Is the incentives reform act necessary?

Dindo Manhit, President of the Stratbase ADR Institute

An expansionary fiscal policy is said to exist if government increases its spending (i.e., the “Build, build, build” program) or decreases direct taxes (i.e., income tax and corporate taxes), or it does both. The rationale behind such moves is the strategic goal of revitalizing the economy and fostering economic activity.

During his 2019 State of the Nation Address, President Duterte emphasized the need to prioritize the passage of the Corporate Income Tax and Incentives Reform Act (Citira), which forms Package 2 of the Comprehensive Tax Reform Program.

Package 2 is now under the scrutiny of the Senate. Is Citira a much-needed boost to the economy, or an unnecessary burden?

For decades, the Philippines has been regarded as one of the most generous countries in providing incentives to companies. With the launch of the Duterte administration’s tax reform program, existing tax administration models have been placed under review, including the various tax incentive provisions currently in place.

Formerly called the Tax Reform for Attracting Better and High-Quality Opportunities, or Trabaho, the proposed Citira is primarily intended to lower the corporate income tax rate from 30 percent to 20 percent in 10 years, and modernize fiscal incentives to correct glaring inequities and inefficiencies in the corporate tax system. At the same time, it is projected to promote the development of micro, small and medium enterprises by maintaining a conducive business environment through a deduction option favorable to them in a given taxable year.

From the government’s perspective, about 10 problems haunt the current system of corporate taxation and incentives provision: The Philippines has the highest rate of corporate income tax in the region, incentives are inefficient and ineffective in terms of firm performance, they target priority industries, they disperse economic growth, are indefinite, nontransparent, prone to abuses, too complex, and are open to question about whether such incentives do have an impact on the economy.

The proposed Citira, in turn, claims to provide 10 solutions to the said problems: Lower the corporate income tax from 30 percent to 20 percent by 2029; make the tax incentives system time-bound, targeted, performance-based and transparent; offer an incentives menu that rewards performance with additional incentives that cover more deductions for labor, R&D, infrastructure, training, development, investment and domestic input; a three-year strategic investment priority plan (SIPP) will be formulated by the Board of Investments; the SIPP will also give more incentives to priority areas; approved activities will be given incentives for five to 10 years and are renewable; an enhanced monitoring system on the collection of incentives will be established to include detailed information on the cost and benefits of the incentives to improve transparency in the system; enhance antiavoidance rules and shift to the next income tax system; the Fiscal Incentives Review Board (FIRB) will approve all incentives and have an oversight function on overall IPAs where the Department of Finance will chair; and the FIRB will conduct regular monitoring and evaluation of fiscal incentives, including cost-benefit analyses to determine their economic impact.

The bone of contention, however, is clearly not the tax reduction, but the removal or downgrading of the incentives. Some argue that this may make it more expensive for businesses to operate, in an environment already burdened with relatively higher operating costs such as labor, power and logistics.

The risks may also multiply into complications. The current review of the tax incentive packages is generating a sense of uncertainty in the business community, especially among those who have been enjoying generous incentives from the government for decades, and those who are about to take the plunge of investing in the Philippines primarily because of these incentives. Some businesses may respond to Citira by taking their businesses somewhere else, causing job and foreign direct investment losses.

Until its actual effects are seen, Citira is being seen as the sword of Damocles hanging over the business community’s head at the moment.

 

 

This article was originally published in the Philippine Daily Inquirer.

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