DOF, Peza clash over second tax reform package

Contrary to the Philippine Economic Zone Authority’s claims that the proposed second tax reform package would invalidate existing government contracts with investors, hence is “unconstitutional,” the Department of Finance clarified Monday that “deserving” businesses will continue to enjoy fiscal perks under the new corporate income tax regime.

In a statement, Finance Assistant Secretary and spokesperson Paola Alvarez said that the second tax package “seeks to lower the corporate income tax paid by some 95 percent of businesses, while at the same time retaining and providing new fiscal incentives for deserving recipients that will contribute to national development and help generate pro-poor investments and jobs.”

As such, Alvarez said reports claiming that all tax perks will be removed under the second tax reform package were “erroneous.”

Last week, Peza said that the tax package would go against a constitutional provision that protected existing government contracts.

The investment promotion agency (IPA) had explained that the second tax package would strip the tax incentives being enjoyed by existing Peza-registered firms, even though these perks were promised in their agreements with the government agency.

The second tax reform package is currently pending in the Lower House under House Bill No. 7458.

Under HB 7458, 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 has received the incentives, the shorter the transition period would be. After which, they would have to comply with the new set of perks listed under the proposed bill.

For Peza, it will be a violation of the 1987 Constitution’s Bill of Rights, under which no law impairing the obligation of contracts shall be passed.

But Finance Undersecretary for legal affairs Bayani H. Agabin argued: “It is our belief that these businesses cannot invoke the non-impairment clause in this instance. Jurisprudence supports this. There are no vested rights in tax incentives.”

“Because these are mere statutory privileges, they may be modified or withdrawn at the will of the granting authority. In this case, that granting authority is the Philippine Congress,” Agabin added.

Also, Alvarez answered Peza’s allegations that the tax incentives it shelled out amounted only P40 billion in 2015, almost six times smaller than the DOF’s estimates.

“Based on the requirements under Republic Act No. 10708 or the Tax Incentives Management and Transparency Act (Timta Law), the DOF estimates incentives granted to registered enterprises in Peza zones reached P235.3 billion in 2015 alone, out of a total of P301 billion, which includes the incentives for 13 other IPAs,” Alvarez said.

“These perks are broken down as follows: income tax holiday, P25.9 billion; the 5-percent tax on gross income earned (GIE), P25.8 billion; customs duties, P14.9 billion; import value-added tax (VAT), P147.8 billion; and local VAT, P20.9 billion. The perks under the 5-percent GIE is computed as the difference between what they paid and what they would have paid under the regular 30-percent net income tax,” Alvarez added.

“The DOF did not come out with its estimates on a whim. Our data came from the submissions of the IPAs and validated with data from the Bureau of Internal Revenue’s income tax information and the import entries from the Bureau of Customs’ database and were based on what were required under the Timta and its implementing rules and regulations. In fact, apart from the DOF, the IPAs should be able to compute the cost of fiscal incentives as the data came from them. Our method is very transparent and are open to sharing it with interested parties,” according to Alvarez.

For Alvarez, “those who create good jobs, bring development to poorer areas of the country, and invest in research and development have nothing to fear, but the spread of misinformation and false claims have led to confusion.”

“These good corporate citizens certainly deserve performance-based and targeted incentives, as a reward for taking risks that others don’t for the good of the country. The government will give support to pro-poor and sometimes riskier investments for a reasonable amount of time, after which support can be directed to new players or those who wish to expand their contributions to job generation, innovation, and countryside development,” she added.