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

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Package 2 COMPREHENSIVE TAX REFORM PROGRAM Corporate income tax and incentives reform As of 2 October 2018 11:00 am

Comprehensive Tax Reform Program Package 1: TRAIN Package 2: TRABAHO Personal income Corporate income tax and tax and fiscal consumption tax incentives Package 1A: Package 1B: Package 2+: Personal income tax, Tax amnesty and Alcohol and tobacco consumption tax, and motor vehicle excise tax, and mining tax transaction taxes user charge TRAIN (RA 10963) (MVUC)

Comprehensive Tax Reform Program Package 3 Package 4 Property valuation Capital income and and taxes financial taxes

Objectives of the tax reform packages

1. Why is Package 2 necessary? Content of Package 2 2. Cost-benefit analysis 3. Proposed reform What do we gain from a review of past incentives and benefits received?

Broaden tax base

Currently, we have the following regular corporate income tax (CIT) regime

The Philippines has the highest corporate income tax rate in the ASEAN region. Source: Asian Development Bank and PWC

CIT revenue is increasing, but efficiency is very low. Source: OECD, individual country statistics offices, and DOF staff calculations.

We have a complex tax incentives system. We grant the most generous fiscal incentives since they are in lieu of all taxes and given forever . - 14 IPAs - 136 investment laws 200 non-investment laws - 546 ‘ecozones’ and freeports Source: Individual country finance agencies and investment promotion offices.

We have a complex tax incentives system 14 Investment Promotion Agencies (IPAs)

We have a complex tax incentives system (based on latest data available) IPA No. of ecozones AFAB 1 APECO 1 BCDA 1 BOI - CDC 1 CEZA 1 PEZA 528 PIA 1 PPMC 1 PRA - TIEZA 8 SBMA 1 RBOI-ARMM 1 ZCSEZA 1 TOTAL 546 Source: PEZA, IPAs, and DOF staff calculations

Huge inequity under the current system: ● Firms with no incentives pay the regular rate of 30% of net taxable income ● Firms with incentives pay between 6% and 13% For example, almost all of the 90,000 SMEs pay the regular 30% Source: DTI and TIMTA rate.

Tax incentives in billion pesos 2016 Type of tax 2015 Estimated 121 Income tax 86 57 Customs duties 18 forgone 179 Subtotal 104 revenue due TBD Import VAT (gross) 160 TBD Local VAT (gross) 37 to tax TBD Local business tax TBD incentives TBD Subtotal for incentives 301 TBD Leakage 43 TBD Total 344 3,102 No. of recipients 2,844 Source: TIMTA, DOF estimates

Estimates of tax incentives: income and duties (in billions PHP) Source: TIMTA

Estimates of tax incentives: income and duties by IPA (in billions PHP) Source: TIMTA

Top beneficiaries of tax incentives by sector (in billions PHP) Source: TIMTA

Some incentives may be needed to attract investments that support our growth objectives. Create more and Promote research Encourage innovation better jobs and development Diversify product space Stimulate domestic industries (e.g., to higher value exports) However, they must be performance-based , targeted , time-bound , and transparent .

Despite giving the most generous and forever incentives... FDI pales in comparison to our neighbors. Source: BSP, UNCTAD, and DOF calculations

Despite giving the most generous and forever incentives... Export competitiveness has been in decline. Domestic industries have weak linkages to export industry. Reliance on imported parts, thus weak domestic content. Source: PSA, UNCTAD, DOF calculations

The current incentives system has a big room for improvement. - Complexity and inequity - Lack of monitoring and evaluation, accountability, and transparency - Incentives as band-aid solution to compensate for past structural weaknesses It is time that we revisit our incentives system to ensure that we gain from every peso that we grant.

Incentives may be important to encourage investments that promote growth and jobs... ...but, investment tax incentives are tax expenditures that someone else has to pay. It is not free money from heaven. Some incentives are unnecessary, i.e., Government needs to ensure investment would have happened anyway efficiency in spending. even without the incentives (e.g., available market, quality labor, land, resources, (How much tax incentive can we afford?) etc.).

