Concerns over Trabaho bill revival grip firms
There is no lasting peace when a fight ends in a truce, for there is always the fear that hostilities will resume.
And so, although a divisive tax package failed to get passed this year, some members of the business community have not let go of their concerns over the measure since the bill will just likely be refiled in 2019.
The tax package, previously called TRAIN (Tax Reform for Acceleration and Inclusion) 2, already scared off investment pledges for the most part of this year, even if the bill hasn’t even been passed into law.
The talks themselves, an official said, raised concerns of the private sector.
In essence, the Tax Reform for Attracting Better and High-quality Opportunities (Trabaho) bill has two main goals. One, it wants to slowly lower the corporate income tax (CIT), easing the burden on local companies after years of paying a 30-percent CIT, one of the highest rates in Southeast Asia.
The business community is united in wanting the CIT to be lowered, although there have been criticisms thrown at how slow the scheduled decrease is, since the CIT will only hit 18 percent in 2029.
The bill also wants to rationalize tax incentives, at the same time, casting a cloud of uncertainty on industries that have—in part—used these perks to invite companies to set up shop in the Philippines, a way to offset the otherwise high cost of doing business here.
These industries include companies into manufacturing and business processing.
Many of these are located in economic zones, where they are registered under the Philippine Economic Zone Authority (Peza).
Uncertainties over tax perks have already adversely affected investment decisions, according to Rey Untal, president and CEO of the Information Technology and Business Process Association of the Philippines.
“While the bill has not been passed, uncertainties related to the rationalization of fiscal incentives continue to impact investment decisions to retain or locate operations in the country, thereby also negatively influencing the growth of hundreds of thousands of jobs,” he said.
“This year, we saw its effects when we were affected by the wait-and-see attitude of investors and potential locators due to a number of geopolitical issues and uncertainty over the incentives rationalization, which led to our slower-than-expected growth for the past 18 months,” he added, referring to an 18-month review that traced industry figures since 2016.
For his part, Danilo Lachica, president of the Semiconductor and Electronics Industries in the Philippines Foundation Inc., said rationalizing tax perks “needs more study.”
“If passed in its current version, I’m concerned that we will eventually lose investors and existing jobs,” he said.
It is hard enough to invite investors under the current fiscal regime with guaranteed task perks, and industries fear that it will be even harder given the difficulty doing business in the country.
“Doing business in the Philippines is not easy,” the Japanese Chamber of Commerce and Industry of Cebu Inc. said in a position paper on the tax package earlier this year.
The bill will not remove all incentives under the current menu of tax perks. It will even add more perks that are considered performance-based, among other factors.
It will, however, shake the status quo enough to cause concern among some investors holding onto how things are working now, critics said.
One of the perks that the bill wants to remove is the 5-percent gross income earned tax, which qualified export-oriented firms pay in lieu of local and national taxes. This also acts as a shield against meddlesome local governments, since it lessens the interactions with agencies outside Peza.
The perk, which could last forever under current rules, will eventually be removed through the Trabaho bill, spiking the costs of doing business for projects that will fail to qualify under the new tax regime.
Create or lose jobs?
The past months showed that the Trabaho bill does not need to be in effect for it to have an adverse impact on investment decisions.
While Peza is yet to release a full-year update on its pledges, the numbers have seen a huge decline lately.
In the first three quarters of the year, Peza’s investment pledges fell 55.28 percent, reaching P87.85 billion from P196.46 billion in the same period in 2017.
The Department of Finance, however, said the Trabaho bill would actually create jobs, instead of lose them.
It said the bill would create 1.4 million jobs, without explaining how having companies pay less tax necessarily means that they would hire more.
Moreover, despite this assurance, the Trabaho bill passed in the House of Representatives set aside P45 billion as a so-called structural adjustment fund, which the bill said was meant to “compensate workers that may be displaced by the rationalization of fiscal incentives.”
Some companies, however, do not buy this assurance.
According to a survey done earlier this year by the Cebu-based Japanese Chamber earlier, a quarter of Japanese firms located in economic zones plan to pull out their investments if an opposed tax reform bill pushes through. This, however, is based on an earlier version of the Trabaho bill.
For the head of Peza, the logjam in Congress gives investment promotion agencies (IPAs) such as Peza more time to think about the Trabaho bill, and hopefully craft a more favorable one.
“This will give Peza and the other IPAs time to study further the incentives package that will enhance the incentives and separate the [perks] for exporters and domestic enterprises, [which have] different needs and challenges,” Peza Director General Charito Plaza said.
“TRAIN 2, [which] seems hurriedly done, lacks the consultation with IPAs, industry locators and a comparative study with other countries also providing incentives [and] even subsidies to attract industries who bring in huge capital investments [and] create hundreds of thousands of jobs,” she added.
The American Chamber of Commerce of the Philippines (AmCham), for its part, doubts the bill will be passed anytime soon.
“The proposed disruption of fiscal incentive policies that have successfully created a huge number of good jobs for Filipinos needs to be rethought. Investors have serious concerns with the House bill,” said AmCham senior adviser John Forbes.
“With an election in May, it now appears TRAIN 2 cannot be passed until the second half of 2019,” he added.
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