The American Chamber of Commerce of the Philippines Inc. on Tuesday expressed concern on the impact of the proposed 25-percent corporate income tax as part of the second package of the Tax Reform for Acceleration and Inclusion (TRAIN 2) to the country’s competitiveness as an investment haven in the region.
In a 38-page position paper, the AmCham said that while it is not opposed to a proposal to exact 25 percent corporate income tax, it would prefer the 20 percent, as proposed in House Bill 7458.
The American business group warned that implementing a 25 percent CIT will create uncertainty for existing and new investors as the measure will result to reduced revenues and job losses on a large scale as a result of damaged investor confidence.
The AmCham said as the country moves forward to becoming an advanced nation by 2040, the country’s tax regime should ensure that growth is sustained and that new wealth is inclusively distributed to all Filipinos.
The group noted that a 20 percent CIT rate would be close to the Association of Southeast Asian Nations average, and these countries have more inclusive economies than the Philippines, as measured by levels of poverty.
“A rate of 25 percent will not give the Philippines a significant advantage in comparison to other countries. Foreign firms will still find the 25 percent CIT tax rate a deterring factor when comparing the Philippines to other investment locations,” AmCham’s position paper said.
However, the group said that a staggered reduction to 20 percent also protects against a potential decrease by Indonesia of its 25 percent CIT, which would leave the Philippines still the highest of the Asean-6 if its rate is only 25 percent.
“Congress may wish to consider passing the CIT reform separately from FIR (Fiscal Incentives Rationalization). Given the long history of delayed legislation of any FIR reform and the importance of reducing the current high CIT of 30 percent, the Congress should consider a separate bill to reduce the CIT effective Jan. 1, 2019,” AmCham said.
According to AmCham, the rate of reduction should be studied carefully, but 2% a year to 20% in five years conditioned on specific indicators of macroeconomic progress would be a possible formula to protect against an unforeseen downturn in the economy.
AmCham said it supports the tax collection efficiency measures in the bills, such as requirements for the use of electronic receipts and electronic filing, noting that the tax efficiency rate of the Philippines of 12% in 2015 is considerably lower than countries such as Thailand at 31% and Vietnam at 29%.
However, the authorization for the Bureau of Internal Revenue (BIR) to prosecute civil and criminal violations may be considered a conflict of interest between an agency focused on revenue collection and the rights of the taxpayer.
“We also encourage the BIR and Bureau of Custom (BOC) to improve their collection efficiency records by widening the taxpayer base and, with the Department of Justice, improving the record of successful prosecution of tax avoidance cases,” the position paper said.
“The proposed bill creates uncertainty for existing and new investors.” Past bills on Fiscal Incentives did not remove the 5% GIW unbound incentive. Until the proposed TRAIN 2 bill is enacted, investors will face uncertainty about the future CIT and FI,” the AmCham warned.
“Tax projections, an important part of calculations of the future revenues, will be handicapped by this uncertainty. CIT and FI in countries competing against the Philippines for investments will be more certain and predictable. The proposed formula for reducing the CIT, made dependent on reductions in total FI reported in TMTA data, makes future reductions in the CIT to 25% very uncertain,” the group said.
Instead, AmCham suggested a “status quo” on current FI package of Philippine Export Zone Authority (PEZA) and leading investment promotion agencies (IPAs).
“AmCham recommends that the current FI package of PEZA and leading IPAs be retained. Our main argument is that it has been successful in attracting a large number of foreign investors and creating millions of jobs,” it said.
The American businessmen also cautioned that the radical changes proposed in HB 7214 and HB 7458 will “lead to an end to expansions by many foreign investors and a reversal of the success in recent decades in attracting thousands of foreign firms to invest in the country.”
“The bill as drafted, if implemented, will most likely lead to reduced revenues and job losses on a large scale as a result of damaged investor confidence,” AmCham warned.
The Philippine manufacturing sector is one of the fastest growing sectors in Southeast Asia, next only to Vietnam.
In the last five years, AmCham said changing tax incentives to this industry could affect the long-awaited manufacturing resurgence that underpins sustained economic growth by providing the highest multiplier effect in the economy. Manufacturing investments should continue to have the most competitive incentives in Asia.
