October 6,
2019 | 9:34 pm
Congratulations are due to
House Speaker Alan Peter Cayetano and Ways and Means Chair Joey Salceda on the
swift passage of the Corporate Income Tax and Incentive Rationalization Act and
Passive Income and Financial Intermediary Taxation Act in the House of
Representatives. Memorably tagged CITIRA and PIFITA by Congresman Joey, it is
now being heard in the Senate Ways and Means Committee which is most ably
chaired by lawyer and economist Senator Pia Cayetano.
At the last hearing, I was
privileged to read the statement of support of former Finance Secretaries and
noted economists in favor of these pending tax reform packages. Signatories
included former Prime Minister Cesar Virata, former Senator and
Finance/Executive/Foreign Affairs Secretary Alberto Romulo, Former Finance
Secretaries Roberto de Ocampo, Jose Isidro Camacho, Margarito Teves, and Former
Planning Secretaries Cielito Habito and Arsenio Balisacan.
The collective wisdom and
experience of this group in the field of fiscal and economic governance is
unparalleled, gained not only during their years in office, but also in the
leadership positions they now occupy. Our full statement can be accessed on
this link — www.dof.gov.ph/index.php/former-dof-secretaries-eminent-economists-join-top-legislators-in-seeking-urgent-passage-of-remaining-tax-reform-packages/.
The last two sentences
read: “All these reforms are necessary if the Philippines is to move forward to
a future with no extreme poverty by 2040. Together, we stand ready to support
these reforms in any way we can. We urge both houses of Congress to recognize
the great merits of the Comprehensive Tax Reform Program and pass the remaining
packages at the soonest possible time.”
Urgency is truly called
for, since this congress has less than a year before election fever grips the
nation and everything is pushed back for at least three more years. And the
country, especially the poorest citizens, cannot wait. Philippine poverty
incidence stands at over 21% vs. 11% for Indonesia, 9% for Thailand, 7% for
Vietnam. (Source ASEAN Key Figures, 2018, aseanstats.org)
Moreover, the world does
not stand still. This is especially relevant for CITIRA which will affect the
behavior of investors, the job creators. In the ASEAN, our corporate income
taxes (CIT) rates stand out uncompetitively at a high 30%, even as our ASEAN
peers, which now average 22%, are moving swiftly to further lower them. (See
the column of Atty. Benedicta Du-Balabad, “CITIRA and the ASEAN Tax War,” Philippine
Daily Inquirer.)
To lower the corporate
income tax to 20% faster, quick action is likewise needed to rationalize fiscal
incentives to cover for foregone revenues from there. The strongest objections
are coming from locators in PEZA (Philippine Economic Zone Authority) zones,
championed by the Joint Foreign Chambers of Commerce, and the PEZA
Administrator (though disowned by its Chairman and Board). Though
unsubstantiated by specific data, the apprehension has been sown that any
departure from the status quo of “forever incentives” will lead to huge job
losses.
Recent data suggest
otherwise. That as literature and research finds, incentives are not what
drives FDI (foreign direct investment). And the fears of massive exit of FDI
due to recent initiatives of the Department of Finance on incentives
rationalization may be exaggerated.
On this, the remarks of
Prof. Renato Reside of the UP School of Economics during the Senate hearing is
worth quoting. He and his UP colleague, then-former Planning Secretary and now
Monetary Board Member Philip Medalla, separately did the seminal work on the
case for rationalising fiscal incentives as early as the mid-1990s. (See
“Reside, Towards Rational Fiscal Incentives (Good Investments or Wasted
Gifts),” 2006. http://www.econ.upd.edu.ph/dp/index.php/dp/issue/view/42.)
These have informed bold but sadly failed efforts of five administrations.
“… based on global
experience with tax incentives, certain investors get benefits they may not
need, certain incentives are redundant. And while certain benefits cannot be
attributed to them, there will certainly be costs to granting them. But CITIRA
aims to substitute inefficient for more efficient incentives, not take them
away so the question is how adjustment will take place when shifting to lower
tax rates, tax credits and tax allowances and accelerated depreciation to
reward marginal additions to R&D, employment and investment levels. For
sure, additional investment and hence employment will also be spurred by more
efficient incentives, lower tax rates and more targeted incentives.”
A possible compromise has
been mentioned by Department of Trade and Industry Secretary Ramon Lopez. A UP
and foreign trained economist, he served as a Director in NEDA (National
Economic and Development Authority), as a top corporate executive, and as
champion of SMEs at Go Negosyo, and is thus well placed to see all sides. He is
recommending a longer phase-in period for the new incentive scheme for
well-defined PEZA locators.
The thinking of the
Foundation for Economic Freedom (FEF) is aligned with this:
“We support the phasing out
of all incentives except temporarily for a small subset of labor intensive
industries which unless the CIT is 25% or lower are likely to move out to other
countries without incentives. Such exemptions can be phased out when the CIT is
aligned with the lower CIT rates in our neighboring countries.”
Now a note on PIFITA. This
well-studied bill crafted by the Department of Finance officials and consultant
team, goes a long way in simplifying, harmonizing taxation of financial
instruments, towards developing our capital market. The FEF has a reservation
on the proposed presumptive capital gains tax of 0.1 percent per trade, as this
will create friction costs that will impair liquidity and trading, and at the
end hurt issuers, especially government, the biggest issuer, as well as savers.
Taxing capital gains from debt securities trading as regular income would be
more efficient and friendly to the development of the market.
The other tax reform
packages, including Package 2+ on Sin Taxes for Universal Health Care, and
Package 3 on Real Property Valuation Reform, were likewise fully endorsed by
the former Finance Secretaries and the FEF.
Hopes are high that under
the committed leadership in the House and the Senate, the resolute Duterte team
will succeed where their predecessors have floundered — just as they did in
getting the game-changing rice tariffication law passed that has lowered
inflation now and for the long haul, and is en route to upgrading Philippine
agriculture and reducing poverty. On the other hand, further delay will mean
more uncertainty; arguably the heaviest tax — on investments, job creation, and
the public good.
Romeo L. Bernardo was
finance undersecretary during the Cory Aquino and Fidel Ramos administrations
He is Philippine Adviser of GlobalSource Partners, a New York-based network of
independent analysts.
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