The Department of Finance (DOF) and the House Committee on Ways and Means are keen on including in the second package of the tax-reform program a provision that would require firms to report in real time the incentives they get from the government.
During the hearing of the committee on Package 2 of the Comprehensive Tax Reform Package (CTRP) on Monday, Rep. Dakila Carlo E. Cua of Quirino, panel chairman, asked the DOF to consider his proposal to “ensure transparency” in granting tax perks.
“In TRAIN [Tax Reform for Acceleration and Inclusion] 1, we introduced an administrative solution requiring large taxpayers to comply with real-time reporting, and we also included the exporters and online merchants so we can capture the tax base,” he said.
“Now, are you open to considering that all firms receiving incentives be also required to have real-time reporting with the BIR [Bureau of Internal Revenue] as the case may be if it is possible?” Cua asked the DOF.
The TRAIN 1 requires large taxpayers, exporters and taxpayers engaged in e-commerce to electronically issue their invoices and receipts and sales to the BIR.
During the hearing, Finance Undersecretary Karl Kendrick T. Chua threw his support behind Cua’s proposal.
“That is a very good idea, which I think is very reasonable to support. For [the DOF], incentives are not entitlements; they are privileges that should be earned. So I think improving transparency by requiring them to report not only what they got from the government but also real-time reporting of their sales is something that we would support,” Chua said.
Cua told lawmakers that 2015 was the earliest year when the Tax Incentives Management and Transparency Act made possible the monitoring and review of the economic impact of incentives given to businesses.
House priorities
At the sidelines of the hearing of the House Committee on Ways and Means, Speaker Gloria Macapagal-Arroyo vowed to prioritize the approval of the second package of the Duterte administration’s tax-reform program, which seeks to reduce corporate income-tax (CIT) rates and rationalize fiscal incentives.
Arroyo also reiterated that, as speaker, she will prioritize the legislative agenda of the administration.
“I don’t want to be very explicit about the timeline but it’s [tax-reform] priority,” Arroyo said.
“Remember in the Sona [State of the Nation Address] of President Duterte, it’s there, and I said in my very short statement upon assumption the first and foremost job I have as a speaker is to carry out the legislative agenda of President Duterte,” she added.
Arroyo also said she wants to call the bill “corporate income/incentives reform” because calling it TRAIN 2 is “misleading,” saying the proposed second package of tax reform would not impose new taxes.
“It’s not called TRAIN 2 because TRAIN 2 is misleading. It’s called corporate income/incentives reform,” Arroyo said.
The second package of the CTRP, which was designed to be revenue-neutral, proposed to gradually lower the CIT rate from 30 percent to 25 percent, while rationalizing fiscal incentives for companies to make these performance-based, targeted, time bound and transparent.
Consolidation
Chua, in the same hearing, told lawmakers that there is a need to consolidate 315 incentive laws into one incentives law.
He also noted that the Philippines has 14 investment-promotion agencies (IPAs) that are authorized to grant incentives to a select group of businesses.
Chua added some 315 special laws exist that grant other forms of incentives beyond what the IPAs give.
“These laws that are outside the national tax code comprise 123 statutes that give out investment incentives and 192 others that provide noninvestment incentives to registered enterprises,” he said.
Because of these numerous incentives laws, Chua said the government lost P178.56 billion in potential revenues in 2016 as a result of tax incentives given out to only 3,102 firms registered with various IPAs.
Citing data from the BIR and the Bureau of Customs, Chua said the government had foregone P74.53 billion in revenues from income-tax holidays (ITHs), P46.66 billion from special income-tax rates and P57.38 billion in customs duties.
“These foregone revenues as a result of tax incentives given out to select enterprises are collectively termed as ‘investment-tax expenditures’,” he added.
Under the Budget of Expenditures and Sources of Financing document published by the Department of Budget and Management, these only include ITHs, special income-tax rates and incentives on customs duties.
