Package 2 COMPREHENSIVE TAX REFORM PROGRAM Corporate income tax and - PowerPoint PPT Presentation

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Year 2021 2023 2025 2027 2029 CIT rate 28% 26% 24% 22% 20% 92,455 223,892 406,556 655,756 991,900 Direct job creation Indirect job 50,697 122,769 222,932 359,578 543,900 creation Total 143,152 346,661 629,488 1,015,334 1,535,800 (IO method) Total 262,467 537,878 980,531 1,569,408 2,259,475 (DSGE method) Sources: PSA, and DOF estimates 1. The IO method incorporates the lowering of the (corporate income tax) CIT rate. 2. The DSGE method incorporates both the reduction in CIT rates and the recovery of fiscal incentives, and represents an upper bound for the job estimates. 3. The significant reduction in the CIT frees up more capital for firms to invest and, in turn, create jobs. 4. The impact on jobs from the lowering of the CIT rate is strongly positive, and slightly higher after the fiscal incentives recovery. 5. For instance, job creation can reach about 140 thousand in 2021 with a 28% CIT rate and can reach around 1.5 million in 2029 with a 20% CIT rate. 12

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 3 RESPONSE A. The decline in investment pledges is not 3. Package 2 will accurate. Despite the claim that Package 2 is causing a decrease in investments, PSA lower investment, reported a 60% year-on-year increase in FDI pledges for the second quarter of 2019, both foreign and signaling confidence in the policies of the Duterte administration despite Package 2. domestic. B. The far majority of FDI do not need incentives. C. In 2018, the largest investment came from BOI firms and they do not receive forever incentives. D. In the past, approved investments were low even without Package 2, so how can critics blame lower investment solely on Package 13 2?

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION 1. Philippine Statistics Authority (PSA)’s report on the doubling of foreign direct investment (FDI) pledges during the first half of 2019 shows that fears of investment flight due to the expected passage of CITIRA are unfounded. 2. Specifically, the PSA reported that foreign investment pledges in the second quarter amounted to P49.58 billion, up 60.2% from P30.95 billion a year ago. The report is based on data from 6 of the 7 investment promotion agencies monitored by the Philippine Statistics Authority (PSA), which include the Board of Investments (BoI), Philippine Economic Zone Authority (PEZA), Clark Development Corporation (CDC), Subic Bay Metropolitan Authority (SBMA), Authority of the Freeport Area of Bataan (AFAB), BoI-Autonomous Region in Muslim Mindanao (BoI-ARMM) and Cagayan Economic Zone Authority (CEZA). 14

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION The far majority of FDI do not need incentives. 1. The gap between FDI and approved foreign investments is widening. This suggests that the majority of foreign investment do not need incentives. 2. PEZA approved investments have been generally declining since 2012 and 2015, even without the proposed CITIRA. 3. In 2018, BOI approved investments was higher than PEZA, suggesting that there is no need for forever incentives to attract investment. 4. Prior to 2012, PEZA approved foreign investments was sometimes higher than the whole Philippine FDI. This suggests that approved investment never or only partly materializes. 15

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION The far majority of FDI do not need incentives. Approved foreign investments by investment promotion 1. Wider gap between total FDI and approved FDI means most agency and foreign direct investments, in USD billions investors don’t need incentives. 11 9.80 4. Prior to 2013, PEZA approved FDI 9 were consistently higher than total FDI. This suggests that many approved 7 2. PEZA approved investments USD billions investment don’t materialize. have been declining even without 5 CITIRA. 3 1.97 1.30 1 3. BOI approved investments are 0.13 higher than PEZA, suggesting that -1 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 firms don’t need forever incentives BOI PEZA Other IPAs FDI to invest. Source: PSA 16 16

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) At the aggregate, FDI reached record highs in recent years despite declining approved foreign investments. 17

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Historically, PEZA attracted the most foreign investments, followed by the BOI. 18

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION First quarter approved investments generally peak during election years. Approved foreign investments in Q1 140 119 120 100 PHP billions 80 64 60 50 47 37 40 32 26 23 22 22 21 19 18 14 14 20 6 5 4 0 Source: PSA Note: Orange bars represent election years. 19

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 4 RESPONSE A. Package 2 provides superior and performance-based 4. Package 2 will miss incentives to attract the right investors leaving China. B. Moreover, Package 2 offers superior incentives to the out on the opportunity largest firms that the President can grant over and above the standard incentive package. to attract investments C. The sooner we enact Package 2, the faster we remove uncertainty and the quicker the investment exiting China amid the will come. D. The Philippines will never attract much investment if US-China trade war. it continues to use incentives as band-aid solution instead of addressing infrastructure, government efficiency, and doing business concerns. This is what we are prioritizing now. E. Progress in achieving the 10-point socioeconomic agenda is advancing strongly. This is what investors look for. 20

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 4 RESPONSE F. Most investments have not left China. They 4. Package 2 will miss are on a wait-and-see mode and assessing the impact of the trade war on their out on the opportunity business. G. Some investments have left China and they to attract investments go to countries like Vietnam not because of exiting China amid the incentives. H. Vietnam is the preferred manufacturing US-China trade war. destination for exports because of its free trade agreements (FTA), transport networks, low labor cost, proximity to China, and better governance. 21

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION World Bank 2005 World Economic Forum 2017-18 22

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Progress in achieving the 10-point socioeconomic agenda is advancing strongly. 23

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Vietnam is preferred for export manufacturing because… 1. Free trade agreements (FTAs) A. Upcoming: Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Vietnam – EU FTA (EVFTA) 2. Vietnam’s proximity to China A. Situating manufacturing centers (e.g. Hai Phong) close to traditional hubs in China (e.g. Shenzhen) B. Many factories in Vietnam are foreign-owned, easier transfer of intangible assets 3. Transport networks A. Proximity to regional shipping routes B. 114 seaports C. Extensive railway network (e.g. Kunming, China – Hai Phong) 4. Low labor costs A. Monthly minimum wages range: USD 125 to USD 180 5. Governance A. Relatively stable government that continues to prioritize infrastructure investment Source: https://www.china-briefing.com/news/vietnam-overtaking-china-us-export-manufacturing/ 24

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Signed Free Trade Agreements (FTA) with Japan, China, Korea and the USA Japan China Korea USA Philippines Yes No No No Yes No No No Indonesia Yes No No No Malaysia Yes Yes No No Thailand Yes Yes Yes Yes Singapore Vietnam Yes No Yes No Source: Asia Regional Integration Center 25

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 5 RESPONSE A. Removing the forever incentives does not mean 5. Package 2 will that we will reduce the competitiveness of incentives. make tax incentives B. Package 2 provides more competitive and performance-based incentives such as additional regionally less deductions for labor, training, R&D, local inputs, infrastructure, reinvestment, depreciation, and competitive. net operating loss carryover. These additional options are available to qualified activities which are not present in the current incentives system and in many other countries. All these can incentivize the right type of investment. C. Moreover, firms can re-apply for incentives after the initial availment period as long as they qualify and innovate. 26

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ITH and special rate incentive package durations in CITIRA (by location) 25 19 20 Section 297. Relocating from urban areas Duration (in years) Section 296. Recovering areas 15 Section 295. Agribusiness or outside urban areas 10 10 7 5 5 0 NCR Laguna, Bulacan, Cavite, Rizal Other areas Relocating to recovering areas Base ITH Base special rate Section 295 ITH Section 295 special rate Section 296 ITH Section 296 special rate Section 297 ITH Section 297 special rate 27

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Additional 3 years of incentives for: Registered activities relocating outside Metro A. Manila and selected urbanized areas adjacent to Metro Manila Agribusiness projects of registered enterprises B. located outside Metro Manila and urban areas Projects located in less developed areas or C. those recovering from armed conflict or a major disaster 28

