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

Package 2

COMPREHENSIVE TAX REFORM PROGRAM

Corporate income tax and incentives reform

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

As of 2 October 2018 11:00 am

Package 1: TRAIN

Package 1B: Tax amnesty and motor vehicle user charge (MVUC) Package 1A: Personal income tax, consumption tax, and transaction taxes TRAIN (RA 10963)

Comprehensive Tax Reform Program

Package 2: TRABAHO

Package 2+: Alcohol and tobacco excise tax, and mining tax

Corporate income tax and fiscal incentives Personal income tax and consumption tax

Comprehensive Tax Reform Program

Package 3 Property valuation and taxes Capital income and financial taxes Package 4

Objectives of the tax reform packages

• 2. Cost-benefit analysis

What do we gain from a review of past incentives and benefits received?

• 1. Why is Package 2

necessary?

Content of Package 2

• 3. Proposed reform

Broaden tax base

Currently, we have the following regular corporate income tax (CIT) regime

The Philippines has the highest corporate income tax rate in the ASEAN region.

Source: Asian Development Bank and PWC

CIT revenue is increasing, but efficiency is very low.

Source: OECD, individual country statistics offices, and DOF staff calculations.

We have a complex tax incentives system.

• 14 IPAs
• 136 investment laws

200 non-investment laws

• 546 ‘ecozones’ and

freeports We grant the most generous fiscal incentives since they are in lieu of all taxes and given forever.

Source: Individual country finance agencies and investment promotion offices.

We have a complex tax incentives system

14 Investment Promotion Agencies (IPAs)

We have a complex tax incentives system

(based on latest data available)

Source: PEZA, IPAs, and DOF staff calculations

IPA

• No. of ecozones

AFAB 1 APECO 1 BCDA 1 BOI

• CDC

1 CEZA 1 PEZA 528 PIA 1 PPMC 1 PRA

• TIEZA

8 SBMA 1 RBOI-ARMM 1 ZCSEZA 1 TOTAL 546

Huge inequity under the current system:

• Firms with no incentives pay

the regular rate of 30% of net taxable income

• Firms with incentives pay

between 6% and 13% For example, almost all of the 90,000 SMEs pay the regular 30% rate.

Source: DTI and TIMTA

Estimated forgone revenue due to tax incentives

Tax incentives in billion pesos

Type of tax Income tax Customs duties Subtotal Import VAT (gross) Local VAT (gross) Local business tax Subtotal for incentives Leakage Total

• No. of recipients

2015 86 18 104 160 37 TBD 301 43 344 2,844 2016 121 57 179 TBD TBD TBD TBD TBD TBD 3,102

Source: TIMTA, DOF estimates

Estimates of tax incentives: income and duties

(in billions PHP)

Source: TIMTA

Estimates of tax incentives: income and duties by IPA

(in billions PHP)

Source: TIMTA

Top beneficiaries

• f tax incentives

by sector

(in billions PHP)

Source: TIMTA

Some incentives may be needed to attract investments that support our growth objectives.

Create more and better jobs Promote research and development Encourage innovation Stimulate domestic industries Diversify product space (e.g., to higher value exports)

However, they must be performance-based, targeted, time-bound, and transparent.

Despite giving the most generous and forever incentives...

FDI pales in comparison to

• ur neighbors.

Source: BSP, UNCTAD, and DOF calculations

Export competitiveness has been in decline. Domestic industries have weak linkages to export industry. Reliance on imported parts, thus weak domestic content.

Despite giving the most generous and forever incentives...

Source: PSA, UNCTAD, DOF calculations

The current incentives system has a big room for improvement.

• Complexity and inequity
• Lack of monitoring and evaluation,

accountability, and transparency

• Incentives as band-aid solution to

compensate for past structural weaknesses

It is time that we revisit our incentives system to ensure that we gain from every peso that we grant.

Incentives may be important to encourage investments that promote growth and jobs...

Some incentives are unnecessary, i.e., investment would have happened anyway even without the incentives (e.g., available market, quality labor, land, resources, etc.).