Chua said the data collated by the DOF’s Domestic Finance Group (DFG) does not yet include foregone revenues from the value-added tax exemptions on imports and local that enterprises registered with IPAs also get to enjoy.
“It also does not yet include the foregone local taxes and leakages that may arise as a result of abuse of transfer pricing,” he said.
Citing the DOF-DFG report, Chua said foregone revenues from investment incentives, excluding VAT and local tax privileges, expanded by 71.03 percent in 2016 from the previous year’s figure of P104.40 billion and were 52.52 percent higher from 2015 projections.
The report said these revenue losses may have increased to P196.02 billion, or by 9.77 percent, in 2017.
For 2015 Chua said the DOF has already included estimates of revenue losses from VAT exemptions, which reached about P196.83 billion for that year, on a gross basis.
Adding this figure to the investment-tax expenditures of P104.40 billion from ITHs, special tax rates and custom duty incentives, this brings the total estimated foregone revenues of the government from investment incentives to P301 billion in 2015 alone, Chua said.
Highest in Asean
Currently, Chua said some 90,000 active small and medium enterprises (MSMEs) pay the regular CIT rate of 30 percent, which remain the highest among Asean economies.
Package 2 aims to lower the CIT paid by some 95 percent of businesses, while retaining and providing new fiscal incentives for deserving recipients. This is expected to help generate “pro-poor investments and jobs.”
Chua said the current inequitable corporate-tax system places MSMEs at a disadvantage as they have to compete with bigger firms that, ironically, enjoy various tax perks when they can easily afford to pay the correct amount of taxes.
Action for Economic Reforms (AER), in a separate statement, said small and medium enterprises (SMEs) can benefit from tax incentives now being enjoyed only by a minority of investors if CTRP 2 is passed into law.
The AER also allayed fears raised by some senators that Package 2 will exacerbate inflation because it should lead to little if not zero increase in prices of goods and services.
“The rationalization of fiscal incentives as contained in package 2 of the CTRP should redound to better employment opportunities, innovation in technology and expansion of investments in poor priority regions,” said Jenina Joy Chavez, AER Industrial Policy Coordinator.
Chavez said the reforms will give SMEs the chance to “compete fairly and squarely” with other investments, following a clear set of criteria under the strategic investment priority areas as proposed in the bill.
SMEs employ more than 60 percent of the country’s work force and constitute 99 percent of Philippine firms that pay the regular tax rate. In contrast, only 4,000 firms currently enjoy billions of pesos in tax incentives, according to the AER.
“Incentives will not be removed, but improved as to design and timing. Export-oriented, efficiency-seeking enterprises will continue to benefit under the proposal as long as they meet the proposed criteria,” Chavez said.
“The senators are worried that the proposed tax reform will automatically result in increased prices and be a burden to the Filipino family. But, if you look at the reforms carefully, most of the packages pending in Congress actually reduce the tax burden on corporations and ordinary Filipinos,” she added.
Tax perks from IPAs
In terms of IPAs, Chua said the DOF-DFG report showed that the Philippine Economic Zone Authority accounted for the biggest portion of total investment-tax expenditures amounting to P118.85 billion, or 66.56 percent, of the total in 2016.
The Board of Investments accounted for P36.26 billion, or 20.31 percent, of the total investment-tax expenditures, he said.
The Authority of Freeport Area of Bataan, Aurora Pacific Economic Zone and Freeport, Clark Development Corp., Cagayan Economic Zone Authority, Poro Point Management Corp., Subic Bay Metropolitan Authority, Tourism Infrastructure and Enterprise Zone Authority and Zamboanga City Special Economic Zone Authority accounted for the remaining P23.45 billion, or 13.13 percent of the total.
According to the report, the data covered 5,694 out of 5,790 registered business entities (RBEs) in IPAs.
From 2015 the number of RBEs that availed of income-tax incentives increased 9.07 percent in 2016, while those that were granted incentives on customs duties grew by 5.85 percent.