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Maximum and minimum duration of ITH in ASEAN 30 25 25 20 20 20 Duration (in years) 15 15 15 15 *renewable if qualified 15 12 9 10 7 4 5 5 5 4 4 5 3 3 3 2 1 1 0 Vietnam Myanmar Cambodia Philippines Thailand Lao PDR Malaysia Singapore Brunei Philippines Indonesia (CITIRA) Darussalam (Current) Philippines (current): AFAB and APECO can give 20 years ITH Source: PWC, OECD, DOF staff research, IPA charters 29

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Maximum and minimum duration of special tax rates in ASEAN 50 Forever 40 Forever 40 Duration (in years) *renewable if qualified 30 25 19 20 15 10 10 10 5 3 5 5 5 2 1 0 1 1 Cambodia Thailand Malaysia Myanmar Vietnam Philippines Indonesia Singapore Philippines (CITIRA) (current) 30 * Philippines (current): 5% of Gross Income Earned (GIE) is equivalent to about 15% of net income, on average. Duration has no bounds (forever). Sources: PWC , DOF staff research, IPA charters

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Maximum and minimum duration of income tax incentives across ASEAN 50 Forever 40 40 Forever Duration (in years) 28 30 25 *renewable if qualified 20 20 19 18 20 16 15 9 10 5 4 5 3 3 3 2 2 1 1 1 0 Cambodia Lao PDR Thailand Myanmar Philippines Brunei Malaysia Indonesia Vietnam Singapore Philippines (CITIRA) Darussalam (Current) Notes: Cambodia – Securities (3), Rice (9) Malaysia – biotechnology companies Lao PDR – Under developed areas without adequate infrastructure Indonesia – SEZs Thailand – A1 and A2: Knowledge based R&D, infrastructure related Vietnam – Category 3: High technology, tach parks, software, powerplants, ports Myanmar – SEZ Singapore – Pioneer/ development and expansion incentive 31 Brunei – high tech parks Philippines (current) – forever; ADAB and APECO fiscal incentives are cumulative up to 20 years

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Comparison of ITH and special rate packages in the Philippines and Indonesia (by investment amount) 40 Forever 30 Duration (in years) *renewable if qualified 2 20 7 25 10 20 15 15 12 8 7 0 USD 7 to 35m In SEZ, below USD In SEZ, USD 35 to Relocated to Over USD 35m In SEZ, over USD All ecozones (Indonesia) 35m (Indonesia) 70m (Indonesia) recovering areas (Indonesia) 70m (Indonesia) (Philippines, (Philippines, CITIRA) current) ITH Special rate Sources: PWC, country website 32

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Comparison of ITH and special rate packages in the Philippines and Malaysia (by sector) 40 Forever Duration (in years) 30 *renewable if qualified 20 7 10 10 15 12 10 10 8 5 5 0 Production of Waste ecopark MSC*, R&D Less-developed Relocated to Biotechnology All ecozones machinery and operators, high (Malaysia) areas recovering areas (Malaysia) (Philippines, equipment; technology (Malaysia) (Philippines, CITIRA) current) agricultural, hotel, companies and tourism sectors (Malaysia) (Malaysia) *Multimedia Super Corridor (MSC) ITH Special rate Sources: PWC, country website 33

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Comparison of ITH and special rate packages in the Philippines and Thailand (by sector) 30 Forever Duration (in years) *renewable if qualified 20 7 5 10 15 13 12 12 11 10 8 6 0 B1: Supporting A4: Domestic A3: High Targeted core A1 and A2: Nationally Relocated to All ecozones industry supply chain technology technology Knowledge based strategic sector recovering areas (Philippines, (Thailand) (Thailand) (Thailand) (Thailand) R&D, (Thailand) (Philippines, current) infrastructure CITIRA) related ITH Special rate (Thailand) Sources: PWC, country website 34

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Comparison of ITH and special rate packages in the Philippines and Vietnam (by sector) 40 Forever 30 Duration (in years) *renewable if qualified 20 24 7 10 14 9 5 12 4 8 4 4 4 2 2 0 Cat.5: Non-urban Cat.4: Steel, Cat.3: High Cat.2: Education, Cat.1: Education, Relocated to Ecozones* industrial parks forrestry, irrigation, technology, tach healthcare, cultural, healthcare, cultural, recovering areas (Philippines, (Vietnam) crafts, agriculture parks, software, and sports located and sports located (Philippines, CITIRA) current) (Vietnam) powerplants, ports in non-dfficult areas in dfficult areas (Vietnam) (Vietnam) (Vietnam) ITH Special rate *Category 1 and 2 have lower special rates at 10 percent Sources: PWC, country website 35

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Enhanced net operating loss carry- 3. Depreciation allowance of qualified capital 1. over (NOLCO) (3 years over 5 years) expenditure: Exemption from customs duty on 4. 10% for buildings a. imported capital equipment and raw 20% for machineries b. materials Additional deduction of up to: 2. 100% for research and development (R&D) a. 100% for training b. 100% for country-wide infrastructure c. development 50% for labor expense d. 50% for domestic input expense e. 50% for reinvestment allowance in f. manufacturing industry 36

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Summary of additional deductions incentives in ASEAN countries Additional deductions (percent) Country Investment/ Capital Infrastructure Domestic R&D Labor Training reinvestment expenditure development input allowance 50** Current Philippines CITIRA 100 50 100 100 50 50 Cambodia Indonesia 30 Lao PDR Malaysia 100 200 60 Myanmar 150 100 100 Singapore Thailand 300 200 100 25 10 Vietnam **Additional deduction of 50% of the incremental labor expense if the prescribed ratio of capital assets to annual labor is met, additional deduction of 100% of the incremental labor if located in less-developed areas (cannot be availed of simultaneously with the ITH). Cells in red: no additional deductions 37 Sources: Deloitte, KPMG, PWC

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 6 RESPONSE 6. Package 2 will A. The main cause of uncertainty is the long delay of legislating the reform. Investors prefer to wait until Package 2 is passed before investing. The cause uncertainties. sooner it is passed, the faster investment will flow in. B. The urgency is especially critical given the changing global environment and the US-China trade war. C. The DOF has been consistently pro-active and did not waste time in submitting the proposed package 2 last January 2018, immediately after the passage of TRAIN in Dec 2017. The House approved and transmitted TRABAHO last September 2018, but the Senate conducted only one hearing before the mid-term elections. 38

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION 39

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 7 RESPONSE The title of CITIRA is about the amendment to 7. Package 2 will A. the National Internal Revenue Code (NIRC). The NIRC provides the regular tax rates, reduced B. violate the one-bill tax rates, exemptions, and the institutions to administer and oversee tax collection, like the one-subject rule by BIR, BOC, the various congressional oversight committees, and other agencies such as DBM in including fiscal charge of monitoring the earmarked funds. Thus, including the incentives of IPAs such as C. incentives and FIRB reduced rates and exemptions of IPAs, and the governance of these incentives through the FIRB is consistent with the provisions of the NIRC. provisions in the bill. 40

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 7 RESPONSE A. There are two requirements of the one-bill one- 7. Package 2 will subject rule: completeness and germaneness. B. The one-bill one-subject rule is sufficiently complied violate the one-bill with where the title is comprehensive enough to embrace the general objective it seeks to achieve, and one-subject rule by if all the parts of the statute are related and germane to the subject matter embodied in the title or so long as the same is not inconsistent with or foreign to the including fiscal general subject and title (Farinas vs. The Executive Secretary) . incentives and FIRB C. The reduction of the corporate income tax, the rationalization of fiscal incentives, the expansion of the power of the FIRB, and the repeal of the provisions provisions in the bill. under the charters of the IPAs are not different subject matters as all pertain to the corporate taxation in the country. Thus, CITIRA does not violate the constitutional requirement that every bill shall embrace only one subject which shall be expressed in the title thereof. 41