...but, investment tax incentives are tax expenditures that someone else has to pay. It is not free money from heaven.

Government needs to ensure efficiency in spending.

(How much tax incentive can we afford?)

Package 2

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.

Cost-benefit analysis of fiscal incentives

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

“Ex-post” cost-benefit analysis

This is done so that we can determine if the tax incentives given to recipients benefit our economy more than it costs.

Note: Evaluation of the past performance does not necessarily indicate future priority or preference over some industries.

Tax incentives usually violate the principles of:

Efficiency Equity Simplicity

However, incentives may be justified if they provide net benefit to society as a whole.

Cost-benefit analysis: Methods

• 1. Estimating implicit

labor subsidy

What is the cost for each job created?

• 3. Estimating net

government revenue

Do we generate more revenue from the tax we forego?

• 2. Performing a

counterfactual analysis

Do firms with registered activities for incentives perform better in terms of job creation, R&D investments, productivity, etc. when compared to non-registered firms?

• 4. Accounting of direct

and indirect cost and benefit

Do total benefits from incentives, both private and social, outweigh total costs?

In 2015, to create 1 job, it costs taxpayers at least P252,706.

Note: In 2012 to 2015, 402,000 jobs created, and in 2015, P104 billion in income and customs duties incentives were given to 14 IPAs.

Result #1

(Implicit labor subsidy)

Source: IPA submissions, TIMTA, DOF estimatess

In general, registered firms, when compared to non-registered firms…

• Have the same employment relative to size
• Have similar average wages, but pay top management higher
• Spend more on fixed assets, but do not spend higher on R&D
• Have the same level of exports relative to sales
• No difference in productivity

Result #2

(Counterfactual analysis using propensity score matching)

Source: PSA ASPBI, TIMTA, DOF estimates

Summary (all firms)

On average, for every peso we grant as incentive, we collect 34 cents in taxes, even after accounting for taxes from indirect employment and domestic inputs. If taxes from unnecessary incentives are accounted for, we collect 95 cents.

Result #3

(Net government revenue effect)

Taxes collected from: Firms Employees Dividends Indirect employees Domestic inputs Tax incentives on: Income Duties (30%) VAT (net of refund) Local taxes

Source: IPA submissions, SEC, TIMTA, DOF estimates

Identifying necessary & unnecessary incentives

Number of firms enjoying incentives for at least 15 years

We have been supporting many firms unnecessarily.

645 firms receiving incentives for at least 15 years.

Source: TIMTA.

On average, for every peso spent on incentive, between P0.63 and P1.21 comes back in benefits, even after accounting for employment generated and spillovers, both direct and indirect.

Result #4

(Accounting of total direct and indirect cost and benefit)

Source: IPA submission, PSA ASPBI, SEC, TIMTA, DOF estimates

Result #2 Result #1

Summary

Result #3 Result #4

For every peso we grant as incentive, we collect 34 cents in taxes. To create 1 job, it costs taxpayers at least P252,706. For every peso spent on incentive, between P0.63 and P1.21 comes back in benefits.

In general, registered firms do not perform better on employment, exports, and productivity compared to non-registered firms.

Source: TIMTA, DOF estimates

Conclusion: while fiscal incentives are important for national development, some incentives are unnecessary

Taxes not collected from unnecessary incentives could have been used to fund necessary infrastructure and skills enhancement, and create a better business environment for all businesses, whether small or large, domestic or foreign that benefits ALL, not just a few.

TRABAHO Bill

Tax Reform for Attracting Better and High-quality Opportunities bill (HB 8083)

2 1

Summary

3 4 Fair and accountable tax incentives system Lower corporate income taxes for all

Provide incentives to attract industries consistent with development priorities

Simplify tax rules

Lower corporate income tax

The President may advance the scheduled reduction in the CIT rate when adequate savings are realized from the rationalization

• f fiscal incentives.

