package 2 - department of finance€¦ · the 2011 and beyond data points were based on actual...

Draft for discussion. Subject to change.CTRP – Package 2: Top 10 (as of September 19, 2019) Draft for discussion. Subject to change.

Package 2COMPREHENSIVE TAX REFORM PROGRAM

Corporate income tax and incentives reform

Why reform is needed

http://taxreform.dof.gov.ph/publication/recent-presentations/

As of September 19, 2019

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Table of contents

1. Ten reasons why we need to reform the corporate income tax and incentives systema. Problemsb. Solutions

2. Summary of reform

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Ten reasons why we need to reform the corporate income tax and incentives system

1. To lower the corporate income tax (CIT) rate and 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 make tax incentives performance-based;4. To make tax incentives targeted to priority industries;5. To make tax incentives targeted to priority areas; 6. To make tax incentives time-bound;7. To make tax incentives transparent;8. To reduce the abuse of transfer pricing;9. To improve governance in the grant of tax incentives through the Fiscal Incentives Review

Board (FIRB);10. To ensure regular and rigorous monitoring and evaluation of the impact of incentives on

the economy through cost-benefit analysis.5


Source: Asian Development Bank and PWC

Problem 1. Highest corporate income tax rate in the region.

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Problem 1. Highest corporate income tax rate in the region.

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LocationRevenue1 Capital assets2

PHP billions Percent share PHP billions Percent share

Philippines 84.6 66 33.5 34

Foreign 43.2 34 63.8 66Note:1. Revenues are from external customers by geographical market.2. Capital assets refer to non-current assets excluding financial, deferred tax and pension assets.3. Most of URC subsidiaries in Asia are located in China, with a 25% CIT rate.Source: 2018 audited financial statements 2018

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Due to lower CIT rates in the region, URC Philippines expands internationally, investing 66% of its total capital

assets abroad. This means lost job opportunities here. If our CIT rate were lower, URC can invest here instead.


Solution 1. Lower the corporate income tax rate to make it regionally competitive and bring back jobs.

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In 2017, over PHP 441 billion (2.8% of GDP) was granted to 3,150 firms.

Source: DTI, TIMTA, and DOF estimates

Problem 2. PHP 441 billion in foregone revenue in 2017 from tax incentives, many of which are unnecessary incentives.

1. Firms with no incentives pay the regular rate of 30% of net taxable income.

2. For example, almost all of the 90,000 SMEs pay the regular 30% rate.

3. Firms with incentives pay between 6% and 13% effective tax.

In 2017, 989,166 registered firms, most of which pay the regular tax rate.

In addition, PHP 63 billion (0.4% of GDP) was lost due to possibleabuse of transfer pricing.

Total: PHP 504 billion(3.2% of 2017 GDP)

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Type of tax

2015 Revenue foregone

(in billion pesos)


(in billion pesos)


(in billion pesos)

Income tax incentives 86.3 121.2 126.9

Income tax holiday 53.8 74.5 70.2

Special rate 32.5 46.7 56.7

Customs duties 18.1 57.4 46.5

Import VAT (gross) 159.8 202.1 267.7

Local VAT (gross) 37.0 TBC TBC

Subtotal 301.2 380.7 441.1

Local business tax 1.6 1.0 TBC

Possible leakage from transfer pricing abuse

42.7 52.5 63.1

Total 345.5 434.2 504.2

2015 to 2017 estimated foregone revenue due to tax incentives


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PHP 441 billion 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


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An estimated PHP 5.5 trillion in tax incentives was given to PEZA firms since 1995, while PEZA approved investment amounted to only PHP 3.6 trillion.0

50

100

150

200

250

300

350

400

PH

P b

illi

on

s

PEZA tax incentives vs. PEZA approved investments

Total incentives Total approved investments

Source: PSA and DOF staff estimatesNotes: 1. Approved investments are based on official PSA data, while tax incentives before 2011 were estimated using a linear trend with available data.2. The 1999 tax incentive data point was estimated by World Bank, while the 2004 data point was estimated by Reside (2005). The 2011 and beyond data points were based on actual data, of which 2015 onwards were from TIMTA.


Incentives are not really needed by most investors


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1.97

1.30

0.13

9.80

-1

1

3

5

7

9

11

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Approved foreign investments by investment promotion

agency and foreign direct investments, in USD billions

BOI PEZA Other IPAs FDISource: PSA

1. Wider gap between total FDI and approved FDI means most investors don’t need incentives.

2. PEZA approved investments have been declining even without CITIRA.

3. BOI approved investments are higher than PEZA, suggesting that firms don’t need forever incentives to invest.

4. Prior to 2013, PEZA approved FDI were consistently higher than total FDI. This suggests that many approved investment don’t materialize.