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION A. The constitutional prohibition of more than one subject in an act does not impose any limitation on the comprehensiveness of the subject, which may be as comprehensive as the legislature chooses to make it, provided, it constitutes, in the constitutional sense, a single subject and not several. To constitute plurality of subject, an act must embrace two or more dissimilar and discordant subjects, that by no fair intendment can be considered as having any legitimate connection with or relation to each other. Within the meaning of the constitutional provision, matters which apparently constitute distinct and separate subjects are not so where they are not incongruous and diverse to each other. Generally speaking, the courts are agreed that a statute may include every matter germane, referable, auxiliary, incidental, or subsidiary to, and not inconsistent with, or foreign to, the general subject or object of the act. (Casco Company et. al. vs. Public Utility District No. 1 of Thurston Country et. al., 137 Wash. Dec. 726 [[37 Wn. 2d 777]]) 42

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION B. A legislation may contain any number of provisions, no matter how diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and may be considered in furtherance of such subject by providing for the method and means of carrying out the general subject. (Farinas vs. The Executive Secretary) C. The constitutional requirement as now expressed in Article VI, Section 26(1) "should be given a practical rather than a technical construction. It should be sufficient compliance with such requirement if the title expresses the general subject and all the provisions are germane to that general subject. (Sumulong vs. Comelec) 43

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Provisions alleged to be violative of the rule Provisions reorganizing and defining the functions of the Fiscal Incentives ● Review Board (Section 30 of House Bill No. 4157 inserting new Sections 298 and 299, to the National Internal Revenue Code of 1997, as amended) 44

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ONE-SUBJECT RULE: The rule The "One-Subject Rule", is enunciated in Article VI, Section 26(1) of the 1987 ● Constitution, to wit: Sec. 26(1). Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof. The Rule mandates that where the subject of a bill is limited to a particular matter, ● the lawmakers along with the people should be informed of the subject of proposed legislative measures. This constitutional provision, thus, precludes the insertion of riders in legislation, a rider being a provision not germane to the subject matter of the bill. 45

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ONE SUBJECT RULE: Cases Purpose of the rule The purpose of the constitutional directive that the subject of a bill should be embraced in its title • is to apprise the legislators of the purposes, the nature and scope of its provisions, and prevent the enactment into law of matters which have not received the notice, action and study of the legislators and the public. In this case, legislators will be apprised of the amendments to be made as the bill is set to be deliberated in the committee and plenary. The proscription is aimed against the evils of the so-called omnibus bills and log-rolling legislation • (Log-Rolling) as well as surreptitious and/or unconsidered encroaches (Riders). Omnibus Bills are acts containing several subjects with unrelated matters representing diverse interests, the main object of such combination being to unite the members of the legislature who favor any one of the subjects in support of the whole act. (Fariñas vs. Executive Secretary) The Rule is required to prevent surprise or fraud upon the legislature by means of provisions in • bills of which the titles gave no information, and which might therefore be overlooked and carelessly and unintentionally adopted; and to fairly apprise the people, through such publication of legislative proceedings as is usually made, of the subjects of legislation that are being considered, in order that they may have opportunity of being heard thereon by petition or otherwise if they shall so desire. (De Guzman Jr. vs. COMELEC) 46

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ONE SUBJECT RULE: Cases In general • “The constitutional prohibition of more than one subject in an act does not impose any limitation on the comprehensiveness of the subject, which may be as comprehensive as the legislature chooses to make it, provided, it constitutes, in the constitutional sense, a single subject and not several. To constitute plurality of subject, an act must embrace two or more dissimilar and discordant subjects, that by no fair intendment can be considered as having any legitimate connection with or relation to each other. Within the meaning of the constitutional provision, matters which apparently constitute distinct and separate subjects are not so where they are not incongruous and diverse to each other. Generally speaking, the courts are agreed that a statute may include every matter germane, referable, auxiliary, incidental, or subsidiary to, and not inconsistent with, or foreign to, the general subject or object of the act. ” (Casco Company et. al. vs. Public Utility District No. 1 of Thurston Country) 47

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ONE SUBJECT RULE: Cases • “A general title may be said to be one which is broad and comprehensive, and covers all legislation germane to the general subject stated. It is not an objection that it covers more than the subject of the body of the act, but it most, in any event, cover less. It is not necessary that it index the details of the act, or give a synopsis of the means by which the object of the statute is to accomplished. All matters which are germane to the subject may be embraced in one act. Under the true rule of construction, the scope of the general title should be held to embrace any provisions of the act, directly or indirectly related to the subject expressed in the title and having a natural connection thereto, and not foreign thereto. Or, the rule may be stated as follows: Where the title of a legislative act expresses a general subject or purpose which is single, all matters which are naturally and reasonably connected with it, and all measures which will, facilitate the accomplishment of the purpose so stated are properly included in the act and are germane to its title. (Gruen vs. State Tax Commission) 48

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ONE SUBJECT RULE: Cases Completeness of Title The Constitution does not require Congress to employ in the title of an enactment, language of • such precision as to mirror, fully index or catalogue all the contents and the minute details therein. It suffices if the title should serve the purpose of the constitutional demand that it inform the legislators, the persons interested in the subject of the bill and the public, of the nature, scope and consequences of the proposed law and its operation. (Lidasan vs. COMELEC and Tio vs. Videogram Regulatory Board) The Court held that it should be sufficient compliance with such requirement if the title expresses • the general subject and all the provisions are germane to that general subject. (Sumulong vs. COMELEC) • Of course, the Constitution does not require Congress to employ in the title of an enactment, language of such precision as to mirror, fully index or catalogue all the contents and the minute details therein. It suffices if the title should serve the purpose of the constitutional demand that it inform the legislators, the persons interested in the subject of the bill and the public, of the nature, scope and consequences of the proposed law and its operation. (Lidasan vs. Comelec) 49

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ONE SUBJECT RULE: Cases An act having a single general subject, indicated in the title, may contain any number of provisions, • no matter how diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and may be considered in furtherance of such subject by providing for the method and means of carrying out the general subject . (Fariñas vs. Executive Secretary) Liberal interpretation of the rule To determine whether there has been compliance with the constitutional requirement that the • subject of an act shall be expressed in its title, the Court laid down the rule that – Constitutional provisions relating to the subject matter and titles of statutes should not be so narrowly construed as to cripple or impede the power of legislation . The requirement that the subject of an act shall be expressed in its title should receive a reasonable and not a technical construction. It is sufficient if the title be comprehensive enough reasonably to include the general object which a statute seeks to effect, without expressing each and every end and means necessary or convenient for the accomplishing of that object. Mere details need not be set forth. The title need not be an abstract or index of the Act. (Fariñas vs. Executive Secretary) 50

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ONE SUBJECT RULE: Cases If the law amends a section or part of a statute, it suffices if reference be made to the legislation to • be amended, there being no need to state the precise nature of the amendment. To lend approval to such a plea is to construe the above constitutional provision as to cripple or impede proper legislation. ” (Alalayan vs. National Power Corporation) • The constitutional requirement as now expressed in Article VI, Section 26(1) "should be given a practical rather than a technical construction. It should be sufficient compliance with such requirement if the title expresses the general subject and all the provisions are germane to that general subject." (Sumulong vs. Comelec) 51

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ONE SUBJECT RULE: Opinion • From the above, Section 26(1) of Article VI of the 1987 Constitution is sufficiently complied with where the title is comprehensive enough to embrace the general objective it seeks to achieve, and if all the parts of the statute are related and germane to the subject matter embodied in the title or so long as the same are not inconsistent with or foreign to the general subject and title. • The Reduction of corporate income tax, the rationalization of fiscal incentives, the expansion of the power of the FIRB and the repeal of the provisions under the charters of the IPAs are not different subject matters as all pertain to the corporate taxation in the country. Thus, the provisions being germane, anciliary, incidental and subsidiary to the provisions of the NIRC, CITIRA does not violate the constitutional requirement that every bill shall embrace only one subject which shall be expressed in the title thereof. 52