Incentives menu

Special rate (2019)

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

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

• f capital equipment

Special VAT incentives for exporters: 90% of export sales are actually shipped

• ut 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

Approved on 3rd Reading by the House of Representatives on 10 September 2018 Filed by SP Sotto last 2 August 2018, public hearings commenced last 25 September 2018

Automatic reduction in the CIT rate

• f 2% every 2 years starting 2021

until it reaches 20%: 2021 – 28% 2023 – 26% 2025 – 24% 2027 – 22% 2029 – 20%

Single menu for all IPAs Immediate CIT reduction to 25% beginning 1 January 2019 Single menu for all IPAs

HB 8083 and SB 1906

Status Reduction of the corporate income tax (CIT) rate Menu of incentives

HB 8083 and SB 1906

• Oversight for all IPAs
• Approve the grant of

incentives of risky projects and in the event of a deadlock decision

• DOF to chair FIRB and co-

chair all IPAs

• SOF with limited veto power
• n the projects cited above

(bullet 2)

• Overall administrator of IPAs
• Approver of all incentives
• DOF to chair FIRB and co-

chair all IPAs

• No SOF veto power

Role of FIRB

HB 8083 and SB 1906

Repeal of 50 laws or provisions Repeal of 125 laws or provisions

Repeal list

Incentives menu

• Depreciation allowance of qualified capital

expenditure:

• 10% for buildings
• 20% for machineries
• Additional deduction of up to:
• 100% for research and development (R&D)

and training

• 50% for labor expense
• 100% for country-wide infrastructure

development

• 50% for reinvestment allowance to

manufacturing industry

• 50% for domestic input expense
• Enhanced net operating loss carry-
• ver (NOLCO) (5 years)
• Exemption from customs duty on

imported capital equipment and raw materials

53

Incentives menu

• Additional 2 years of incentives for:
• registered activities relocating outside

Metro Manila and selected urbanized areas adjacent to Metro Manila

• agribusiness projects of registered

enterprises located outside Metro Manila and urban areas

• projects located in less developed areas or

those recovering from armed conflict or a major disaster

• VAT incentives to registered enterprises whose export meet the 90% of sales

threshold, and are within an ecozone or free port:

• VAT exemption on importation
• VAT zero rating on domestic purchases

Sunset provision for existing incentives

For RBEs which availed of ITH: Continue until remaining period ends or for a period of 5 years, whichever comes first For RBEs enjoying existing 5% GIE:

Tax administration provisions

Further clarifications to the e-sales reporting and e- receipting systems Improve the general anti-avoidance rules Removal of the tax credit certificate Clarification on the service of subpoena by authorized revenue

• fficers

Submission of tax-related information to the Secretary of Finance Clarifications on the service of letter

• f authority

Clarification of rules on the non-recognition of gains or loss in bona fide statutory corporate reorganizations Clarification of the definition of liquidating dividends Adjustment of the threshold value for Commissioner-approved abatement or compromise Application for extension of the period of limitation of assessment Adjustment

• f penalties

Other tax administration provisions

Allowing BIR to prosecute tax cases

Others (SIPP)

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

• BOI shall ensure that the more targeted list includes activities with

significant positive externalities

• Only the President may propose activities or projects not in the SIPP

that may be granted tax incentives

Integrate tax expenditure reporting into the budget process.

• Incentives will not be budgeted but should be

reported as a tax expenditure for transparency purposes

There are other and may be better ways to support firms

Granting tax incentives is not the only way to directly help firms The government can use more efficient and targeted subsidies The real solution in the medium-term is to address infrastructure gaps, corruption, inefficiency in government, and complex business regulations

• Ex. lifeline subsidies, power subsidies,

housing vouchers, skills training, etc.

Earmarking provisions

• Structural adjustment fund to compensate workers that

may be affected due to rationalization of fiscal incentives:

• P 500 million for targeted cash grants
• P 500 million for targeted trainings
• P 5 billion for skills upgrading of IT-BPO workers
• P 15 billion for development of infrastructure and

economic activities in areas around IPAs

• Earmarking for student vouchers, housing vouchers, and

universal healthcare

Incentives must be

With effective monitoring and evaluation system and anchored on a strategic investment priority plan that emphasizes:

Job creation Research & development Countryside development Skills training Innovation

Thank you!