Features Philippines Economy

Philippine reforms push for corporate tax cut but incentive changes spook foreigners

29, May. 2020

Photo by Joakim Honkasalo on Unsplash
Photo by Joakim Honkasalo on Unsplash

By Darlene Basingan

MANILA, NNA – To help companies recover and attract foreign investors aiming to diversify their supply chains after being ravaged by the Covid-19 pandemic, the economic team of Philippine President Rodrigo Duterte has revised the second tax reform bill as it comes close to being passed.

While businesses welcome a generous reduction in corporate tax, foreign business groups and analysts are worried that changes in the fiscal incentive system might drive investors away and cause the loss of more jobs.

The Duterte administration has long been pushing for the passage of the second package of its comprehensive tax reform program (CTRP), which was revised thrice already. But this time, the economic team has redesigned it to help the country and businesses regain their footing after being slammed hard by the pandemic, just like other countries.

The bill, which is one of the stimulus programs, has been renamed as the Corporate Recovery and Tax Incentives for Enterprises Act (Create).

The economic team has proposed that corporate income tax be immediately reduced from 30 percent to 25 percent once the bill is passed. From 2023, it will decrease yearly by one percent until reaching 20 percent in 2027.

In a joint meeting with local and foreign business groups on Thursday, Finance Secretary Carlos Dominguez, said the bill has to be passed urgently "to attract foreign investors who want to relocate from other countries and are in search of resilient, high-growth-potential economies like the Philippines."

"This will also improve the ability of the country to attract highly desirable investments that will serve the public interest," he said.

While slashing the corporate income tax would result in the loss of government revenues as much as 625 billion pesos ($12.4 billion) in the next five years, it would benefit all firms especially the micro, small, and medium enterprises.

Dominguez said the bill also seeks to extend by two years the transition period to a new incentive system that would be "highly-targeted, performance-based, and time-bound."

"This should reduce the uncertainty and encourage new investments in our economy," he explained.

While businesses generally support the lowering of corporate income tax, the highest in Southeast Asia, some business lobby groups whose members operate in special economic zones do not agree with changes to the fiscal incentives they are enjoying now.

For example, businesses in zones regulated by the Philippine Economic Zone Authority (PEZA) do not pay corporate income tax for up to six years, and in some instances, up to eight years.

They also do not need to pay tax and duties on the import of raw materials, capital equipment, machinery and spare parts. And after the expiry of the tax holiday, the companies would only need to pay a 5 percent special tax on gross income earned in lieu of national and local taxes.

These are among the fiscal perks that investors benefit in economic zones and they have compensated for the high cost of doing business in the country, according to PEZA.

A file photo taken in November 2019 shows the Cavite Economic Zone operated by the Philippine Economic Zone Authority. It has more than 400 companies that employ over 60,000 workers. (NNA)
A file photo taken in November 2019 shows the Cavite Economic Zone operated by the Philippine Economic Zone Authority. It has more than 400 companies that employ over 60,000 workers. (NNA)

But the president’s economic managers felt that it was high time to “rationalize” the incentives after the government suffered a forgone revenue of 1.2 trillion pesos as a result of tax incentives and exemptions to “a select group” of 3,150 companies from 2015 to 2017.

They also noted that the Philippines is the only country that offers fiscal incentives in perpetuity.

The latest version of the bill aims to give the government the flexibility in customizing incentives for targeted companies and industries.

“The idea here is instead of the old tax system that one size fits all, now we have the flexibility to give them what they want so long as they give us what we want,” Acting Socio-Economic Planning Secretary Karl Chua said in an online forum on Tuesday.

However, Nobuo Fujii, the vice president of the Japanese Chambers of Commerce and Industry of the Philippines, told NNA the cut in corporate income tax would be a good move but it would still remain as the highest in Southeast Asia where the average hovers around 23 percent.

However, his group flatly reject the “rationalization” of incentives to existing investors. He had previously warned that withdrawing the current incentives might force many Japanese firms to shutter or relocate to other countries.

There are more than 1,500 Japanese firms in the Philippines and many operate in economic zones.

As Duterte’s economic team pushes Congress to pass the bill before their session break on June 3, industry groups are busy lobbying for its fine-tuning especially on the incentive revision.

Among them is the electronics and semiconductor industries, which contributes 61 percent to the country’s total commodity exports.

Semiconductor and Electronics Industries in the Philippines Foundation Inc. (Seipi) said it supports the lowering of the corporate income tax but has reservations on the incentives proposal

If the second tax package in its current form is passed into law, it will have disastrous effects on employment, with its estimates at 700,000 direct job losses and 1.2 million indirect jobs in supply chains, according to the Trade Union Congress of the Philippines, the largest labor group in the country.

To prevent this, the group proposed that the current fiscal incentives be retained for five years instead of two years to provide adequate time for the industry to recover. It wants the 5 percent tax on gross income that businesses pay in lieu of national and local taxes to be kept for existing investors who could meet the mandated performance criteria.

Apart from other proposals, the group also do want the implementation of the five-year cap on import duty exemption on equipment, parts and materials.

When asked whether the economic team's proposals would attract investors, Seipi president Dan Lanchica told NNA on Friday, “It depends on how the overall package stacks up against the tax structure and incentives of our ASEAN neighbors, such as Vietnam.”

Manufacturers see Vietnam as a top favorite with investors because of its investor-friendly policies and government. Now that many firms in China are thinking of relocating to diversify their supply chains, Vietnam has become an obvious choice also because of its proximity to China.

Elmar Lutter, president and CEO of Lufthansa Technik Philippines, a joint venture of Lufthansa Technik AG and Philippine aviation service provider MacroAsia Corp., told NNA his group is still in discussion with the government on how to retain the competitive edge of their industry.

Lufthansa, which is involved in aviation maintenance, repair and overhaul, is one of the biggest foreign companies in the Philippines and employs more than 3,000 workers.

“It is a high-tech export service which many countries compete for. We are confident that the government takes that into account in finalizing the Create bill,” he said in a mobile message to NNA on Friday.

Alexander Cabrera, chairman and senior partner of professional services firm PwC Philippines’ chair and senior partner, stressed that for the Philippines to attract foreign investments, it must keep its existing investors first.

“In that regard, the Create bill is very good, but in so far as keeping (to) incentivize foreign investors already here, the bill still needs to acquire its best form,” he said in an online forum.

Economist Ronald Mendoza, a dean at the Ateneo De Manila University’s School of Government, feels that the government should not pass the bill in a rush as there is a need to address the health crisis and the currently fragile economy more carefully.

In a position paper he shared with NNA, he flagged the “weak capability” of the government in executing policies, citing the first package of tax reform introduced during a period of high fuel prices.

He said, "Too many Filipino families are still reeling from the combined effects of poorly executed reform policies in 2018 and 2019, and high-uncertainty and socio-economic disruption arising from the Covid-19 crisis. Pushing more reforms at this stage, seems like hubris."

But Finance Secretary Dominguez pointed out that the Philippines was the first country in ASEAN to impose strong lockdown measures to save lives and protect its communities.

"According to the World Bank, this swift and decisive action of the president has likely saved more than 50,000 people from infection and death," he said on Thursday.

At the same time, Trade and Industry Secretary Ramon Lopez reiterated that the latest version of the bill is better for new investors and existing ones.

“It is what is needed by the country now as our businesses wrestle with the disruption in supply chains and markets brought about by the Covid-19 pandemic,” he said in a statement.