Package 2 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.

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Cost-benefit analysis of fiscal incentives

“Ex-post” cost-benefit analysis This is done so that we can determine if the tax incentives given to recipients benefit our economy more than it costs. Note: Evaluation of the past performance does not necessarily indicate future priority or preference over some industries.

Tax incentives usually violate the principles of: Efficiency Equity Simplicity However, incentives may be justified if they provide net benefit to society as a whole.

2. Performing a 1. Estimating implicit counterfactual analysis labor subsidy Do firms with registered activities for What is the cost for each job incentives perform better in terms of created? job creation, R&D investments, productivity, etc. when compared to Cost-benefit non-registered firms? analysis: Methods 4. Accounting of direct 3. Estimating net and indirect cost and government revenue benefit Do we generate more revenue from Do total benefits from incentives, the tax we forego? both private and social, outweigh total costs?

Result #1 (Implicit labor subsidy) In 2015, to create 1 job, it costs taxpayers at least P252,706. Note: In 2012 to 2015, 402,000 jobs created, and in 2015, P104 billion in income and customs duties incentives were given to 14 IPAs. Source: IPA submissions, TIMTA, DOF estimatess

Result #2 (Counterfactual analysis using propensity score matching) In general, registered firms, when compared to non-registered firms… ● Have the same employment relative to size ● Have similar average wages, but pay top management higher ● Spend more on fixed assets, but do not spend higher on R&D ● Have the same level of exports relative to sales ● No difference in productivity Source: PSA ASPBI, TIMTA, DOF estimates

Summary (all firms)

Result #3 (Net government revenue effect) Tax incentives on: Income On average, for every peso Duties (30%) VAT (net of refund) we grant as incentive, we Local taxes collect 34 cents in taxes, even after accounting for taxes from indirect employment and domestic inputs. Taxes collected from: Firms Employees If taxes from unnecessary Dividends incentives are accounted Indirect employees Domestic inputs for, we collect 95 cents. Source: IPA submissions, SEC, TIMTA, DOF estimates

Identifying necessary & unnecessary incentives

We have been supporting many Number of firms enjoying incentives for at least 15 years firms unnecessarily. Source: TIMTA. 645 firms receiving incentives for at least 15 years.

Result #4 (Accounting of total direct and indirect cost and benefit) On average, for every peso spent on incentive, between P0.63 and P1.21 comes back in benefits, even after accounting for employment generated and spillovers, both direct and indirect. Source: IPA submission, PSA ASPBI, SEC, TIMTA, DOF estimates

Summary In general, registered firms do not To create 1 job, it costs Result #2 perform better on employment, Result #1 taxpayers at least exports, and productivity compared to non-registered firms. P252,706. For every peso spent on For every peso we incentive, between P0.63 Result #3 Result #4 grant as incentive, and P1.21 comes back in we collect 34 cents benefits. in taxes.

Source: TIMTA, DOF estimates

Conclusion: while fiscal incentives are important for national development, some incentives are unnecessary Taxes not collected from unnecessary incentives could have been used to fund necessary infrastructure and skills enhancement , and create a better business environment for all businesses , whether small or large, domestic or foreign that benefits ALL, not just a few.

TRABAHO Bill Tax Reform for Attracting Better and High-quality Opportunities bill (HB 8083)

Summary Lower Simplify tax corporate 2 1 rules income taxes for all Provide Fair and incentives to accountable tax attract industries 3 4 incentives consistent with system development priorities

Lower corporate income tax The President may advance the scheduled reduction in the CIT rate when adequate savings are realized from the rationalization of fiscal incentives.

Incentives menu Income tax holiday Up to 3 years plus 1 year extension if investing in agribusiness, or in less developed areas, or if relocating outside Metro Manila and adjacent urban areas Special rate (2019) 18% on net taxable income after ITH for up to 5 years including the ITH - 1.5% to province - 1.5% to municipality