comprehensive tax reform program proposed package...

Draft for discussion. Subject to change.Draft for discussion. Subject to change.

Comprehensive tax reform programProposed package 2:

Corporate income tax reform and fiscal incentives modernization

Short presentationas of July 23, 2018

DEPARTMENT OF FINANCE 1


I. Background:corporateincometaxandfiscalincentivesregime

II. Rationaleforreform:costandbenefits

III. Proposedreform

Content



Background



Features Rate Legalbasis

Regularcorporateincometax(CIT)rate

Domesticcorporationandresidentforeigncorporations

Non-residentforeigncorporation

30%ofnettaxableincome

30%ofgrossincome

Sec.27(A)and28(A)oftheNationalInternalRevenueCode(NIRC)

Sec.28(B)ofNIRC

MinimumCIT(MCIT)fordomesticcorporationsandresidentforeigncorporations

2%ofgrossincome

Sec.27(E)and28(A) (2)ofNIRC

Optionalstandarddeduction(OSD)inlieuofitemizeddeductions

40%ofgrossincome

Sec.34(L)ofNIRC

4

Regular corporate income tax (CIT) regime

DEPARTMENT OF FINANCE



17%20% 20% 20%

24% 24% 25%

30%

0%

5%

10%

15%

20%

25%

30%

35%

Singapore Cambodia Thailand Vietnam Lao PDR Malaysia Indonesia Philippines

Source: PWC and ADB

Comparative CIT rates in ASEAN



• 14Investmentpromotionagencies(IPAs):theBOI,PEZA,and12otherspecialeconomiczoneauthorities,whichareauthorizedtogranttaxincentivesundertheirrespectivecharters.

• 123 investmentlaws(3NIRC,69speciallaws,and51franchise)and192non-investmentlawsthatprovidetaxincentives.

• IncomeTaxHoliday(ITH) isthecenterpieceoftheincentivessystemfollowedbythe5% GrossIncomeEarned(GIE)tax,andcustomsdutyexemption.TheGIEisgivenindefinitelyandisinlieuofincome,VAT,andlocaltaxes.

• Since2015,TaxIncentivesManagementandTransparencyAct(TIMTA)lawrequiresreportingofthetaxincentivesgrantedforregisteredinvestments.

• 50yearsofpickingwinnersthrutheIPP,whichstartedin1968(RA5186).

Tax incentives system



14 investment promotion agencies



SpecialrateROHQ,Internationalcarriers,proprietary

educationalinstitutionsandnon-profithospitals,non-residentcorporations, cinematographicfilm

owner, lessor,anddistributor

ExemptionsGOCCs(GSIS,SSS,PHIC,PCSO*,LWDs)

Regionalorareaheadquarters,Sec.30(AtoK)– labor,agricultural,mutualsavingsbanks,non-stockcorporations,

chamberofcommerce,non-stockandnon-profiteducationalinstitutions,government

educationalinstitutions.

*TaxableasofJan2018

NationalInternalRevenueCode

Exemptionsandspecialrates


123 investment-relatedfiscal incentive laws by sector

Sector No.oflawsAgrarianreform/agriculture/food 8

Airtransportservices 4Automobile 1

Banks/financialinstitutions 5Bookpublishingindustry 1

Communication/postalservices 42Duty-freeshopping 1Disabledpersons 1

Ecozones (locators/developers/operators) 11

Energy/oilindustry 14Environment/pollutioncontrol 3

Exporters 2Gamesandamusement 5

Health 1Housing 1

Infrastructure 1Ironandsteelindustry 1



123 investment-relatedfiscal incentive laws by sector

Sector No.oflawsJewelry 1Labor 2

Micro,smallandmediumscaleenterprises 2Mining 2

Shipping industry 3Sports 1Tourism 2Veterans 2

VarioussectorsregisteredunderBOI 4Localgovernment code 1

Nationalinternalrevenuecode 1Customsmodernization andtariffact 1

Total 123



11

Country MaximumyearsofincentivesPhilippines 4+8extension+GIEforever

Brunei Darussalam 20Cambodia 9Indonesia 20Lao PDR 20Malaysia 5+5extensionMyanmar 5to7Singapore 15Thailand 13Vietnam 2to4

The Philippines gives the most generous special income tax rate among the ASEAN countries.




• Taxinvestmentallowances• HigherdeductionsforR&D,training,labor,etc.