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 8 RESPONSE 8. Package 2 will There is no contract in the first place as firms fill A. out an application form. violate the non- Tax incentives are not entitlements, but B. privileges. In fact, tax payment is a duty. impairment clause by There is no vested right in a tax exemption, more C. so when the latest expression of legislative intent providing a sunset for renders its continuance doubtful. Being a mere statutory privilege, a tax exemption D. current incentives. of an IPA locator may be modified or withdrawn at will by the granting authority. (Republic vs. Caguioa) The non-impairment clause under the E. Constitution cannot be invoked in the case of a revocation of the tax incentives as the clause yields to the government’s police power and power to tax. 53

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION 54

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION 55

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION 1. The government validly exercises a regulatory and governmental function pursuant to its police power and power of taxation in granting incentives. The government is not acting in its private capacity so as to make such incentives an inducement of valid and substantial consideration for entities to register. Lastly, the incentives also emanate from a regulatory law and not from executive fiat alone. 2. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. (PAGCOR vs. BIR) 3. A tax exemption cannot be grounded upon the continued existence of a statute which precludes its change or repeal. (Republic of the Philippines vs. Caguioa) 56

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Provisions alleged to be violative of the rule Sunset provision of incentives (Section 30 of House Bill No. 4157 inserting a ● new Section 310 to the National Internal Revenue Code of 1997, as amended) 57

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: The rule Section 10, Article III of the Constitution provides: ● SECTION 10. No law impairing the obligation of contracts shall be passed. The Supreme Court has ruled that the purpose of the non-impairment clause is to safeguard the ● integrity of contracts against unwarranted interference by the State. As a rule, contracts should not be tampered with by subsequent laws that would change or modify the rights and obligations of the parties. (Goldenway Merchandising Corporation vs. Equitable PCI Bank) 58

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases Limitations to the rule ● “It has long been settled that police power legislation adopted by the State to promote the health, morals, peace, education, good order, safety, and the general welfare of the people prevail not only over future contracts but even over those already in existence, for all private contracts must yield to the superior and legitimate measures taken by the State to promote public welfare. ” (Surigao del Norte Electric Cooperative vs. Energy Regulatory Commission) ● The non-impairment clause under the Constitution cannot be invoked in the case of a revocation of the tax incentives as the non-impairment clause yields to the government’s police power (La Bugal B’laan Tribal Association, Inc. vs. Ramos) and power to tax (Republic of the Philippines vs. Caguioa). 59

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases Contracts covered by the rule If the grant of an exemption does not constitute a contract, but is merely “a spontaneous ● concession by the legislature, not connected with any service or duty imposed” it is REVOCABLE by the power which made the grant. A state may, at its pleasure, withdraw and exemption which is a mere gratuity possessing no element of a contract, even though the corporation may have incurred expenses on the faith thereof. (Tax Principles and Remedies by Justice Japar B. Dimaampao) Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of ● the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. (PAGCOR vs. BIR) 60

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases ● The government validly exercises a regulatory and governmental function pursuant to its police power and power of taxation in granting incentives. The government is not acting in its private capacity so as to make such incentives an inducement of valid and substantial consideration for entities to register. Lastly, the incentives also emanate from a regulatory law and not from executive fiat alone. 61

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases The rights granted under the Certificates of Registration and Tax Exemption (SBMA Registration) of ● private respondents are not absolute and unconditional as to constitute rights in esse – those clearly founded on or granted by law or is enforceable as a matter of law. These certificates granting private respondents a "permit to operate" their respective businesses are in the nature of licenses, which the bulk of jurisprudence considers as neither a property nor a property right. The licensee takes his license subject to such conditions as the grantor sees fit to impose, including its revocation at pleasure. A license can thus be revoked at any time since it does not confer an absolute rightWhile the tax exemption contained in the Certificates of Registration of private respondents may have been part of the inducement for carrying on their businesses in the SBF, this exemption, nevertheless, is far from being contractual in nature in the sense that the non-impairment clause of the Constitution can rightly be invoked. (Republic of the Philippines vs. Caguiao) 62

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases Republic of the Philippines vs. Caguioa: 1. There is no vested right in a tax exemption, more so when the latest expression of legislative intent renders its continuance doubtful. Being a mere statutory privilege,a tax exemption may be modified or withdrawn at will by the granting authority. 2. A tax exemption cannot be grounded upon the continued existence of a statute which precludes its change or repeal. 3. The rights granted (under the Certificates of Registration and Tax Exemption of private respondents) are not absolute and unconditional as to constitute rights in esse – those clearly founded on or granted by law or is enforceable as a matter of law. 4. Applying this principle, the Supreme Court held that while the tax exemption contained in the SMBA Certificates of Registration of private respondents may have been part of the inducement for carrying on their businesses in the Subic Bay Freeport, this exemption, nevertheless, is far from being contractual in nature in the sense that the non-impairment clause of the Constitution can rightly be invoked. 63

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Opinion • Package 2 follows the country’s tax policy, which is determined by Congress. It is the inherent power of the State to tax. It is the responsibility of all taxpayers to pay taxes. Incentives are not entitlements, but privileges that must be earned. When firms apply for incentives, • they do so under the prevailing incentive structure, which can be changed by Congress. • If tax incentives, can never be changed, then it is telling Congress it has no power to change tax policy. 64

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 9 RESPONSE 9. The sunset provision Being a mere statutory privilege, a tax exemption A. may be modified or withdrawn at will by the will violate the due granting authority. process clause in Further more, no new tax is being imposed and B. CITIRA does not tax past transactions. relation to the principle The legislative power to tax involves the power to C. of non-retroactivity of determine the subject thereof - who to tax, who to exempt, the removal of the incentives, being tax laws. statutory privileges, is being exercised under authority of a law that is valid or the Constitution itself. It is a valid exercise of legislative power. Jurisprudence allows tax laws to apply D. retroactively so long as the law itself provides for its retroactive application (Hydro Resources vs CA) and the same is not so harsh to constitute the violation of the due process clause (Central Azucarera de Don Pedro vs CTA) . 65

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Provisions alleged to be violative of the rule Sunset provision of incentives (Section 30 of House Bill No. 4157 inserting a new Section 310 to ● the National Internal Revenue Code of 1997, as amended) Argument: Removing the incentives means changing the taxation regime of an RBE. ● 66

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) DUE PROCESS CLAUSE: The rule Section 1, Article III of the Constitution provides: ● SEC. 1. No person shall be deprived of life, liberty, or property without due process of law xxx. The due process clause in taxation requires that a tax must be for public purpose, it must be ● imposed within the territorial jusridcition, and that there is no arbitrariness or oppression in the assessment and collection thereof. One may be deprived of life, liberty and property as long as the due process – notice and hearing – ● have been complied with. Any deprivation of life, liberty and property with due process if done: (a) under authority of a law ● that is valid or the Constitution itself; and (b) after compliance with fair and reasonable methods of procedure presented by law. 67

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) PROSPECTIVITY OF LAWS PRINCIPLE: Cases • Taxes may be imposed retroactively by law but unless so expressed by such law, these taxes must only be imposed prospectively. (Hydro Resources vs. CA) • Tax laws are neither political nor penal in nature, and they are deemed laws of the occupied territory rather than the occupying enemy. (Hilado vs. Collector) • The “ex post facto” rule, except for the penalty imposed (not the interest), would be inapplicable. A harsh retroactivity of the law, however, may make it inequitable and violative of the constitution; similarly, due process is violated if the tax is oppressive. (Central Azucarera de Don Pedro vs. CTA) • Property taxes and benefits assessments on real estate, retroactively, are not open to the objection that they infringe upon the due process of law clause of the Constitution; that taxes on income are not subject to the constitutional objection because of their retroactivity. (Fernandez vs. Fernandez) 68