USD

bill

ion

s


Solution 2: Package 2 to promote 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.

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Problem 3. Incentives are not performance-based.

1. No monitoring of firm performance on its “commitment” to increase export, create jobs, or raise productivity (e.g., approved vs actual investment).

2. Counterfactual analysis shows no significant difference in the performance between firms receiving incentives and those that do not receive incentives.

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Outcome IndicatorsPanel

2012/20152014 2015

Employment and compensation

Total employment / total assets

Total employment / total sales

R&D employment / total employment

Total compensation

Total compensation / total expenses

Average compensation to workers

Total salaries / paid workers

R&D=1 if establishment has R&D spendingR&D expenses / total expensesTotal investments / total assets

Capital investments

Land assets / total assetsTotal fixed assets / total assets

Building assets / total assets

Machineries / total assetsExports Direct exports / sales

Productivity

Average hours workedSales / total employment

Sales / paid workers

Summary of counterfactual analyses

Note: Panel data used the 2012 CPBI and the 2015 ASPBI with the 2015 TIMTASource: PSA, TIMTA, DOF estimates

= Registered firms performed significantly better than non-registered firms

Problem 3. Incentives are not performance-based.

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Solution 3: Package 2 offers a more competitive incentives menu that rewards performance with more incentives.

1. Depreciation allowance of qualified capital expenditure:

a. 10% for buildingsb. 20% for machineries

2. Additional deduction of up to:a. 100% for research and development (R&D) b. 100% for trainingc. 100% for country-wide infrastructure

developmentd. 50% for labor expensee. 50% for domestic input expensef. 50% for reinvestment allowance in

manufacturing industry

3. Enhanced net operating loss carry-over (NOLCO) (3 years over 5 years)

4. Exemption from customs duty on imported capital equipment and raw materials

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a. This cannot be availed together with the ITH, among other conditions. The additional deduction shall be 100% if the activity is located in less developed areas. (Does not include TIEZA, SBMA, CDC, and APECO)b. Additional deduction of 50% of the value of training expenses incurred may be deducted from the 5% final tax due (not to exceed the national governments share of 3%). (Does not include BOI, TIEZA, SBMA, CDC, APECO, PIA, and PRA)c. The enterprise may deduct from taxable income an amount equivalent to 100% of necessary and major infrastructure works (infrastructure, public utilities, and other facilities, such as irrigation, drainage or other similar waterworks infrastructure) with the prior approval and provided that the title to all such infrastructure works shall upon completion, be transferred to the Philippine Government. (For BOI only)


Direct labor expense

Training expense

Domestic inputs purchased

R&D costs

Depreciation allowance

Reinvestment allowance for manufacturing

Infrastructure development

Net operating loss carry-over

Under status quo

Up to 150% deductiona

Up to 150% deductionb

Up to 100% deduction


-

-

Up to 100% deductionc

Carried over for the next 3 years

Under Package 2





10% for buildings, 20% for machinery

Up to 50% of reinvested profit (within 5 years from time of reinvestment)


Incurred during first 3 years carried over next 5 years


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Summary of additional deductions incentives in ASEAN countries

Country

Additional deductions (percent)

R&D Labor TrainingCapital

expenditure

Infrastructure

development

(full

deduction)

Investment/

reinvestment

allowance

Domestic

input

PhilippinesCurrent 50a 50b 100c

CITIRA 100 50 100 100 50 50

Cambodia

Indonesia 30

Lao PDR

Malaysia 100 200 60

Myanmar

Singapore 150 100 100

Thailand 300 200 100 25

Vietnam 10

a. This cannot be availed together with the ITH, among other conditions. The additional deduction shall be 100% if the activity is located in less developed areas. (Does not include TIEZA, SBMA, CDC, and APECO)b. Additional deduction of 50% of the value of training expenses incurred may be deducted from the 5% final tax due (not to exceed the national governments share of 3%). (Does not include BOI, TIEZA, SBMA, CDC, APECO, PIA, and PRA)c. The enterprise may deduct from taxable income an amount equivalent to 100% of necessary and major infrastructure works (infrastructure, public utilities, and other facilities, such as irrigation, drainage or other similar waterworks infrastructure) with the prior approval and provided that the title to all such infrastructure works shall upon completion, be transferred to the Philippine Government. (For BOI only)*Cells in red: no additional deductionsSources: Deloitte, KPMG, PWC



1. Application for incentives shall constitute an agreement to achieve targets such as job creation, export, and productivity.