• Accelerateddepreciation• Netoperatinglosscarryover• Customsdutyexemption• Exportsubsidies

Other incentives


CIT revenue is rising as the economy grows



CountryCIT revenues

(percent of GDP, 2016)

Headline CIT rate (percent,

2016)

Revenue productivity

(percent, 2016)

Vietnam 7.1 20 35.6Malaysia 6.0 24 25.2

Singapore 3.3 17 19.5China 3.9 25 15.8

Indonesia 2.5 25 10.0Revenue productivity is calculated as the ratio of tax revenue as a share of GDP divided by the tax rate.Sources: OECD, and individual country statistics offices.

However, efficiency is quite low.


Thailand 4.0 20 20.1

Philippines 3.7 30 12.3


Investment tax incentives: cost



16

2015 estimated forgone revenue due to tax incentives

TypeoftaxRevenue(inbillions

PHP)Incometax 86.3

Customsduties 18.1Import VAT(gross) 159.8LocalVAT(gross) 37.0Local BusinessTax TBD

Leakage TBDTotal 301.2



Note:VATandlocaltaxincentiveswerenotincludedintheestimation.

17

Estimates of tax incentives From 2011 to 2014

Taxincentives(in billionPHP) 2011 2012 2013 2014

Incometaxincentives 61.3 87.3 77.5 88.2ITH 45.6 64.4 56.4 58.4SpecialRate 15.7 22.9 21.2 29.7

Customsdutiesincentives 83.0 69.8 69.3 38.0Total 144.3 157.1 146.8 126.2RatiotoGDP 1.5% 1.5% 1.3% 1.0%RatiotototalNGexpenditures 9.3% 8.8% 7.8% 6.4%RatiotototalNGrevenues 10.6% 10.2% 8.6% 6.6%



18

TypeofIncentiveAmountoftaxincentives

(inbillionPHP)

Ratio to2015GDP(%)

Ratioto2015NG

expenditures(%)

Ratio to2015NGrevenues

(%)

Incometax holiday 53.8 0.4 2.4 2.6SpecialRate(5%GIE) 32.5 0.2 1.5 1.5TotalincentivesonincomeTax 86.3 0.7 3.9 4.1Totalincentivesoncustomsduties 18.1 0.1 0.8 0.9Total 104.4 0.8 4.7 5.0

2015 tax incentives estimates(following the TIMTA law)



19

IPATaxexpenditureonincometaxholiday

(ITH)

Taxexpenditureonspecialincometax

rate

Taxexpenditureoncustomsduties

Totaltaxexpenditure

PhilippineEconomicZoneAuthority(PEZA) 25.9 25.8 14.9 66.6

BoardofInvestments(BOI) 26.8 1.9 0.7 29.4ClarkDevelopmentCorporation(CDC) 0.3 2.1 1.6 4.1SubicBayMetropolitanAuthority(SBMA) 0.6 2.0 0.4 3.0AuthorityoftheFreeportAreaofBataan(AFAB) 0.0 0.2 0.6 0.8CagayanEconomicZoneAuthority(CEZA) - 0.5 0.0 0.5TourismInfrastructureandEnterpriseZoneAuthority(TIEZA) 0.1 - - 0.1Poro PointManagementCorporation (PPMC) - 0.1 0.0 0.1ZamboangaCitySpecialEconomicZoneAuthority (ZCSEZA) 0.0 0.0 - 0.0BasesConversion andDevelopmentAuthority(BCDA) 0.0 - - 0.0

Total 53.8 32.5 18.1 104.4

2015 tax incentives by IPA and by type of tax incentive (in billions PHP)



20

Sector Totaltaxexpenditureonincomeandduty

Percentagetototaltaxexpenditure

Manufacturing(industrialgoods,machines,electronics, electricalproducts,etc.)

30.8 29.4

Services(callcenter,BPO,etc.) 14.0 13.4

Services (warehousing,logistics, utilities,operatorofseaportsandairports,etc.)

7.8 7.5

Manufacturing (vehicles, vehicleaccessories, transportequipment) 7.6 7.3

Energy (coal,diesel,etc.) 6.1 5.9

Energy(renewable) 5.1 5.0

Services (softwaredevelopment, IT-relatedservices, gamingandothercomputer-relatedactivities, etc.)