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 10 RESPONSE 10. Package 2 will violate The provisions under CITIRA, delegates to the A. President the power to advance the scheduled the principle of non- reduction on RCIT and to grant incentives to highly desirable projects through the delegation of taxing power ascertainment of standards as provided. It does not leave these powers upon factual matters by allowing the President within the control of the President. As held by the Supreme Court, there is no undue B. to adjust the CIT rate and delegation of the legislative power when only the discretion as to the execution of a law is given. grant incentives to highly This is constitutionally permissible. (Abakada Guro Party List vs. Executive Secretary) desirable projects. Congress does not abdicate its functions or C. unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. (Abakada Guro Party List vs. Executive Secretary) 69

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 10 RESPONSE 10. Package 2 will violate There are several provisions in the tax D. code that gives precedence. the principle of non- Section 106A (old NIRC provision) 1. gives the President the power to raise delegation of taxing power the VAT rate from 10 to 12 percent if by allowing the President conditions are met. Section 148 gives the President the 2. to adjust the CIT rate and power to suspend the next oil excise increase if conditions are met. grant incentives to highly Section 27A gives the President the 3. desirable projects. power to lower the CIT rate if conditions are met. 70

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Provisions alleged to be violative of the rule Provisions allowing the President to advance the scheduled reduction on RCIT (Section 7 and 8 ● which amends Sections 27 and 28, respectively, of the National Internal Revenue Code of 1997, as amended) Provision giving the president the power to grant incentives to highly desirable projects (Section ● 30 of House Bill No. 4157 inserting a new Section 301 , to the National Internal Revenue Code of 1997, as amended) 71

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) NON-DELEGATION OF THE TAXING POWER: The rule • Section 28, Article VI of the Constitution provides: SEC. 28. (2) The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. • The principle of separation of powers ordains that each of the three branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim potestas delegata non delegari potest (what has been delegated cannot be delegated). (Gerochi vs. DOE) 72

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) NON-DELEGATION OF THE TAXING POWER: Cases Requirements for valid delegation • In the face of the increasing complexity of modern life, delegation of legislative power to various specialized administrative agencies is allowed as an exception to this principle. All that is required for the valid exercise of this power of subordinate legislation is that the regulation be germane to the objects and purposes of the law and that the regulation be not in contradiction to, but in conformity with, the standards prescribed by the law . These requirements are denominated as the completeness test and the sufficient standard test. • Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature such that when it reaches the delegate, the only thing he will have to do is to enforce it. The second test mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's authority and prevent the delegation from running riot. 73

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) NON-DELEGATION OF THE TAXING POWER: Cases • There is no undue delegation of legislative power but only of the discretion as to the execution of the law. This is constitutionally permissible. “Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. In the above case, the Secretary of Finance becomes merely the agent of the legislative department, to determine and declare and even upon which its expressed will takes place. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions action as the executive alter ego or subordinate ( Abakada Guro Party List (etc.) vs. Ermita, G.R. No. 168056, September 1, 2005 ) • As held by the Supreme Court in a similar case, there is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. (Abakada Guro vs. Executive Secretary) 74

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) NON-DELEGATION OF THE TAXING POWER: Opinion • In CITIRA, what will be delegated is only the power to ascertain a fact, that is, that adequate savings have been realized, as certified by the Secretary of Finance, on the basis of which the president may advance the scheduled reduction of corporate income tax rate. The authority to advance the reduction of tax rate is made contingent upon a specified fact or condition (realization of adequate savings). It does not leave the power to reduce corporate income tax rate upon factual matters within the control of the President. 75

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) DUE PROCESS CLAUSE: Why is there no violation of this rule? Being a mere statutory privilege, a tax exemption may be modified or withdrawn at will by the ● granting authority. No new tax is being imposed. ● CITIRA does not tax past transactions. ● The power to tax involves the power to determine the subject thereof--who to tax, who to ● exempt, the removal of the incentives, being statutory privileges, is being exercised under authority of a law that is valid or the Constitution itself. It is a valid exercise of legislative power. Jurisprudence also allows that tax laws apply retroactively so long as the law itself provides for its ● retroactive application. 76

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 11 RESPONSE A. The Department of Finance (DOF) is mandated to generate 11. Governance of fiscal and manage financial resources of the government. In 2020, it is mandated to raise PHP 4.1 trillion pesos. incentives is not part of B. Despite this mandate, the DOF has very limited involvement in the granting of incentives. the Department of i. In the Philippines, DOF is a member of the board of only Finance's portfolio. 2 out of 13 IPAs. ii. Even as a member, it is a miniscule voice in the PEZA board (1 out of 13 board members) and the PIA board (1 out of 10 board members). C. In Indonesia, income tax incentives require Minister of Finance approval. D. In Thailand, the tax agency is responsible for approving tax incentives to international business centers and for R&D activities. E. In Malaysia, Thailand, and Vietnam, the Ministry of Finance is a member of the board that grants fiscal incentives. 77

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION V I S I O N • A strong economy with stable prices and strong growth; • A stable fiscal situation with adequate resources for government projects and budgetary which could be adequately financed; • A borrowing program that is able to avoid the crowding-out effect on the private sector, and minimizes costs; • A public sector debt profile with long maturities and an optimum mix of currencies that minimizes the impact of currency movements; • A strong economic growth with equity and productivity M A N D AT E M I S S I O N Under Executive Orders 127, 127-A and 292, the Department of Finance is responsible Our economy must be one of the most dynamic and active in the world, globally for the following: competitive and onward looking. The DOF shall take the lead in providing a solid foundation for the achievement of this objective, by building a strong fiscal • Formulation, institutionalization and administration of fiscal policies in position, through the following: coordination with other concerned subdivisions, agencies and instrumentalities of the government; • Formulation, institutionalization and administration of sound fiscal policies; • Generation and management of the financial resources of government; • Improvement of tax collection efficiency; • Supervision of the revenue operations of all local government units; • Mobilization of adequate resources on most advantageous terms to meet • Review, approval and management of all public sector debt, domestic or foreign; budgetary requirements; and • Sound management of public sector debt; and • Rationalization, privatization and public accountability of corporations and assets • Initiation and implementation of structural and policy reforms owned, controlled or acquired by the government. 78

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION IPA DOF board membership Aurora Pacific Ecozone (APECO) None Authority of the Freeport Area of Bataan (AFAB) None Bases Conversion and Development Authority (BCDA) None Board of Investments (BOI) None Clark Development Corporation (CDC) None Cagayan Economic Zone Authority (CEZA) None Member Philippine Economic Zone Authority (PEZA) (1 voice out of 13 members) Member PHIVIDEC Industrial Authority (PIA) (1 voice out of 10 members) Poro Point Management Corporation (PPMC) None Subic Bay Metropolitan Authority (SBMA) None Tourism Infrastructure and Enterprise Zone Authority (TIEZA) None Zamboanga City Special Economic Zone Authority (ZCSEZA) None Regional Board of Investments - ARMM (RBOI-ARMM) None 79