2. High performance -> incentives

3. Low performance -> no incentives

4. Review of firm’s performance every two years by the FIRB.


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Problem 4. Incentives are not targeted to priority industries.

1. There are 342 investment and non-investment laws that provide tax incentives outside the tax code.

2. The investment priority plan (IPP) covers up to 64 percent of all industries.

3. As a result, up to 69 percent of the economy in terms of value-added can potentially be given incentives.

4. These are far from being targeted.

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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.

1. The BOI shall ensure a more targeted list covering activities with significant positive externalities that really matter for the future.

2. Only the President may propose activities not in the SIPP that may be granted more tax incentives.

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Draft for discussion. Subject to change.CTRP – Package 2: Top 10 (as of September 19, 2019)

Source: PEZA, IPAs, and DOF staff calculationsNote: The provinces of Batangas, Bulacan, Cavite, Laguna, and Rizal were the provinces considered to be around NCR.

IPA No. of ecozones

AFAB 1

APECO 1

BCDA -

BOI -

CDC 1

CEZA 1

PEZA 531

PIA 1

PPMC 1

TIEZA 5

SBMA 1

RBOI-ARMM -

ZCSEZA 1

TOTAL 544

As of 2018, there are 544 ecozones, all of them are separate customs territory, meaning they are exempt from all taxes.

Moreover, 223 or 41 percent of these ecozones are in Metro Manila alone, and 82 or 15 percent are in areas around NCR,* for a total of 305 or 56 percent.

Problem 5. Incentives are not targeted by area.

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Source: Individual country investment promotion offices.

Problem 5. Incentives are not targeted by area.

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In other countries, poorer areas are where the ecozones are located.


Solution 5. The SIPP shall also improve targeting by giving more incentives to priority areas.

1. Administrative Order 18 series 2019 provides for a moratorium on the proclamation of new economic zones in Metro Manila.

2. The House-approved Package 2 bill provides for additional three years of incentives for:

a. Registered activities relocating outside Metro Manila and selected urbanized areas adjacent to Metro Manila;

b. Agribusiness projects of registered enterprises located outside Metro Manila and urban areas;

c. Projects located in less developed areas or those recovering from armed conflict or a major disaster.

3. All future ecozones must be based on an economy-wide cost-benefit analysis to determine their viability and value-added.

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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 few highly targeted industries and are not automatically given.

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Number of firms enjoying incentives for more than: A. 10 years - 1,169B. 15 years - 627

627

Source: 2017 masterlist of registered enterprises, TIMTA

Time, in years Years AFAB BCDA BOI CDC CEZA PEZA PPMC SBMA Total

40-45 1972-1976 1 1

36-40 1977-1981 5 5

31-35 1982-1986 4 4

26-30 1987-1991 45 45

21-25 1992-1996 207 32 239

16-20 1997-2001 1 2 272 58 333

11-15 2002-2006 1 434 107 542

6-10 2007-2011 2 378 3 31 783 161 1,358

0-5 2012-2017 96 6 845 506 189 1,353 5 394 3,394

Total 98 6 1,225 511 220 3,104 5 752 5,921


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1,169


Dividends declared were equivalent to 133% of income tax incentives received.

Source: SEC, TIMTA


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Dividends versus tax incentives, in billion pesos


Solution 6. Approved standard activities shall be given incentives for a 5, 7, or 10 year period, renewable if they meet the criteria.

Special rate (2020)18% on net taxable income after ITH for up to 3, 4 or 6 years depending on the location.

- 1.5% to province- 1.5% to municipality

Income tax holidayUp to 3, 4, or 6 years, depending on the location plus 2 year extension if investing in

agribusiness, or in less developed areas, or if relocating outside Metro Manila and adjacent urban areas.

Year Special rate (%)National

government (%)Province (%)

Municipality (%)

2020 18 15 1.5 1.5

2022 17 14 1.5 1.5

2024 16 13 1.5 1.5

2026 15 12 1.5 1.5

2028 14 11 1.5 1.5

2030 13 10 1.5 1.5

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Sunset provision for existing incentives

For RBEs which availed of ITH:Continue until remaining period ends or for a period of 5 years, whichever comes first.

For RBEs enjoying existing 5% GIE:

Number of years enjoying 5% GIE

Number of years allowed to continue

5 years below 5

5 to 10 years 3

Above 10 years 2

Solution 6. A sunset provision shall be given to existing incentives. After the period ends, they can reapply again for the new incentives.

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After the sunset, firms can apply again for the new package of incentives if they qualify.


Problem 7. Incentives are not transparent.