“Midstream changes that impact on cost in a major way can may literally affect the positive perception of the Philippine business environment and will influence irreversible way, decisions to remain expand, or set up new companies in the country,” AmCham said.
In March and April, AmCham conducted a survey among multinational members likely to be affected by the fiscal incentive policy changes proposed for TRAIN 2. Most of those who replied benefit from the current fiscal incentives.
The corporate income tax (CIT) in the Philippines at 30% is the highest among large ASEAN economies. The next is Indonesia at 25%. The average CIT of the ASEAN-6 largest economies is 22. 7%. The 30% rate deters some investment by both domestic and foreign firms.
Internationally, the trend-including within ASEAN – is for governments to reduce their CIT. Most recently the United States reduced its CIT rate from 35% to 21% beginning January 1, 2018.
Within ASEAN, Brunei, Laos, Malaysia, Thailand, and Vietnam have reduced their CIT rates since 2009, the year when the current rate in the Philippines went into effect.
Over several decades, the granting of fiscal incentives under a large number of Philippine laws to a multitude of business activities has created a highly complicated fiscal regime containing both positive and redundant incentives.
Over the last two decades thousands of businesses, especially foreign investors engaged in the export of goods and services, were awarded fiscal incentives and established operations in these zones at a 5% GIE CIT rate. Most also benefited from a 4 year income tax holiday (ITH) in their first four years of operation.
The practice of incentivizing investment has become increasingly common in developing as well as developed countries as national and local governments compete for multinational investors, as a tool to encourage development of selected industries and to accelerate creation of better-paying stable jobs for growing populations.
“Given the proposed transition periods in TRAIN 2, 61% of the respondents said the proposed transition would cause their firm to end further expansion.”
TRAIN 2 also proposes to end the fiscal incentives of exemption from local taxes.
AmCham said fiscal incentives are an important factor in most investment decisions since taxes, duties, fees, and deductible expenses add to business expenses. When they are waived or reduced the cost of doing business is less, making the country more competitive. Some countries are able to offer a major investor extremely attractive menus of incentives long income tax holiday (ITH) with reduced corporate income tax (CIT) thereafter with indefinite renewals, free land, and new roads.
Also critical is to preserve the value of PEZA and other economic ones, AmCham said, and to manage carefully any transition from current fiscal incentives to the new regime under TRAIN 2.
“Fiscal incentives compensate for higher costs in Philippines. With higher costs of doing business in the Philippines fiscal incentives play an important role in making an investment in the country more attractive to efficiency-seeking foreign investors,” AmCham said. “For these reasons, the incentives the Philippines offers should be beyond being equal to competitors. They should be more attractive in order to narrow the marginal advantage of other locations.”
Meanwhile, Senator Bam Aquino renewed his push for the passage of his measure to stop the excise tax on oil products under the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
He insisted that the suspension and rollback of the excise tax on fuel would help alleviate the continuing rise in fuel prices and lower the prices of goods and services.
“There is the solution. Let us act on this. The opposition and the administration should help each other to lower the prices of goods,” said Aquino, one of four senators who voted against the ratification of the TRAIN Law.
The senator filed Senate Bill No. 1798 or the Bawas Presyo Bill, which seeks to suspend the excise tax on fuel under the TRAIN Law when the average inflation rate surpasses the annual inflation target over a three-month period.
Aquino said there is a pressing need to enact his measure into law as there is a scheduled second round of increase in excise tax on fuel under the TRAIN Law in January 2019.
He said the woes on high prices of goods and services will continue if the government continues to ignore the plea of the Filipino people, especially the poor.
“Our poor countrymen are already drowning in the high prices and yet, there is another increase in the price of crude oil,” he said.
“Huwag maging manhid sa paulit-ulit na daing ng mahihirap na pamilya. Hindi po masosolusyanan ang problemang ito kung hindi tayo magtutulungan,” the senator added.
Aquino also renewed his call for the government to fully roll out the social mitigating measures under the TRAIN Law, including the unconditional cash transfer (UCT) program for poor Filipino families and the Pantawid Pasada Program, which aims to help jeepney operators and drivers cope with the increase in oil prices.