DOF hopeful on passge of Trabaho bill, other CTRP packages in 2019

January 1, 2019

The Department of Finance (DOF) remains optimistic that the proposed reduction in the 30 percent corporate income tax and the overhaul of the fiscal incentives system, along with the rest of the tax reform packages proposed by the Duterte administration, would be approved by the Congress this year.

Finance Secretary Carlos Dominguez III said the current Congress has several remaining session days in the first half of 2019 before a new set of lawmakers gets elected in May, providing them some time to tackle the proposals under the Duterte administration’s comprehensive tax reform program (CTRP), and hopefully approve them.

The 17th Congress adjourned session last Dec. 15 for its traditional yearend break and will resume session on Jan. 14. It will adjourn again on Feb. 9 and resume session on May 20, after which it will adjourn sine die on June 8.

Dominguez acknowledged the proximity of the May 2019 elections, which could dim hopes on getting the tax reform packages approved in the current Congress.

“We will discuss again with them (legislators) and see how we can push (the tax reform packages),” Dominguez said in a recent interview.

Finance Assistant Secretary Antonio Joselito Lambino II echoed Dominguez’s statement and said the DOF would push for the remaining tax reform packages, which will complement the first CTRP package—the Tax Reform for Acceleration and Inclusion (TRAIN) Law--and complete the process of making the country's tax system fairer, simpler and more efficient.

“We are always supportive of our legislators when they require technical data and analysis for these proposed tax reforms,” said Lambino.

The remaining CTRP packages pending in the Congress are the following:

Package 1B on the reforms in the Motor Vehicle Users' Charge (MVUC). This is still being deliberated in Congress; Package 2, which covers the CIT reduction and reforms in fiscal incentives. The House of Representatives approved its version of the measure—the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill—last September. The Senate version remains pending in its ways and means committee; Package 2 plus, which proposes additional excise taxes on tobacco and alcohol products as well as an increase in the government’s share from mining; Package 3, which covers reforms in property valuation to make the system more equitable, efficient and transparent, will adopt the Schedule of Market Values as single valuation base for national and local property taxation; and Package 4, which proposes the rationalization of capital income taxation to address the multiple rates and different tax treatments and exemptions on capital income and other financial instruments. The House has approved its version of the measure last November.  The Senate has yet to tackle the House-approved version of this tax reform package. Packages 2 and 3 are expected to be revenue neutral, while the DOF proposal under Package1b on the MVUC is expected to bring in an additional P15 billion in a full year of implementation.

Package 2 plus, which will help fund the universal health care (UHC) program, is estimated to yield an additional P60 billion in the first year--that is, if the DOF proposal to raise tobacco excise taxes to P60 per cigarette pack in 2019 and by 9 percent thereafter, and the schedular excise tax increases of fermented liquors, distilled spirits, and wines, to P40 per liter and P40 per proof liter, and 10%, respectively, starting 2019 are adopted by the Congress.

Package 3, meanwhile, will be revenue neutral for the national government but would haul in additional funds for the local government units (LGUs). Package 4 will initially collect additional revenues for the government and will gradually be revenue neutral once it is fully implemented.

The DOF is urging the Congress to place Package 2 in the frontburner, as this is projected to generate some 1.4 million jobs, mostly in small and medium enterprises (SMEs), over the next decade and create a business environment conducive to inclusive growth.

Under the current corporate taxation, a select group of big businesses, many of them on the elite list of Top 1,000 corporations, pay preferred tax rates ranging from 9 to 13 percent while the rest, including SMEs, pay the  30 percent corporate income tax, which is the highest in the region.

Package 2 has been certified as an urgent and priority measure by President Rodrigo Duterte last year.

According to Dominguez, the proposed staggered cuts in the corporate income tax from 30 to 20 percent over a 10-year period--as provided under the TRABAHO bill--will energize hundreds of thousands of SMEs and encourage them to use part of their savings from lower tax payments to expand their businesses and hire more workers.

Dominguez said contrary to the perception poised by tax reform critics, the Duterte administration’s plan will not eliminate incentives for investors but would even improve them by offering a better set of perks that includes the following: 50 percent deduction on incremental labor costs; 100 percent deduction on training, research and development; and 50 percent deduction on purchases of local raw materials.

The set of incentives under Package 2 will be transparent, time-bound, targeted and performance-based, Dominguez said, to, among others, help eliminate corruption and cronyism, and “spare Filipino taxpayers from subsidizing the profits earned by a select group of corporations enjoying redundant incentives in a convoluted system.”

He noted that the reforms being implemented so far by the Duterte administration on its end, including improvements in the ease of doing business, have helped raise net foreign direct investment (FDI) inflows by a hefty third or 31 percent to $7.4 billion in the first 8 months of the year from $5.7 billion during the same period last year.

Apart from pointing to deepening investor confidence in the Duterte administration, Dominguez said the FDI surge this year proves that investors are not being spooked by tax reform, as claimed by certain groups.

Dominguez said the Duterte administration wants the incentives program under Package 2 to “work to the advantage of building a dynamic domestic economy, to create jobs, cause technology transfers, advance research and development, enhance linkages between enterprises and improve conditions for competition.”

“No longer will a favored group of businesses enjoy a permanent grant of 5 percent on gross income earned (GIE).  Never again will the select group of 328 incentivized firms that received 86.3 billion pesos in tax breaks in 2015 declare 141.8 billion pesos in dividends while incurring only 104.6 billion pesos in direct labor costs during the same year,” said Dominguez.

Dominguez said Package 2 will “produce a transparent and even playing field for business” and “broaden the base of participation in wealth creation for our people.” DMS