Word of caution

During his recent State-of-the-Nation address, President Duterte asked Congress to immediately pass the second package of the comprehensive tax reform program, also known as the TRABAHO or Tax Reform for Attracting Better and High-Quality Opportunities bill.

According to the President, the passage of the bill into law will energize micro and small and medium enterprises of MSMEs and hopefully generate 1.4 million jobs in the coming years

The House of Representatives in September 2018 had approved on third and final reading House Bill 8083, or the TRABAHO bill. The proposal, however, did not get a similar support from the senators due to fears of massive job losses.

The bill seeks to reduce the current 30 percent corporate income tax (CIT) rate, considered the highest in the region, by two percentage points every two years starting 2021 until it reaches 20 percent in 2029. It also aims to reform the country’s fiscal incentives system to make it more targeted, transparent, time-bound and performance-based.

The Duterte Cabinet’s economic development cluster has previously identified package two, as well other packages of the CTRP, as among the administration’s priority legislative agenda for the 18th Congress.

Several lawmakers have filed bills seeking to lower corporate income tax rates and rationalize fiscal incentives in the country, the Department of Finance (DOF) said over the weekend.

According to Finance Assistant Secretary Antonio Lambino. three or four House bills, similar to the second package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP), have been filed by members of the 18th Congress so far.

Lambino said the bills filed and the original DOF proposal contain the same core elements, particularly the cut in corporate income tax rates and rationalization of fiscal incentives.

However, he said the DOF wants to have a version similar to the one approved by the House on third and final reading during the previous Congress as the foundation for a new bill.

In the Senate however, it remains to be seen whether it will a rubber-stamp body, considering that most of its members are allies of the President, or whether it will exercise independence and approve a measure that will really help local business flourish and attract foreign investments.

Just recently, Senator Sonny Angara advised the finance department to consult all stakeholders in crafting the final version of the bill that will be submitted to Congress.

Angara said the DOF should exert all effort to consult the various stakeholders in pushing for the TRABAHO bill because there’s a lot at stake, noting that that it is not only jobs, but also the country’s reputation that must be considered.

He pointed out that the country’s foreign direct investments, though improving, is still low. With companies leaving China because labor cost is going up and because they are trying to diversify, our government should work to attract the departing companies.

The local manufacturing sector, Angara said, really needs a shot in the arm and with a lot of manufacturers located in ecozones, government should be careful on how it tweaks incentives.

In crafting the sunset provisions for the grant of fiscal incentives, Angara suggested that the DOF consider the quality of investments in its decision, noting that there are locators that may have millions of dollars invested in their operations in the country but are not producing.

Angara explained that the investments the DOF should target are those that produce quality products that bring home Filipino employees from abroad.

He added that government could end the incentives of firms who have been enjoying perks for over 30 years. But for those who just came in and have made financial projections over the next few years, a little leeway could be extended.

For her part, Sen. Imee Marcos, the new chair of the Senate Committee on Economic Affairs, warned the TRABAHO Bill would be a hard sell in the upper house. 

Business welcomes the proposed cut in corporate income tax, but caution against making fiscal incentives more targeted, performance-based and time-bound.

According to several business groups, this could result in a drop in investments, loss of jobs, and a decline in the country’s competitiveness. 

Although still a proposal, the threat of a TRABAHO law is already turning away investors. Last year, pledges with the Philippine Economic Zone Authority (PEZA) dropped to P140.2 billion from P237.6 billion in 2017. PEZA cited uncertainties brought by the TRABAHO bill’s aim to rationalize incentives. According to PEZA, the incentives resulted in the creation of 7.5 million direct and indirect jobs. 

Different industries have also warned about the bill’s potential adverse impact. The IT and Business Process Association of the Philippines (IBPAP) said that the bill would cut the information technology and business process management’s (IT-BPM) growth by 35 to 40 percent. The IT-BPM industry is one of the fastest rising sectors in the Philippines, employing 1.23 million Filipinos and contributing $25 billion in revenues.

The Confederation of Wearable Exporters of the Philippines (CONWEP) has warned that up to 110,000 workers may be displaced if the TRABAHO Bill is passed while the Semiconductor and Electronics Industries in the Philippines Foundation Inc. (SEIPI) projects that a cutback on incentives could lead to the loss of up to 140,000 jobs.

For their part, foreign chambers like the European Chamber of Commerce, the Korean Chamber of Commerce and the Japanese Chamber of Commerce and Industry  cautioned that the TRABAHO bill which could push foreign investors to other countries like Vietnam, which is aggressive in offering attractive incentive packages to foreign investors.

To keep the country competitive and investment-friendly, business groups are offering some concessions in lieu of the PEZA incentives’ removal. SEIPI for instance has proposed an increase in gross income earned (GIE) tax from five to seven percent, which can be imposed once PEZA locators’ income tax holidays have been used up. The Join Foreign Chambers of Commerce of the Philippines (JFC) would rather slash the CIT from 30 to 25 percent immediately, followed by a one percent reduction per year until it’s down to 20 percent.  

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