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Country Incentives administration Finance agency involvement Role Board Notes Limited Philippines Board of Investments, various investment promotion agencies No The DOF is a member in only the PEZA board (1 out of 13) and the PIA (current) (AFAB, APECO, BCDA, BOI, CDC, CEZA, PPMC, RBOI-ARMM) administrative board (1 out of 10). involvement Philippines Fiscal incentives review board (FIRB) Approval Chair The FIRB shall administer, regulate, audit, and evaluate granting of (CITIRA) incentives. Indonesia Indonesia Investment Coordinating Board (BKPM), The National Approval Not a Income tax incentives require Minister of Finance approval. Council for SEZ member Minister of Finance approves projects for reinvestment allowance and Malaysia Malaysia Investment Development Authority, various IPAs, Audit Member for projects in the following sectors: transportation, communications, Ministry of Industrial Development Sabah, Ministry of Industrial services, and utilities. Development Sarawak (for discretionary incentives); Inland Revenue Board of Malaysia (for statutory incentives)* Singapore Singapore Economic Development Board (for discretionary Evaluation Not a A Pioneer certificate or Development Expansion Incentive company must incentives); Inland Revenue Authority of Singapore (for statutory member submit regular progress reports to the EDB for the evaluation of incentives)* performance. The BOI makes all promoted companies’ profiles available in a Thailand Thailand Board of Investment (BOI) Approval Member searchable database on its website. All tax legislation is prepared by the Ministry of Finance Vietnam Foreign Investment Agency Vietnam Audit Member *Statutory incentives are explicitly laid out by law. Discretionary incentives are dependent upon the administering body. 80 Source: country websites, https://vietnam.oxfam.org/sites/vietnam.oxfam.org/files/file_attachments/Oxfam%20Tax%20incentive%20report%20ENG.pdf

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 12 RESPONSE 12. The Fiscal Incentives A. The IPAs will process application for incentives and recommend to the FIRB. Review Board (FIRB) will B. The FIRB will approve or disapprove all applications for incentives. But these duplicate the incentive shall be deemed approved if not decided approval process, upon by the FIRB following the EODB- mandatory max processing time. adding another layer of C. This layered approval is good practice to ensure that decisions are prudently bureaucracy. made. For instance, major investment projects go through three levels of approval: ICC technical, ICC cabinet, and NEDA board approval. 81

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Approval/disapproval of incentives IPAs recommend the tax incentives to be given to registered enterprises BOI Board of Investments BOI determines the priority sectors through the Strategic Investment Priority RBOI- Plan (SIPP) ARMM 82

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 13 RESPONSE A. There are 133 investment and 209 non- 13. The investment investment laws (total of 342) that provide incentives outside the tax promotion plan (IPP) code. currently in place B. The IPP covers 815 industries out of 1,265 (64 percent of all industries) already targets based on the 5-digit PSIC. C. As a result, up to 69 percent of the specific industries for country’s GDP can potentially be given incentives. growth. D. This implies that the current targeting is not focused. 83

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Current incentives system: 133 investment-related fiscal incentive laws EO 22 Reducing the Rates of Duty on Capital Equipment RA 8550 Fisheries and Aquatic Resources RA 9275 Water Quality Management RA 7353 Rural Banks PD 66 Export Processing Zone Authority PD 87 Oil Exploration and Development Act RA 8407 Manila Jockey Club, Inc. RA 9513 Renewable Energy RA 9003 Ecological Solid Waste Management Program RA 9136 Electric Power Industry Reform Act of 2001 RA 8756 Regional or Area Headquarters RA 7916 PEZA EO 226 Omnibus Investment Code of 1987 RA 9178 Barangay Micro Business Enterprises RA 9379 Defining Handline Fishing RA 10771 Green Jobs EO 290 Natural Gas Vehicle Program RA 9295 Philippine Domestic Shipping RA 9400 Amending RA 7227-BCDA RA 7906 Thrift Banks PD 529 Petroleum Exploration Concessionaires RA 9490 Aurora Special Economic Zone RA 7844 Develop Exports RA 9593 Tourism Act of 2009 PD 538 Phividec Industrial Authority RA 9501 Magna Carta for Small Enterprises RA 10817 Halal Export Development PD 1869 PAGCOR RA 10068 Promotion of Organic Agriculture RA 10083 Aurora Special Economic Zone RA 7884 National Dairy Authority RA 7151 Cebu Air, Inc. RA 10601 Agricultural And Fisheries Mechanization RA 10654 Unregulated Fishing PD 972 Coal Development Act of 1976 RA 7961 CRUZTELCO RA 10816 Farm Tourism In The Philippines PD 705 Forestry Code of the Philippines RA 6847 Philippine Sports Commission RA 8098 BEAM, Inc. RA 8099 Sagay Broadcasting Corporation (SBC) RA 8065 Isla Cellular Communications, Inc. RA 8144 Azimuth Broadcasting Corp. RA 8158 Jorge D. Bayona PD 1174 Amending Coal Development Act of 1976 RA 7156 Mini-Hydro Electric Power RA 8446 Fil-Asia Racing Club EO 182 CARS Program RA 7308 National Seed Industry RA 8047 Book Publishing Industry RA 7942 Philippine Mining Act of 1995 RA 7076 Mining RA 8423 Traditional and Alternative Health Care RA 8479 Downstream Oil Industry RA 10926 Smart Communications Inc. RA 9267 Securitizations Act RA 7922 Cagayan Special Economic Zone of 1995 RA 10900 Bell Telecommunication Philippines Inc. PD 1590 Philippines Airlines, Inc. RA 9856 REIT Act of 2009 RA 7718 Infrastructure Projects by the Private Sector RA 7903 Zamboanga City Special Economic Zone Authority RA 8066 Isla Paging Company RA 8424 NIRC RA 7471 Philippine Overseas Shipping Development Act RA 6848 Al-Amanah Islamic Investment Bank RA 7909 Pacific Airways Corporation RA 10863 CMTA RA 7859 Worldwide Communications, Inc. RA 7953 Philippine Racing Act, Inc. RA 8145 Radyo Pilipino Corporation RA 7900 High Value Crops RA 7962 Philippine Broadcasting Corporation RA 7963 Cebu Broadcasting Company RA 8169 GV Broadcasting System Inc RA 7969 Central CATV, Inc. RA 10884 Urban Development and Housing Act of 1992 RA 7966 ABS-CBN Broadcasting Corporation RA 8339 Air Philippines Corporation RA 8095 Islatel Corporation RA 8502 Jewelry Industry Development Act of 1998 RA 7967 Pacific Broadcasting System, Inc. RA 8097 Partido Broadcasting Center RA 9511 National Grid Corp . DEPARTMENT OF FINANCE 84

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) (cont.) Current incentives system: 133 investment-related fiscal incentive laws RA 7939 Island Country Telecommunications, Inc. RA 7227 Bases Conversion and Development Authority RA 8060 Palawan Broadcasting Corporation . RA 8071 VisMin Radio and Television Broadcasting Network, Inc.. RA 8004 Millenia Telecommunications Corporation RA 9337 Philippine Airlines, Cebu Pac, Aboitiz Air Transport, Pacific Airways RA 8063 Beacon Communications System, Inc. RA 8120 Andres Bonifacio College Broadcasting System, Inc. RA 7583 Aboitiz Air Transport Corporation RA 8128 Oriental Mindoro Management Resources Corporation (OMARCO) RA 8067 Radio Gubat Network, Inc. RA 7918 Amending Art. 39 Incentives to Registered Enterprises RA 8080 Asian-Pacific Broadcasting Company, Inc. RA 8004 Millennia Telecommunications Corporation RA 8096 Allied Broadcasting Center, Inc. RA 9301 Amendment to RA 7471 – Overseas Shipping RA 8094 Ipil Broadcasting News Network, Inc. PD 1491 Philippine Veterans Investment Development Corp RA 8121 M.S. Network Management, Inc. RA 8748 Amending RA 7916- Special Economi Zone Act of 1995 RA 8116 VIMCONTU Broadcasting Corp. EO 619 Special Economic Zones inside the Clark Freeport RA 8123 Royal Broadcasting Corporation RA 7277 Self-Development and Self-Reliance of Disabled Persons RA 8119 Good News Sorsogon Foundation Inc. RA 8102 Ultimate Entertainment Inc RA 8132 Jose M. Luison and Sons, Inc. RA 7160 LGC RA 8154 Prime Broadcasting Network, Inc. RA 8032 Philippine Radio Corporation RA 8149 Tagbilaran Broadcasting System RA 7783 Major Telecoms EO 488 Compressed NatGas (AFTA) EO 97-A Subic Special Ecozone RA 8180 downstream oil industry RA 9367 Biofuel Program RA 10378 Recognizing Principle of Reciprocity RA 8298 Metro Manila Turf Club, Inc. RA 7925 Public Telecommunications Policy Act RA 8147 Southern Broadcasting Network RA 7111 Overseas Workers Investment Fund Act RA 8122 Swara Sug Media Corporation RA 10972 Infocom Communications Network, Inc RA 7816 Manila Broadcasting Company RA 4540 Clavecilla Radio System ( Globe Telecoms) RA 8027 Kaissar Broadcasting Network, Inc RA 7633 International Communications Corporation PD 972 Coal Development Act of 1976 RA 8068 Agusan Telecommunications Foundation Inc RA 8153 Rex Electronics Communications System PD 1442 Exploration and Development of Geothermal Resource RA 7299 as amended by RA 10773 Eagle Broadcasting Corporation RA 11321 Sagip Saka Act RA 11089 Streamtech Systems, Inc. RA 11151 Innove Communication RA 11256 Gross International Reserves RA 11285 Energy Efficiency Act 85 DEPARTMENT OF FINANCE

