Peza frowns over 2nd tax reform proposal: It’s ‘unconstitutional’

The Duterte administration’s proposed second tax reform package would invalidate existing government contracts with investors, a move which the Philippine Economic Zone Authority (Peza) has called “unconstitutional.”

Elmer San Pascual, manager of Peza’s promotion and public relations, told reporters last week that the tax package would go against a constitutional provision that protects existing government contracts.

This is because, according to Pascual, the tax package would strip the tax incentives being enjoyed by existing companies registered under Peza even if these perks were promised in the said agreements.

Filed as House Bill 7438, the package wants to lower the corporate income tax while reducing the tax perks being offered by the government.

Under the bill, companies that benefit from the current tax perks could keep these incentives for the span of a transitional period of no less than five years.

The longer the company had received the perk, the shorter the transitional period would be. After which, they would have to comply with the new set of perks listed under the bill.

“In our part, we cannot agree to that. We cannot legislate a law which would violate contracts especially contracts [with the] government. There is a provision in our Constitution [regarding] the inviolability of a contract,” Pascual said in a mix of English and Filipino.

The Duterte administration has moved to reform the country’s tax rules. The initial tax reform package took effect in January 2018.

The uncertainty brought about by the proposed tax reform package could be seen in the decline in Peza investment pledges in some sectors last year, and the over-all drop of pledges for the first two months of 2018.

Under status quo, a Peza-registered company would pay five percent gross income earned (GIE) tax in lieu of all taxes, a perk that essentially has no expiration date. This GIE tax would only take effect for companies that have used up their income tax holidays of four to six years.

The House bill, which echoes the proposal made by the Department of Finance (DOF), would strip off that perk. Companies that have enjoyed the incentive for more than a decade could only keep the perk for two more years.

“Our contract with our investors [means] that as long as you are doing your registered [business] activity, you would continue to enjoy 5 percent GIE tax. That’s perpetual. If they would legislate [a law] violating that contract, that is, we think, and I personally think, in violation of the Constitution,” Pascual said.