4.8 4.6

Manufacturing (wood,glass,paper,plastic, ceramic,rubberproducts,etc.)

3.9 3.7

Economicandlow-costhousing 3.6 3.5

Tourism (accommodation, hotels,resort,etc.) 2.6 2.5

Manufacturing(food,foodprocessing) 2.4 2.3

Others(agriculture andfishery,othermanufacturing, otherservices,etc.) 15.7 15.0

Total 104.4 100.0

2015 top beneficiaries of tax incentives by sector (in billions PHP)



21

MajorSector SpecialRegime(SpecialIncomeTaxRate)

RegularRegime

ETRoftaxincentiverecipients(%)

ETR ofregularfirms(%)

AgricultureandFishery 6.3 30EconomicandLow-costHousing 9.1 30

Energy 10.0 30Manufacturing 10.2 30MiningandQuarrying - 30PPPProjects - 30Services 12.0 30Tourism 9.6 30Unfilled/UnspecifiedRegisteredActivity 13.5 30

Due to tax incentives, tax rates are very unequal.



22

IPA ImportVAT LocalVAT

Exempt Exemptpurchases 0%purchasesAFAB 1,363.5 3.3 9.4BOI 77.2 8,896.9 2,666.3CDC 9,195.9 961.4 1,571.2CEZA 1.7 0.2 30.3PEZA 147,828.4 3,313.1 17,565.9PPMC 0.2 0.0 0.3SBMA 1,358.2 761.9 947.1TIEZA - 0.0 0.0ZAMB - 67.7 201.4TOTAL 159,825.1 14,004.5 22,991.8

2015 tax incentives on value added tax (VAT), per IPA (in millions PHP)



Investment tax incentives: benefits



PHL foreign direct investment (FDI) has been growing…



But can be better…



2.0 2.3 2.3

3.7

6.1

8.7

9.4

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Philippines Thailand Indonesia Malaysia Vietnam Lao PDR Cambodia

Source: World Bank

ASEAN FDI in 2015 (% of GDP)




At the aggregate, FDI reached record highs in recent years despite declining approved foreign investments.



Historically, PEZA attracted the most foreign investments, followed by the BOI.



First quarter approved investments generally peak during election years.

145 6

119

32

64

18 21

4

47

22 19

50

37

2226 23

14

0

20

40

60

80

100

120

140

PHPbillion

sApprovedforeigninvestmentsinQ1

Source:PSANote:Purple barsrepresentelectionyears.



51

46 47 4749

46 47

43

37

3235

3231

28 29 28 28

0

5

10

15

20

25

30

35

40

45

50

55

1.0

1.6

2.2

2.8

3.4

4.0

4.6

Percento

fGDP

PHPtrillions

Philippinetotalexports

Exports(total,PHPtrillions),left

Exports(total,percentofGDP),right

Sources: PSA,DOFstaffestimates

As a result, overall exports has dropped as a share of GDP, reflecting loss of competitiveness.



0

20

40

60

80

100

120

140

Percento

fGDP

TotalexportsofASEAN5countriesasashareofGDP

Philippines Indonesia Malaysia

Thailand Vietnam

Sources:WDI,DOFstaffestimates

The Philippines has one of the lowest exports as a share of GDP among the ASEAN5.



Real labor productivity has been increasing, yet real wages have been stagnant

80

100

120

140

160

180

Indicesofrealoutputperworker,andrealminimumandaveragewages(2001=100)

Reallaborproductivity Realminimumwage

Realaveragewage

Sources:National WagesandProductivity Commission,PhilippineStatisticsAuthority, andDOFstaffestimates



The lack of incentives is not a leading problem for doing business in the Philippines

0 5 10 15 20 25

Poorpublichealth

Inflation

Foreigncurrencyregulations

Crimeandtheft

Inadequatelyeducatedworkforce

Insufficientcapacitytoinnovate

Poorworkethicinnationallaborforce

Restrictivelaborregulations

Governmentinstability/coups

Accesstofinancing

Policyinstability

Taxrates

Taxregulations

Corruption

Inadequatesupplyofinfrastructure

Inefficientgovernmentbureaucracy

Score

MostproblematicfactorsfordoingbusinessinthePhilippines,2017

Source:WorldEconomicForumNote:Fromthelistoffactors,respondentstotheWorldEconomicForum'sExecutiveOpinionSurveywereaskedtoselectthefive mostproblematicfactorsfordoingbusinessintheircountry andtorankthembetween1(mostproblematic)and5.Thescorecorrespondstotheresponsesweightedaccordingtotheirranki ngs.