1. Investment promotion agencies (IPAs) do not publicly disclose the names of firms and amount of incentives given.

2. Likewise, firm-level benefits, such as exports, investment, and employment figures are not submitted as part of TIMTA.

3. The TIMTA law requires firm level incentives data but only industry level benefits data

4. There is a lot of confidentiality, discouraging public analysis and full transparency.

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Solution 7. An enhanced monitoring system of the incentives, including the collection of detailed information on the cost and benefits of incentives.

1. Integrate tax expenditure reporting into the budget process.

a. DOF to submit to DBM details of tax incentives availed, including estimated claims and programmed fiscal incentives for the following years.

b. Incentives will not be budgeted but should be reported as a tax expenditure for transparency purposes.

2. The FIRB shall publish the names of the recipients of incentives and other related information on their costs and benefits to assure the public that tax incentives are used properly.

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Problem 8. Transfer pricing is one of the top abuses of tax incentive regimes, resulting in substantial revenue loss for the government.

1. Export zones – leakages into domestic economy2. Regional investment incentives and enterprise zones – diverting activities to outside

the region or zone3. Transfer pricing schemes with related entities (through sales, services, loans,

royalties, and management contracts)4. Disguising or burying non-qualifying activities into qualifying activities5. Churning or fictitious investments (lack of recapture rules)6. Schemes to accelerate income (or defer deductions) at the end of a tax holiday period7. Overvaluation of assets for depreciation, tax credit, or other purposes8. Employment and training credits – fictitious employees and phony training programs9. Domestic firms restructure as foreign investors10. Existing firms transform into new entities to qualify for incentives

Source: Comparative Tax Policy and Administration program, Harvard Kennedy School 38

Top abuses of fiscal incentives



In 2017, an estimated 63 billion pesos in government revenues was lost due to possible transfer pricing abuse and misallocation of profits and costs.

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A company under three tax regimes can shift costs among activities to minimize taxable income and thus tax liability.

Possible abusive allocation schemes to minimize tax:A. Firm A can pad direct costs with indirect costs in order to minimize tax payments under the 5% GIE regime.B. Firm A can shift income under the regular to the ITH regime to minimize income tax.C. Firm A can shift direct and indirect costs under ITH to the regular regime to minimize tax payments.D. Firm A can shift indirect costs under 5% GIE regime to regular regime to claim such as deductions and minimize tax payments.E. Firm A can shift direct costs under the ITH regime to the 5% GIE regime to claim such as deductions and minimize tax payments.

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60

80

100

Exempt Special Regular

Pe

rce

nt

Firm A – cost structure

Direct costs Indirect costs Net taxable income

Note: Based on cost structure of service

E

D

C

A

B



Below is the estimated tax foregone if:1. Special and regular activities had the same cost structure as exempt activities, and2. Regular activities had the same cost structure as special activities.

Estimated CIT foregone from potentially abusive transfer pricing

in billion pesos 2011 2012 2013 2014 2015 2016 2017Estimated leakage from

Goods* 17.5 25.5 23.9 29.6 34.0 43.7 51.7

Exempt and special rate 3.0 3.7 2.9 3.0 6.9 8.1 10.3

Special and regular rate 14.5 21.8 21.1 26.6 27.1 35.6 41.4

Exempt and regular rate** 18.8 6.2 34.2 9.5 3.1 6.5 5.6

Services 8.4 10.9 11.2 10.4 8.6 8.8 11.4

Exempt and special rate 0.4 0.8 0.7 4.2 4.0 2.2 2.3

Special and regular rate 7.9 10.1 10.5 6.2 4.6 6.5 9.1

Exempt and regular rate** 7.9 6.2 7.1 10.7 9.9 17.9 18.9

Total 25.9 36.5 35.1 40.0 42.7 52.5 63.1Sources: BIR, DOF staff estimates

Notes: *Goods refer to manufacturing, and wholesale and retail trade. Services refer to all other industries.

**Leakages from exempt and regular rates were not included in the total amount as they may result in double counting of leakages.

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Solution 8: Shift to net income tax system and enhanced anti-avoidance rules

1. The shift from gross income* taxation to net income taxation can limit transfer pricing abuse since it reduces the number of tax regimes.

2. Enhancement of Section 50 of the NIRC of 1997, as amended.a. Authority of the Commissioner to

distribute, apportion, allocate, and impute income and deductions to disregard and counteract tax avoidance arrangements.

41* Gross income earned is defined in the National Internal Revenue Code as gross sales less sales returns, discounts, allowances, and cost of goods sold.


Problem 9. There are multiple investment promotion agencies with the power to grant incentives, and the DOF has very little say.

