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

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Package 2 COMPREHENSIVE TAX REFORM PROGRAM Corporate income tax and incentives reform Why reform is needed http://taxreform.dof.gov.ph/publication/recent-presentations/ As of September 19, 2019 1

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) 2

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Table of contents 1. Ten reasons why we need to reform the corporate income tax and incentives system a. Problems b. Solutions 2. Summary of reform 3

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Ten reasons why we need to reform the corporate income tax and incentives system 1. To lower the corporate income tax (CIT) rate and make it regionally competitive; 2. To grant incentives more judiciously to reduce fiscal cost amounting to 441 billion pesos (2.8 percent of GDP) in 2017; 3. To make tax incentives performance-based ; 4. To make tax incentives targeted to priority industries; 5. To make tax incentives targeted to priority areas; 6. To make tax incentives time-bound ; 7. To make tax incentives transparent ; 8. To reduce the abuse of transfer pricing ; 9. To improve governance in the grant of tax incentives through the Fiscal Incentives Review Board (FIRB) ; 10. To ensure regular and rigorous monitoring and evaluation of the impact of incentives on the economy through cost-benefit analysis. 5

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Problem 1. Highest corporate income tax rate in the region. Source: Asian Development Bank and PWC 6

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Problem 1. Highest corporate income tax rate in the region. Due to lower CIT rates in the region, URC Philippines expands internationally, investing 66% of its total capital assets abroad. This means lost job opportunities here. If our CIT rate were lower, URC can invest here instead. 3 Revenue 1 Capital assets 2 Location PHP billions Percent share PHP billions Percent share Philippines 84.6 66 33.5 34 66 Foreign 43.2 34 63.8 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. 7 3. Most of URC subsidiaries in Asia are located in China, with a 25% CIT rate. Source: 2018 audited financial statements 2018

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Solution 1. Lower the corporate income tax rate to make it regionally competitive and bring back jobs. 8

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Problem 2. PHP 441 billion in foregone revenue in 2017 from tax incentives, many of which are unnecessary incentives. In 2017, 989,166 registered firms, most of which pay Firms with no incentives pay the 1. the regular tax rate. regular rate of 30% of net taxable income. In 2017, over PHP 441 billion (2.8% of GDP) was For example, almost all of the granted to 3,150 firms. 2. 90,000 SMEs pay the regular 30% In addition, PHP 63 billion rate. (0.4% of GDP) was lost due to possible Firms with incentives pay between 3. abuse of transfer pricing. 6% and 13% effective tax. Total: PHP 504 billion (3.2% of 2017 GDP) 9 Source: DTI, TIMTA, and DOF estimates

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Problem 2. PHP 441 billion in foregone revenue in 2017 from tax incentives, many of which are unnecessary incentives. 2015 to 2017 estimated foregone revenue due to tax incentives 2015 2016 2017 Revenue Revenue Revenue Type of tax foregone foregone foregone (in billion pesos) (in billion pesos) (in billion pesos) Income tax incentives 86.3 121.2 126.9 Income tax holiday 53.8 74.5 70.2 Special rate 32.5 46.7 56.7 Customs duties 18.1 57.4 46.5 Import VAT (gross) 159.8 202.1 267.7 Local VAT (gross) 37.0 TBC TBC Subtotal 301.2 380.7 441.1 Local business tax 1.6 1.0 TBC Possible leakage from transfer 42.7 52.5 63.1 pricing abuse 10 Total 345.5 434.2 504.2

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Problem 2. PHP 441 billion in foregone revenue in 2017 from tax incentives, many of which are unnecessary incentives. PHP 441 billion of foregone revenues in 2017 could have funded… 33,000 public markets or 46,000 kilometers of roads or 130,000 daycare centers or 450,000 classrooms. Source: DOF estimates 11

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Problem 2. PHP 441 billion in foregone revenue in 2017 from tax incentives, many of which are unnecessary incentives. PEZA tax incentives vs. PEZA approved investments An estimated PHP 5.5 400 Total incentives Total approved investments trillion in tax 350 300 incentives was given 250 to PEZA firms since PHP billions 200 1995, while PEZA 150 approved investment 100 3 amounted to only 50 0 PHP 3.6 trillion. Source: PSA and DOF staff estimates Notes: 1. Approved investments are based on official PSA data, while tax incentives before 2011 were estimated using a linear trend with available data. 2. The 1999 tax incentive data point was estimated by World Bank, while the 2004 data point was estimated by Reside (2005). The 2011 and beyond data points were based on actual data, of which 2015 onwards were from TIMTA. 12

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Problem 2. PHP 441 billion in foregone revenue in 2017 from tax incentives, many of which are unnecessary incentives. Incentives are not really needed by most investors 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 14

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Solution 2: Package 2 to promote a fair and accountable tax incentives system. Every peso granted as tax incentive is a peso off the budget that could have been spent for infrastructure, health, education, and social protection that benefit all, and not only a few. 17

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Problem 3. Incentives are not performance-based. 1. No monitoring of firm performance on its “commitment” to increase export, create jobs, or raise productivity (e.g., approved vs actual investment). 2. Counterfactual analysis shows no significant difference in the performance between firms receiving incentives and those that do not receive incentives. 18

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of September 19, 2019) Problem 3. Incentives are not performance-based. Panel Outcome Indicators 2014 2015 2012/2015 Summary of Total employment / total assets counterfactual Total employment / total sales R&D employment / total employment analyses Employment and Total compensation compensation Total compensation / total expenses Average compensation to workers Total salaries / paid workers = Registered firms =1 if establishment has R&D spending R&D R&D expenses / total expenses performed Total investments / total assets significantly Land assets / total assets Total fixed assets / total assets Capital better than non- investments Building assets / total assets registered firms Machineries / total assets Exports Direct exports / sales Average hours worked Sales / total employment Productivity Note: Panel data used the 2012 CPBI and the 2015 Sales / paid workers ASPBI with the 2015 TIMTA 19 Source: PSA, TIMTA, DOF estimates