’ transactions with various government agencies.

• B. Local business tax is still part of the

incentive package while real property tax is largely paid by developers that do not receive incentives.

CONCERN 7 RESPONSE

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CTRP – Package 2: Top 10 (as of August 12, 2019)

• 8. Package 2 will create an

added layer

• f bureaucracy with the

FIRB.

• A. FIRB will follow the

requirements of the law, particularly the recently- passed Ease of Doing Business Law that mandates standards for processing time.

• B. So long as IPA adhere to the

policy, approval of FIRB is quick.

CONCERN 8 RESPONSE

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• 9. Package 2 will

scare investors away.

• A. Package 2 offers competitive

incentives, such as additional deductions, that can attract firms, help them grow, and create more and better jobs. Only firms that take advantage of the current system might be scared off.

• B. Package 2 helps ensure that tax

incentives are reoriented toward the strategic growth industries of the future.

CONCERN 9 RESPONSE

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• 10. Package 2 will kill the

goose that lays the golden egg.

• A. Far from the claim that we are

killing the goose that lays the golden egg, we want to reform

• ur current tax system so that

the fattened goose may share its food with everyone else.

CONCERN 10 RESPONSE

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