Why or Way “Trabaho” Bill

There is pending in the Senate the second part of the tax rationalization legislation of the current administration renamed the “Trabaho” bill rather than the TRAIN 2. Significant in the TRAIN 1 was the upward revision of specific taxes on fuel oil and automobiles, and the reduction in the estate taxes which have been digested by the consumers in the past few months. In the TRAIN 2, the important proposals are the reduction of the corporate income taxes to 20% over a period of time from the current 30%, and the removal of some of tax incentives to locators in Export Processing Zones (EPZ)/Special Economic Zones (SEZ) and those enjoying tax incentives under the Investments Incentives Act (IIA).

The rationale for the corporate tax reduction is to bring the Philippine corporate income tax rates closer to the rates of neighboring Asian economies, some of which are even less than 20%. And the reasons for the removal of the tax incentives for locators in EPZs and SEZs and those under the IIA are the rationalization of the incentives, to raise more revenues from them, and to subject them eventually to the regular corporate income tax rates.

There is no objection or controversy in the staggered reduction in the corporate income tax rates and it is welcomed by the business sector together with the simplification of tax computation. But there is strong objection to the removal of the tax incentives of EPZs and SEZs which are currently enjoying a tax rate of 5% of their gross revenues in lieu of income and other taxes. On the surface or just on the tax rates alone, these companies enjoy lower effective tax rates, but we have to consider these companies export their products and services, and their revenues are in dollars which we would not get if they weren’t located here in the Philippines. These are the companies in EPZs that make semiconductors for computers, phones, and other electronic products, or garments/footwear manufacturers exporting to other parts of the world, or assembling wiring harness components for car manufacturers. These are also the Business Processing Organizations (BPOs) that employ thousands of call center agents, accountants, animators, engineers, designers, transcribers, etc. that generate over $30 billion to the Philippine economy which together with the exports from EPZs and SEZs amount to over $65 billion a year.

The Semiconductor Exporters Industries Producers and Exporters and the BPO Associations object to the proposed removal of the tax incentives they are currently enjoying and have a counter-proposal to just increase the tax rate to 7% from the current 5%. They contend these rates were set precisely as an incentive for them to locate in the Philippines, not other countries, and it was attractive enough compared to other countries also offering tax incentives. The other reason they prefer the flat rate to the gross revenue is in the ease of compliance and tax computation and the avoidance of discretion by the tax agents on the allowable/deductible expenses in the computation of the taxable income. The gross revenue computations of these companies, mostly or all foreign companies, are easily validated so tax leakages in this area are avoidable.

While the Philippine GDP have been growing over 6% in the past 11 years it has been slowing down to the low 6% in the past three years. The impact on aggregate demand of EPZs and SEZs to our consumption-led economy is at least 10% and could grow to 15%.

Given also the negative impact of the non-contractualization law and the US-China trade war, a positive compromise solution to this tax incentive issue is a must. As of June 2019, a number of expansion plans of these companies have been shelved or put on hold. A recent study also showed the greatest contributor to China’s fast economic growth in the past 30 years is Foreign Direct Investments, which these companies are. We need the “Trabaho” bill to create trabaho instead of way trabaho.