Pass the tax bill now

“I […] implore Congress to immediately pass Package 2 of the Comprehensive Tax Reform Program, or the Trabaho bill, which shall gradually lower the […] corporate income tax, and rationalize and improve fiscal incentives. It will energize our MSMEs and encourage them to expand their business […] The MSMEs hold the promise of raising a lot of the Filipinos.”

That’s what President Duterte said in this year’s State of the Nation Address (Sona). Well, it’s not just MSMEs, it’s the foreign investments we need, too. They just aren’t coming. No one will invest when they don’t know what tax they’ll pay.

The Sona was on July 22; it’s now Dec. 5. Congress has only nine days left before it goes on recess for Christmas. If it truly cares for the people, it will pass Package 2 of the tax reforms in the next nine days. Apart from the budget, I can’t think of any bill more important.

The need for tax and incentives reform was first raised in 1999, 20 years ago! It has been on the agenda of this administration from Day One. Three and a half years is more than enough time to have reviewed, revised, reconsidered anything—more so a tax bill that is holding up investments while it remains unresolved.

The Corporate Income Tax and Incentives Rationalization Act will reduce corporate income tax to 20 percent from the current 30 percent. Think of the huge stimulus to business activity it will create and, in making us more competitive with our neighbors, the greater levels of investment it will attract. Mind you, it will take several years to get there, as it will be reduced a little each year, but corporations plan long-term so the attraction will be there.

Where the problem lies is in incentives. Those getting them now as well as some of the business chambers involved in export (where most of the incentives lie) are not happy with some of the changes the Department of Finance (DOF) wants. DOF is in a difficult position; it would like (maybe not like, but accept) to be generous, but can’t afford to be.

Cutting income tax by one percentage point will reduce government revenues by P20 billion, which has to be recovered somewhere, somehow. Rationalizing incentives is a logical place to get at least most of the revenue back, particularly as there is a mishmash of some 180 incentive-giving laws today.

They need to be consolidated into a sensible whole.

The DOF sees tax incentives as foregone revenues, which they are. But much of that is necessarily foregone for a greater benefit: creating jobs, growing the economy faster. The problem is, where does the middle ground lie? What level needs to be set that will attract the right kind of investment yet not necessarily lose government money?

It’s a tough calculation. If companies don’t come, government gets nothing, so what is needed to entice them to come? There are a lot of disincentives to investing in the Philippines that has to be overcome: high power costs, high logistics costs (try our traffic as a start), uncompetitive labor rates in some areas and an ineffective bureaucracy (that hopefully the Anti-Red Tape Act will fix over time). Until those barriers to investing are addressed, you need incentives. And while other countries offer incentives, you need incentives that compensate for the disadvantages the Philippines poses as an investment site.

Where controversy exists is on just how long a company can benefit from an income tax holiday. At present, it can be quite a long time. Many have benefited for well over 10 years, some over 20. The DOF wants to limit this to 5, 7 or 10 years, depending on the type of activity and where.

Another contentious issue is the proposed shift from a special tax rate (5 percent) based on gross income earned, to one based on net income. The argument then is on what rate this should be.

Where a real problem lies is in transition. The export zones claim the grandfather rule should apply: What was given can’t be changed. DOF claims it can, and should be, as some companies are getting unreasonably long exclusions from paying full tax.

The real problem, though, is none of this; it is time. For the past couple of years, investors have been deterred from investing because they don’t know what tax they’ll pay. The country has suffered enough. This can’t go on.The trouble is, Congress has only nine days to work out a deal among the competing groups that satisfies, more or less, all of them and achieves the twin goals of attracting investors and giving the government money.

With a budget yet to be finalized, it’s looking increasingly unlikely. But it must be tried. Our senators and congressmen should work double time to get both these bills into law. Next year, 2020, must not be another period of uncertainty.

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