Cost-benefit analysis• Cost of tax incentives in 2015: PHP 301 billion, not

counting local taxes and leakages.• Initial cost-benefit analysis shows that on average,

there is no difference between the performance offirms receiving incentives and firms not receivingincentives in terms of employment, exports,investments, and productivity. This means manyincentives are redundant.

• Many firms receiving incentives across industries paymore dividends than incentives they receive, which is asign of profitability, making incentives also redundant.


The proposed package 2 reform




Corporate income tax rate• HB 7458 – Rep. Cua, Rep. Aurelio, and Rep. Gonzales

• Automatic reduction in CIT rate by 1 ppt every year starting 2019until it reaches 20% in 2028.

• HB 7214 – Rep. Suansing, E. and Rep. Suansing, H.• Beginning Jan 1, 2020, reduce the CIT rate by 1 ppt for every 0.15

percent of GDP (or PHP 26 billion in 2018) reduction ofinvestment tax incentives two years ago.

• The goal is to reduce the CIT rate from 30% to 25% by 2022,while expanding the tax base by 0.75 percent of GDP (or PHP 130billion in 2018 prices).

• HB 7364 (Rep. Batocabo and Rep. Garin)• No provision.

• HB 231 (Rep. Singson)• No provision.


37

Corporate income tax rateH.B. No.7458

(Rep.Cua,Rep.Abu,andRep.Gonzales)

H.B. No.7214(Rep.Suansing,H.andRep.Suansing,E.)

Status Pendingwith CommitteeofWaysandMeanssinceMay15,2018

Pendingwith CommitteeofWaysandMeanssinceFebruary26,2018

Reductionofthecorporateincometax(CIT)rate

Automatic reduction intheCITrate1percenteveryyearstarting2019untilitreaches20percent

Conditionalreduction in theCITrateby1percentagepointforevery0.15percentofGDP(orPHP26billionin2018)reductionofinvestmenttaxincentivestwoyearsago.

Menuofincentives One singlemenuforallIPAs One singlemenuforallIPAs

Role ofFiscalIncentivesReviewBoard(FIRB)

• FIRB tobeoveralladministratorofIPAs

• DOFtochairFIRBandco-chairallIPAs

• SOFtohavevetopower

• FIRB tobeoveralladministratorofIPAs

• DOFtochairFIRBandco-chairallIPAs

• SOFtohavevetopower

Repeallist • Repealof67laws • Repeal of123laws




Tax admin provisions• Enhance the e-invoicing/receipting system and e-sales

reporting system.• Expand the authority of the commissioner to require

other taxpayers to comply with the e-invoicing/receipting system and e-sales reportingsystem.

• Grant of incentives to early adoption of the e-invoicing/receipting system and e-sales reporting system.

• In relation to improvement on tax avoidance and transfer pricing rules, expand the authority of the BIR commissioner to:

• Distribute, apportion, allocate, and impute income anddeductions to disregard and counteract tax avoidancearrangements on transactions involving related parties.



• Improve compliance by simplifying tax rules for corps.• Reduction of OSD for both individuals and corporations to 20% of gross income

as defined under Section 32 • Clarification on the service of subpoena by authorized revenue officers • Clarifications on the service of letter of authority• Submission of tax-related information to the Secretary of Finance • Clarification of rules on the non-recognition of gains or loss in bona fide statutory

corporate reorganizations• Improve the general anti-avoidance rules: allocation and imputation of income

and deduction and stricter definition of related parties• Clarification of the definition of liquidating dividends• Removal of the tax credit certificate • Adjustment of the threshold value for Commissioner-approved abatement or

compromise • Allowing BIR to prosecute tax cases • Application for extension of the period of limitation of assessment • Further clarifications to the e-Sales Reporting and E-Receipting Systems • Adjustment of penalties

Proposed CIT reform


Performance-basedClear attainment of actual investment, job creation, exports, country-side development, and research and development, else incentives arerevoked.

TargetedTo minimize leakages and distortion in the tax system, tax incentivesshould be given to activities with significant positive externalities asspecified in the strategic investments priority plan.

