Keep the TRAIN rolling

Last week I raised the urgency of getting TRAIN 2 through Congress. This week let’s discuss a couple of the points.

But let me first make an impassioned appeal.

Congress, we need replacement funds. I beg you, as a start, to allow the value-added tax to be imposed on co-ops (requested by the Department of Finance in TRAIN 1, and rejected by you, Congress). It will lose co-ops little, but gain the nation much. Think of the betterment of your country, and not just a small group within it.

The average co-op would lose between P1 million and P1.2 million annually. The country would gain P30 billion. The people who voted for you need the infrastructure that would build. Business needs the tax reduction that alternative income will allow, so they can create jobs.

As it now stands, the 30-percent corporate income tax (CIT) rate that brought in some P530 billion (based on the Bureau of Internal Revenue’s 2016 annual report) annually can pay for the needed infrastructure when added to the other sources of revenues. But if it is cut, it no longer can. And it must be cut to make us competitive. So alternative revenues must be agreed to.

The problem with TRAIN 2 is not the CIT. Everyone agrees it must come down. It’s the fiscal incentives—business wants them as generous as possible. The DOF wants only what will result in no losses to it, or losses that are positively covered by other revenue sources. It also wants a rationalization of the mess it is today, with more than 300 different investment and noninvestment laws, some lasting forever. It needs a reduction to one all-encompassing law that sets sensible time limits to incentives granted.

A company should only need financial assistance as it gets going. If it needs financial assistance to keep going, it would need a very good reason for the government to want to continue to support it. The bill doesn’t allow for this and, maybe, realistically can’t. But good if it could.

Under TRAIN 2, the older business process outsourcing and electronics firms, if they’ve had the 5-percent GIE (gross income earned) for over 10 years, would go to the normal tax rate (30 percent going to 25 percent/20 percent). But they’d still be eligible for 5 percent on a per-project basis. So a new project in the same company can get the 5-percent GIE for another five years.

The 15 years — which is what some are proposing — should be acceptable, but only for highly meritorious cases. You can’t argue retroactive protection, because the benefit provided is done as a goodwill gesture of the government, not as a legal contract. If you insist on it, then all the rest of us must continue to pay 30 percent CIT, even when future companies only pay 20 percent. Governments can, and do, change tax rates.

The Philippines imposes the highest CIT rate of 30 percent, but the tax collection efficiency rate is a measly 12.3 percent. Thailand has a 30.5-percent efficiency, followed by Vietnam’s 29 percent and Malaysia’s 27 percent. If we can broaden the tax base and raise it to the 17 percent under the Ramos administration, that would cover much of the income tax loss. With a 20-percent tax, the “incentive” to cheat will be lessened, adding further to government revenues. And if some big, well-known tax cheats are finally put in jail, revenues will rise dramatically. That wouldn’t be sufficient, but it would help.

I think it is important that the integrity and national scope of the Peza (Philippine Economic Zone Authority) be maintained. It has more than proved its effectiveness and worth. Keep it as it is.

So there’s a very small window—I’d say until the end of September — for getting House Bill No. 7214 (the tax bill) through both chambers of Congress. Political reality says the only way that will happen will be if the President steps in, and insists. And if business actively endorses it. The President must become actively, directly involved. Speaker Pantaleon Alvarez has shown he can get his way in the House of Representatives. So if Mr. Duterte supports it, it will pass. And I think the Senate can be brought on board, too. What is needed is business, the DOF and the Department of Trade and Industry, as well as the President, all working together to convince Congress to approve the bill, and pass it into law.

This bill, however it is finally constructed, if it leads to lower taxes, will result in far more jobs.

And isn’t that what really matters? A decent life for all Filipinos? TRAIN 2 can help achieve it.

E-mail: [email protected]. A fuller version of this column is available at www.wallacebusinessforum.com.