13 Investment Promotion Agencies (IPAs)

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IPA DOF board membership

Aurora Pacific Ecozone (APECO) None

Authority of the Freeport Area of Bataan (AFAB) None

Bases Conversion and Development Authority (BCDA) None

Board of Investments (BOI) None

Clark Development Corporation (CDC) None

Cagayan Economic Zone Authority (CEZA) None

Philippine Economic Zone Authority (PEZA)Member

(1 voice out of 13 members)

PHIVIDEC Industrial Authority (PIA)Member

(1 voice out of 10 members)

Poro Point Management Corporation (PPMC) None

Subic Bay Metropolitan Authority (SBMA) None

Tourism Infrastructure and Enterprise Zone Authority (TIEZA) None

Zamboanga City Special Economic Zone Authority (ZCSEZA) None

Regional Board of Investments - ARMM (RBOI-ARMM) None

Problem 9. There are multiple investment promotion agencies with the power to grant incentives, and the DOF has very little say.

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Solution 9. The FIRB will have oversight function over all IPAs and approve all incentives. The DOF secretary chairs the FIRB.

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All IPAs will retain their one-stop functions for investors


Solution 9. The FIRB will have oversight function over all IPAs and approve all incentives. The DOF secretary chairs the FIRB.

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Problem 10. No regular cost benefit analysis (CBA) has ever been conducted to determine the impact of incentives on the economy.

1. There has been little to no effort to do a regular CBA analysis.a. AFAB only

started working on a CBA starting 2018.

b. PEZA wants to begin one after decades of existence.

July 2, 2019

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Summary of first-ever compre-hensive CBA conducted by DOF

Solution 10. The first comprehensive CBA analysis has been undertaken by DOF. Going forward, the FIRB shall regularly conduct the CBAs.

54Note: 2015-2017 averages


Solution 10. The first comprehensive CBA analysis has been undertaken by DOF. Going forward, the FIRB shall regularly conduct the CBAs.

1. The FIRB shall “…conduct regular monitoring and evaluation of investment and non-investment fiscal incentives, such as using cost-benefit analysis (CBA), to determine their impact on the economy and whether agreed performance targets are met.”

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Package 2 to promote 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.

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Package 2 promotes a fair and accountable tax incentives system

Fair and accountable tax incentives system with enhanced FIRB functions including regular CBA, IPA oversight, and incentives approval.

Lower the corporate income tax rate from 30 to 20 percent by 2029.

Provide incentives to attract industries consistent with development priorities through additional deductions and a more targeted SIPP.

Simplification and rationalization of tax incentives system by repealing and amending some 87 special laws, and putting those qualified in the SIPP.

1 2

3 4

Year 2019 2020 2021 2022 2023

CIT rate 30 29 28 27 26

2024 2025 2026 2027 2028 2029

25 24 23 22 21 20

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Rationalize investment tax incentives

One menu of incentivesapplicable to IPAs

No double registrationof activities

Only new and qualified investment/ activities shall be granted income tax incentives

Only expansions can avail of exemption from customs duty of

capital equipment

Special VAT incentives for exporters: 90% of export salesare actually shipped out of the

country

Domestic firms allowed if included in the strategic investment priority plan

Three-year additionalincentives for firms

moving out of Manila and adjacent areas

Three years additional incentives for lagging regions, conflict, and calamity-stricken

regions

Three years additional incentives for agribusiness

projects of registered enterprises located outside

Metro Manila and urban areas58


Skilled and hardworking talent pool that needs sufficient

human capital investments.Solution: investment in K12,

TESDA, UHC

Ambitious infrastructure development program that requires fiscal commitment.Solution: PHP 8 trillion BBB

Sizeable small and medium enterprise community that

deserves to be treated fairly through easier doing business

processes. Solution: EODB

More than tax incentives, investors need...

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A. Multiple fiscal incentives rationalization bills have been filed since 1995 or the 10th congress.B. The main cause of uncertainty is the long delay of legislating the reform, not the incentive package.

Investors prefer to wait until Package 2 is passed before investing. The sooner it is passed, the faster investment will flow in.

C. The DOF has been consistently pro-active and did not waste time in submitting the proposed package 2 last January 2018, immediately after the passage of TRAIN in Dec 2017. The House approved and transmitted TRABAHO last September 2018, but the Senate conducted only one hearing before the mid-term elections.

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The timely passage of CITIRA is crucial in reducing uncertainty among investors.


Thank you!For more information, please visit:

For questions, you may directly email us at:

http://taxreform.dof.gov.ph/publication/recent-presentations/

Download this presentation at:

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package 2 - department of finance€¦ · the 2011 and beyond data points were based on actual...

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