The Philippine Economic Zone Authority (Peza) wants more tax incentives to be put under the second tax reform package, including a conditional extension of income tax holidays for every new investment, among other factors.
Peza Director General Charito Plaza told reporters in an interview earlier this week that she has formed a technical working group that would come up with a counterproposal to the tax package.
While finer details of the counterproposal are still being fleshed out, the point is to reward companies with more tax perks for businesses that serve the basic needs of the domestic market and for making additional investments.
The possible conflict, however, is that these recommendations to add more perks run against one of the goals of the second tax reform package, which is the rationalization of tax incentives.
“Our request to [Finance Secretary Carlos Dominguez] is to give us the whole month of March to come up with our proposal because we are the one exposed in the field,” she said in a mix of English and Filipino.
The Department of Finance (DOF) had submitted to Congress earlier this year its second comprehensive tax reform package, which proposed to lower corporate income tax under the condition that tax incentives would also be reduced. This followed the passage of Tax Reform for Acceleration and Inclusion (TRAIN) law, the first tax reform package under Duterte, that lowered personal income tax of millions of Filipinos while raising consumption taxes.
Practice
Under status quo, Peza-registered companies could have income tax holidays (ITH) ranging from four to six years. This could be extended to another year in some scenarios, such as when the project meets a certain ratio of capital equipment to its number of workers.
When the ITH expires, the company would pay five percent gross income earned (GIE) tax in lieu of all taxes, a perk which essentially has no expiration date.
These companies, which are export-oriented, are required to export at least 70 percent of their products or services, while the remaining 30 percent could be availed of by the domestic market.
DOF’s proposed changes
In DOF’s proposal, the ITH would still be offered but an extension would no longer be allowed.
Moreover, instead of the GIE tax, there would be a reduced corporate income tax rate of 15 percent based on net taxable income once the ITH expires. This 15-percent tax rate could be continued for another five years on a per-project basis.
Export-oriented companies would also have to sell 90 percent of their products or services abroad, reducing the share of the domestic market.
Peza’s counterproposal
Plaza said the perpetual GIE is indeed “unfair,” especially for companies that do not expand. This is why Peza is suggesting to base the extension of ITH on certain standards.
“Other than putting a cap, we could encourage existing firms. If they’re going to put up a new product, we will add their ITH. If they will come up with additional capital, if they expand, that would be another ITH. If they will hire or create more jobs, that will be another ITH,” she explained.
She did not say by how many years the ITH would be extended, noting that this is a detail that would be decided on by the technical working group.
She also said she wants new incentive packages for certain companies that would help supply the Philippines with basic crops, as well as help put up important industries that are not yet in the country.
“We will have new incentive packages for basic industries, [which are] industries that are not yet here with us like steel. Then, another package of incentives for companies that would manufacture basic crops we are still lacking in the Philippines,” she said.
“[There would be] another package of incentives that we are now programming here in Peza for companies that will develop the countryside, those who would go to far-flung areas and make them productive,” she added.
She said they may even change the definition of exporters with more emphasis for the domestic market. She noted that companies also consider the prospects of the local market when investing here, which means that that they should be allowed to cater more to the local market.
“We may increase the domestic market. We might change the ratio. Maybe we could switch it. 70 percent for domestic sales and 30 percent for export,” she said.
DTI-BOI backs DOF proposal
Meanwhile, the Department of Trade and Industry (DTI), along with its attached agency the Board of Investments (BOI), called the backlash that some companies might sustain under the DOF proposal “unfortunate” but “necessary.”
In a mobile message on Thursday, Trade Secretary and BOI Chairman Ramon Lopez said that DTI-BOI
“always looks after the concern of investors,” noting that the department wants to make sure that it could still generate more investments even under new tax rules.
“As we rationalize, it is unfortunate that there will be companies or individuals that will be hit but this is exactly the necessary corrections to spread more evenly the gains and remove the years of biases and make incentives more strategic,” he said.