TRAIN-2: Let’s just get it done

The Department of Finance is continuing its good work — bringing our taxes down. But instead of being praised, it is being heckled, even blocked in its attempts.

Anyone who runs a household knows you can’t spend more than you earn, at least not for very long. Or, a closer example, if your salary is cut, do you still live in the same old way? If you do, you soon lose your house as the banks foreclose.

That house is a good example. If you have a plot of land with a tent on it, you want to build a house—a good, strong one. Well, our infrastructure is a ragged tent, untended for decades now. We need to build a house, concrete roads, steel bridges, ports, airports and so on. And do it fast. That costs money (at least some P1 trillion annually).

It’s a most urgent issue, but Congress’ delay in deciding on corporate income taxes and incentives is causing considerable uncertainty in business. It’s delaying, even losing, new investments and reinvestments for growth. While the country’s foreign direct investments (FDI) are growing, the Philippines could attract more, with our peers in the Association of Southeast Asian Nations receiving two to four times more.

So TRAIN-2, the package to reduce corporate income taxes and rationalize the myriad of incentives, needs to be passed in the next few months. Yes, it needs careful deliberation, but not excessively, especially since the debate has been going on since 1995, when past administrations tackled the same issue. The thinking, and the research associated with it, have long been prepared.

So senators and congressmen: jobs. Let’s create them. A 20-percent corporate income tax and competitive incentives will help do it. But they’re not the only things. A hopeless bureaucracy needs to be fixed. A start has been made, but far too little achieved; a holistic, government-wide, fully computerized, compatible and much simplified system is needed.

Traffic, too, needs to flow at an acceptable rate. Bribery needs to be stopped. And the two issues the World Bank ranks the Philippines the worst at—starting a business and enforcing contracts—need to be urgently and fully addressed.

Twenty percent, not 25 percent, is what’s really needed. Twenty-five percent just puts us at the top end of the group (not way over the top as we are now). And with the ideal number, FDI rises markedly. That equals more tax, and more jobs created.

But we need to go faster than 1 percent per year. Let’s complete it by 2022, when this administration and all elected officials bow out. That means a 3-percentage-point reduction annually. The reductions must be at a fixed, announced and committed rate. If they’re conditioned on meeting certain revenue targets, then investment won’t come due to the uncertainty of what tax you’ll pay. If we could do this, I see no reason FDI couldn’t rise to $15 billion next year, or more.

Tax incentives are not what any government would want to do; it’s forgoing money it could use. But tax incentives are something businesses love to have; they reduce costs and lead to better profits.

So why would the government do it? Two reasons only: 1) to attract businesses that would otherwise go elsewhere; or 2) to make viable a new enterprise or activity that couldn’t otherwise afford to start, but is worth having in the longer term.

The first one requires something that I have not seen done in sufficient depth and scope. Taxes are not the only cost of a business. There are salaries and their associated benefits, the logistics costs of moving products, power costs, rentals or leases, duties, and so on. It’s a package, and it’s on that package that a comparison should be made. It will vary from industry to industry.

So incentives should, I think, be designed on a per-industry basis. The draft bill proposes to do just that through the Strategic Investments Priority Plan, where each industry’s cost benefit analysis would be computed before handing out incentives.

As for new businesses, it costs a lot to get started, and there’s risk to it. Mitigating that cost and risk is a fair thing to do, particularly if it’s a business a country wants. So, again, incentives by industry make some sense.

If that’s too difficult, then I suppose an industry-wide system is a reasonable fallback. But it should be done in comparison with the others we compete with for business.

Visit www.wallacebusinessforum.com for the full version.