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 August 12, 2019) Package 2 COMPREHENSIVE TAX REFORM PROGRAM Corporate income tax and incentives reform Why reform is needed As of 12 August 2019 1

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 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. Responding to top ten concerns of stakeholders 2

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Ten reasons why we need to reform the corporate income tax and incentives system: Problems and solutions 3

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Ten reasons why we need to reform the corporate income tax and incentives system 1. To lower the CIT rate to 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 grant tax incentives that are performance-based ; 4. To grant tax incentives that are targeted to priority industries; 5. To grant tax incentives that are targeted to priority areas; 6. To grant tax incentives that are time-bound ; 7. To grant tax incentives that are transparent ; 8. To reduce the abuse of transfer pricing ; 9. To improve governance in the grant of tax incentives through the FIRB ; 10. To regularly evaluate the impact of incentives on the economy through cost-benefit analysis. 4

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Problem 1. Highest corporate income tax rate in the region. Source: Asian Development Bank and PWC 5

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Solution 1. Lower the corporate income tax rate to make it regionally competitive. 6

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Problem 2. PHP 441 billion in foregone revenue in 2017, many of which are unnecessary incentives. In 2017, 989,166 registered firms. Firms with no incentives pay the 1. regular rate of 30% of net taxable In 2017, over PHP 441 income. billion (2.8% of GDP) was granted to 3,150 For example, almost all of the 2. firms. 90,000 SMEs pay the regular 30% rate. In addition, PHP 63 billion (0.4% of GDP) was Firms with incentives pay between 3. lost due to possible 6% and 13% effective tax. abuse of transfer pricing. Total: PHP 504 billion (3.2% of 2017 GDP) 7 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 August 12, 2019) Problem 2. PHP 441 billion in foregone revenue in 2017, many of which are unnecessary incentives. 441 billion pesos 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 9

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Solution 2: Package 2 promotes 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. 10

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 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. 2. Counterfactual analysis shows no significant difference in the performance between firms receiving incentives and those that do not receive incentives. 11

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 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 higher 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 12 Source: PSA, TIMTA, DOF estimates

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Solution 3: Package 2 offers a more competitive incentives menu that rewards performance with more incentives. 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 13

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Solution 3: Package 2 offers a more competitive incentives menu that rewards performance with more incentives. 1. Application for incentives shall constitute a contract to meet agreed targets such as job creation, export, and productivity. 2. Review of firm’s performance every two years by the FIRB. Image source: flaticon.com 14

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Problem 4. Incentives are not targeted to priority industries. 1. There are 342 investment and non-investment laws that provide incentives outside the tax code. 2. The IPP covers up to 64 percent of all industries. 3. As a result, up to 69 percent of the country’s GDP can potentially be given incentives. 15

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Solution 4. A strategic investment priority plan (SIPP) will be formulated to prioritize incentives. A 3-year SIPP shall be formulated by BOI and approved by the President. BOI shall ensure a more 1. targeted list covering activities with significant positive externalities. Only the President may 2. propose activities or projects not in the SIPP that may be granted tax incentives 19

Draft for discussion. Subject to change. CTRP – Package 2: Cost of tax incentives (as of July 31, 2019) Problem 5. Incentives are not targeted by area. IPA No. of ecozones AFAB 1 APECO 1 As of 2018, there are 549 BCDA 1 ecozones, all of them are BOI - separate customs CDC 1 territory, meaning they CEZA 1 are exempt from all taxes. PEZA 531 PIA 1 PPMC 1 TIEZA 8 SBMA 1 RBOI-ARMM 1 ZCSEZA 1 TOTAL 549 20 Source: PEZA, IPAs, and DOF staff calculations

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Solution 5. The SIPP shall also improve targeting of more incentives to priority areas. 1. There is currently an administrative order that provides for a moratorium on the proclamation of new economic zones in Metro Manila (AO 18). 2. Additional two years of incentives for: Registered activities relocating outside Metro Manila and selected A. urbanized areas adjacent to Metro Manila Agribusiness projects of registered enterprises located outside Metro B. Manila and urban areas Projects located in less developed areas or those recovering from armed C. conflict or a major disaster 3. All future ecozones must be based on a country-wide cost-benefit analysis to determine appropriateness of zones. 21

Draft for discussion. Subject to change. Draft for discussion. Subject to change. CTRP – Package 2: Top 10 (as of August 12, 2019) Problem 6. Incentives are not timebound. We grant the most generous fiscal incentives since they are in lieu of all taxes and given forever . All other countries have a maximum duration and it applies only to very few highly targeted industries and are not automatically given. 22