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Current incentives system: 209 non-investment-related fiscal incentive laws RA 6657- Comprehensive Agrarian Reform Law RA 9040- AFP Benefits & Allowances RA 7820- Partido Development Administration RA 9509 – Barangay Livelihood and Skills Act of 2008 PD 857- Philippine Port Authority RA 6982- Social Amelioration Program In The Sugar Industry RA 7291 - Veterans Federation of the Philippines RA 9509 – Barangay Livelihood and Skills Act of 2008 RA 8044 - National Youth Commission RA 6958- Mactan Cebu International Airport Authority RA 7686- Dual Training System RA7798- “Education Act Of 1982” RA 10618- Rural Farm Schools RA10604- Iloilo State University Of Science and Technology RA 6038- Total Electrification of the Philippines RA792- Camiguin Polytechnic State College RA 9720- Ifugao State University RA 7945- Dr. Emilio B. Espinosa, Sr. Memorial State College RA 8193- Jose Rizal Memorial State College RA 8292- Higher Education Modernization Act RA 9746- University Of Antique RA 8365- Rizal Technological University RA 10228- Central Philippines State University RA 9497- Civil Aviation Authority Of The Phils RA 10143- Philippine Tax Academy RA 8794- Motor Vehicle User’s Charge Autonomous Region RA 7653- New Central Bank Act RA 6766- Cordillera Autonomous Region RA 9854- Caraga State University RA 8438- Cordillera Autonomous Region RA 6768- Balikbayan Program RA 10585- Cotabato State University RA 9054- ARMM RA 9174 – Amending RA 6768 - Balikbayan Program RA 8492 - National Museum Act of 1998 RA 10066 - Strengthening the NCCA P PD1127 - Asia Foundation RA 8367- Non-stock Savings and Loan Association Act of 1997 RA 9510- Credit Information System RA 10073- Girl Scouts of the Philippines RA 9721- Romblon State University RA 9521- National Book Development Trust Fund RA 7278- Boys Scouts of the Philippines RA 7355 - Manlilikhang Bayan RA10594- Talisay City State College RA 7306- People’s Television Network,Incorporated (PTN, Inc.) PD 1362-Radio Broadcasting & Television RA 10390- Amending RA 7306 – PTN, Inc. RA 9273 – Capiz State University RA 8370 - Children’s Television Act of 1997 RA 7354- Philippine Postal Corporation RA 9313 – Samar State University RA10598- Compostela State College RA 9520- Amending the Cooperative Code of the Philippines RA 10744- Credit Surety Fund Cooperative Act RA 9314 – Batanes State College RA 9159 – J.H. Cerilles State College RA 7356 - National Commission for Culture& the Arts RA 10086 - Strengthening Peoples' Nationalism RA 9403 – Bataan State University (BPSU) RA 9029- Partido State University RA 9442 - Amending theMagna Carta for Disabled Persons RA 9167- Film Development Council RA 10584-Kalinga State University RA 8557 – Philippine Judicial Academy RA 7917- Amending Section 8 of BCDA of 1992 RA 7079- Campus Journalism Act of 1991 RA 7168 – Philippine Normal University RA 8688 – Cebu Normal University RA 3676 - Ramon Magsaysay Award Foundation RA 7079- Campus Journalism Act of 1991 RA7666 – Sorsogon State College RA 9138- Guimaras State College RA 6807 - Davao Oriental, State College Of Science &Technology RA 7373- Eastern Visayas Science High School RA 9456 – Bukidnon State University RA 9158 – Leyte State University RA 7306- People’s Television Network,Incorporated (PTN, Inc.) RA 8525- Adopt-A-School Program RA 9055- Aklan State University RA 9500- University of the Philippines RA 8461 – Philippine Science High School Lanao Del Norte Campus RA 8547 – Ilocos Sur Polytechnic State College RA 9722 – Bohol Island State University RA 8563 – Apayao State College RA 8498 – Ramon Magsaysay Technological University RA 10229 – Catanduanes State University RA 10599- Palompon Polytechnic State University RA 9647 – Philippine Normal University RA 8548 – Bulacan National Agricultural State College RA 8562 – Bataan Polytechnic State College RA10597- Northern Iloilo State University RA 9045- Batangas State University RA 10231- Bicol State College of Applied Sciences and Technology RA10600- Surigao Del Norte State University RA 10595- Iloilo Science And Technology University RA 9157- University of Rizal System RA 8612 – Nueva Ecija University Of Science And Technology RA 10596- Mindoro State University (MINSU) RA 9395 – Southern Luzon State University (SLSU) RA 8468 – Cavite State University RA 8651- Adiong Memorial Polytechnic State College RA 9744- Cebu Technological University (CTU) RA 9966- Sultan Kudarat State University (SKSU) RA 9718- Naval State University RA 9142- Zamboanga City State Polytechnic College RA 9717- Central Bicol State University RA 10085- North Luzon Philippines State College RA 7166 – Electoral Reforms RA 9083- Sta. Rosa Science and Technology High School RA 7605- Philippine State College of Aeronautics RA 9998- Surigao Del Sur State University RA 9369 - Automated Election System RA 9402 – Laguna State Polytechnic University RA 9261 – Southern Leyte State University RA 9852- Jose Rizal Memorial State University RA 8749- Clean Air Act of 1999 RA 10650- Open Distance Learning In Levels Of Tertiary Education RA 10230- Quirino State University (QSU) RA 10229 – Catanduanes State University RA 10174- Peoples Survival Fund RA 9147- Conservation of Wildlife Resources RA 9486- Central Cebu Protected Landscapes RA 9847- Mount BanahawProtected Landscape RA 7157 - Foreign Service Act of 1991 RA 10629 - 75% Retention Of The Revenues To The IPAF RA 10067- Tubbataha Reefs Natural Park RA 7459- Incentives to Filipino Inventors RA 10165- Foster Care RA 6675 – Medicines Identified By Their Generic Names RA 8980 – Early Childhood Care and Development RA 7875- National Health Insurance Program RA 7719- Voluntary Blood Donation RA 9519- Mindanao University Of Science and Technology (MUST) RA 9272 – Nueva Vizcaya State University RA 9289 – Marikina Polytechnic College RA 10028- Breastfeeding RA 9260 – The Western Philippines University RA 9312 – Eastern Samar State University RA 9311 – Eastern Visayas State University RA 10747- Rare Disorders RA 11054 Bangsamoro Basic Law RA 11039 Electric Cooperatives RA 11220 Davao Del Sur State College RA 11037 National School Feeding Program RA 11150 South Coutabato State College RA 11215 National Integrated Cancer Control Act RA 10932 Anti-hospital deposit RA 11291 Magna Carta of the Poor RA 11035 Balik Sscientists Program 86 DEPARTMENT OF FINANCE