Time boundThere should be a sunset provision in the grant of tax incentives.

TransparentMonitoring of tax incentives should be institutionalized and reportedby government.

General principles of the incentives reform




• Governanceofincentives• TheFiscalIncentivesReviewBoard’s(FIRB)functionisexpandedasfollows:

• ToserveastheoveralladministratorofallIPAsandincentives• ToreviewallIPApolicydecisions• ToapproveallIPAgrantofinvestmenttaxincentives• TogranttaxsubsidiestoGOCCsandgovernmentoffices(currentfunction).

• TheDOF,aschairofFIRB,shallhavevetopowerasthecustodianoffiscalprudenceandresponsibility.TheSecretaryofFinancecancancelorsuspendthegrantofincentivesuponthereviewandrecommendationoftheFIRB.

• DOFtobeco-chairofBOI,PEZA,andallotherIPAs.• NEDAtobeamemberinall14IPAs.

Proposed reform



• Broadenthetaxbase• Repealof123speciallawsoninvestmenttaxincentivesandconsolidateintoasingleomnibusincentiveslaw.

• RepealNIRCexemptionsofGOCCs,proprietaryeducationalinstitutionsandhospitals,RHQs,ROHQs,incomeofresidentforeigncorporationfromforeigncurrencytransactions,nonresidentcinematographicfilmowner,lessorordistributorandownerorlessor,vessels,aircraft,machineriesandotherequipment.

Proposed reform



• Rationalizeinvestmenttaxincentives• OnesinglemenuofincentivesapplicabletoallIPAs.• Nodoubleregistrationofactivities.• Onlynewinvestment/activitiesshallbegrantedincometaxincentives.Expansionsaresignsofprofitabilityandneednotbegivenincentives.

• Expansionscanavailonlyofexemptionfromcustomsdutyofcapitalequipment.

• Definitionofexporter:atleast90%ofsalesareactuallyshippedouttoaforeigncountry.

• Domesticfirmsallowedifinthestrategicinvestmentspriorityplan.• One-yearrelocationincentiveforfirmsmovingoutofMegaManila.• Superiorincentivesforlaggingregions,conflictandcalamity-strickenregions.

Proposed reform



• Incentivesmenu• Incometaxholiday.• Replacethe5%grossincomeearned(GIE)taxinlieuofalltaxeswithareducedcorporateincometaxrateof15%basedonnettaxableincome.

• Otherincome-basedincentives:investmenttaxallowance,doubledeductionforresearchanddevelopmentandtrainingexpenses,50%deductionforlabor,deductionforinfrastructureandreinvestmentofprofit.

• Exemptionfromcustomsduty.• NomoreVATincentives:AllfirmstopayVATandprovetheyexporttobeabletogetarefund.

• TheVATwillnolongerbeusedasaninvestmentincentiveandcannotbeusedintheseparatecustomsterritoryargument,especiallyforverticalzones(i.e.,buildings).

• Nomorelocaltaxincentives:LGUlocalbusinesstaxwillnotbecommittedbyNG.

Proposed reform



• Existing income tax holiday (i.e., 4 years) will be allowed to continue but no extension.

• Existing GIE incentives will be allowed 2 to 5 more years as transition period.

• Receiving for more than 10 years: 2 years • Receiving between 5 and 10 years: 3

years• Receiving below 5 years: 5 years

Proposed reform


Note: BOIandCEZAisnot includedsincetheirsubmissionscoveronlytheperiod2009to2015and2015,respectively.

46

IPA Numberofyears Totalnumberoffirms

15-20 21-25 26-29PEZA 352 98 13 463SBMA 112 21 - 133CDC 39 9 - 48AFAB 6 3 - 9ZCEZA 1 - 1Total 510 131 13 654

Number of firms registered with tax incentives for 15 years and above




• Others• A3-yearSIPPshallbeformulatedbyBOIandapprovedbythePresident.

• BOIshallensurethatthemoretargetedlistincludeactivitieswithsignificantpositiveexternalities.

• OnlythePresidentmayproposeactivitiesorprojectsnotintheIPPthatmaybegrantedtaxincentives.

• Integratetaxexpenditurereportingintothebudgetprocess.• Incentiveswillnotbebudgetedbutshouldbereportedasataxexpenditurefortransparencypurpose.

Proposed reform


16

Thankyou.


comprehensive tax reform program proposed package...

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