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) (cont.) Current incentives system: 209 non-investment-related fiscal incentive laws RA 9299 – Negros Oriental State University (NORSU) RA10605- Pampanga State Agricultural University RA 10800 – Tarlac Agricultural University RA 8282- Social Security System RA 9679- Amending the Pag-Ibig Fund RA10646- Quezon City Development Authority RA 8763- Home Guaranty Corporation RA 10001 - Taxes on Life Insurance RA 8371- National Commission On Indigenous Peopl RA 9832- Don Honorio Ventura College RA 8291 – GSIS Coverage and Benefits ADB – Philippines RA 9207 – Disposition of NG Center Site RA 9904 - Magna Carta for Homeowners RA 9505- Personal Equity and Retirement Account UNESCO – Florence Agreement RA 9576- Deposit Insurance Coverage RA 10846- Liquidation Framework for Banks RA 7932- Agusan Del Sur State College RA 6715- Collective Bargaining RA 10142- Liquidation of Financially Distress Enterprises RA 10583- Mountain Province State University RA 9719- Northwest Samar State University RA 8042 – Overseas Employment PD 292- Southeast Asian Fisheries Development Center PD 380- Revising the Charter of NAPOCOR RA 9245 - Philippine National Ear Institute RA 10801 – O W WA PD1620 - International Rice Research Institute (IRRI) RA 10071 - National Prosecution Service PD 269- “National Electrification Administration” RA 9999- Free Legal Assistance RA 10693- Nongovernment Organizations Microfinance RA 10072- Philippine National Red Cross RA 7696- Upgrading The Benefits for Military Veterans RA 6975 – Philippine National Police RA10349- Revised AFP Modernization Program RA 4917 - Retirement Benefits Of Employees RA 6963- Benefits To The Family Military Personnel RA 2067- Science Act of 1958 RA 6395- Revising the Charter of the NAPOCOR RA 9257- Additional Benefits to Senior Citizens RA 9994 - Additional Benefits to Senior Citizens PD 1183- Travel Tax RA 10865 – Mayor Hilarion A. Ramiro Sr. Medical Center RA 6971- Productivity Incentives Act of 1990 RA 10591 - Law On Firearms And Ammunition R RA 7876- Senior Citizens Center RA 10022- Migrant Workers and Overseas Filipinos Act of 1995 RA 10368 – Victims of Human Rights Violations RA 10919 – University of Science and Technology of Southern Philippines PD1264- Amending RA 95 - to Incorporate the Philippine National Red Cross RA 10121- Philippine Disaster Risk Reduction and Management System RA 3589 - National Science Development Board RA 9146- Northwestern Mindanao State College of Science and Technology RA 10687- Unified Student Financial Assistance System For Tertiary Education RA 10699- Incentives to National Athletes & Coaches RA 9151- National Apiculture Research, Training And Development Institute PD 1171- Southeast Asian Regional Center for Graduate Study and Research in Agriculture EO 1037 – Philippine Retirement Park System 87 DEPARTMENT OF FINANCE

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Share to number Number of industries covered Count of firms, in percent SIPP 677 53.5 IPP 64.4 815 SIPP and IPP 879 69.5 Total PSIC industries at 5 digit level 100.0 1,265 Sources: PSA, DTI, and DOF estimates, Total value-added Value in Share to GDP, in percent by industries covered trillion pesos SIPP 4.0 63.2 IPP 69.4 4.4 SIPP and IPP 4.4 69.4 Total GDP 6.3 100.0 Sources: PSA, DTI, and DOF estimates Note: value-added of covered industries were calculated based on the 2006 88 I-O table.

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION A 3-year SIPP shall be formulated by BOI and approved by the President. 1. BOI shall ensure a more targeted list covering activities with significant positive externalities. 2. Only the President may propose activities or projects not in the SIPP that may be granted tax incentives. 89

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 14 RESPONSE A. There has been little to no effort to do a regular CBA 14. There should be a analysis on the part of IPAs. cost-benefit analysis i. PEZA CBA methodology has double counting and does not show all the costs, like imports. (CBA) conducted to ii. PEZA wants to commission its first “independent audit” in 2019 after decades of existence. determine impact of iii. AFAB only completed a CBA in 2018, covering the periods 2015 to 2017. incentives on the B. NEDA prepared a partial CBA as mandated by the TIMTA law but lacked data. economy. C. The first comprehensive CBA was undertaken by the DOF in 2018. It shows that every peso spent on incentives generates 0.50 to 1.01 pesos in benefits. D. Under Package 2, the FIRB is tasked to regularly conduct CBAs. 90

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION 91

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION July 2, 2019 92

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) Panel Outcome Indicators 2014 2015 2012/2015 Summary of Total employment / total assets Total employment / total sales counterfactual R&D employment / total employment Employment and analyses Total compensation compensation Total compensation / total expenses Average compensation to workers Total salaries / paid workers =1 if establishment has R&D spending R&D R&D expenses / total expenses = Registered firms Total investments / total assets Land assets / total assets performed Total fixed assets / total assets Capital significantly investments Building assets / total assets better than non- Machineries / total assets Exports Direct exports / sales registered firms Average hours worked Sales / total employment Productivity Sales / paid workers Note: Panel data used the 2012 CPBI and the 2015 ASPBI with the 2015 TIMTA 93 Source: PSA, TIMTA, DOF estimates

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Summary of results of initial CBA analysis by DOF 94 Note: 2015-2017 averages

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 15 RESPONSE 15. Package 2 will A. Package 2 does not impose any new taxes. In fact, it lowers the corporate impose new taxes. income tax rate and makes the grant of incentives fairer and more accountable. B. Tax payment is a duty of every taxpayer. Incentives are not entitlements but privileges that should be earned. If firms do not qualify for incentives, then they should pay the regular tax rates like everyone else. 95

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Fair and accountable tax Lower corporate incentives system income tax 96

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CONCERN 16 RESPONSE A. The Philippines has the highest CIT rate among ASEAN at 16. Lowering the CIT will 30 percent. not benefit the country. i. Indonesia is at 25 percent (proposals for lowering CIT to 20 percent are ongoing). ii. Malaysia is at 24 percent. iii. Lao PDR is at 24 percent. iv. Cambodia, Thailand, and Vietnam at 20 percent. v. Singapore has the lowest CIT at 17 percent. vi. CITIRA proposes to gradually reduce the CIT rate to 20 percent by 2029 to make us regionally more competitive. B. Lower CIT rates in the region means Philippine corporates will rather invest in our neighbors than in our own country. C. Lower corporate tax rates is associated with higher FDI intensity. 97

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Source: Asian Development Bank and PWC 98

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) CIT revenue efficiency compared to our ASEAN neighbors is low (2017) CIT revenues Headline Revenue efficiency Country (percent of GDP) CIT rate (percent) (percent) Vietnam 7.0 22 32.0 Malaysia 5.6 24 23.5 Thailand 4.0 20 20.0 Singapore 4.3 17 25.4 China 3.9 25 15.5 Philippines 3.8 30 12.6 Indonesia 2.6 25 10.4 Revenue efficiency is calculated as the ratio of tax revenue to GDP divided by the tax rate. Sources: OECD, and individual country statistics offices. 99

Draft for discussion. Subject to change. CTRP – Package 2: Key concerns (as of 17 September 2019) ADDITIONAL INFORMATION Due to lower CIT rates elsewhere in the region, URC Philippines has expanded internationally, investing 66% of its total capital assets abroad. 3 Revenue 1 Capital assets 2 Location PHP billions Percent share PHP billions Percent share Philippines 84.6 66 33.5 34 Foreign 43.2 34 63.8 66 Note: 1. Revenues are from external customers by geographical market. 2. Capital assets refer to non-current assets excluding financial, deferred tax and pension assets. 3. Most of URC subsidiaries in Asia are located in China, with a 25% CIT rate. 100 Source: 2018 audited financial statements 2018