Tax perk removal ‘unconstitutional’

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

Elmer San Pascual, manager of Peza’s promotion and public relations, said the tax package would go against a constitutional provision that protected existing government contracts.

This was due to the fact that the tax package would strip the tax incentives being enjoyed by existing companies registered under Peza, even though these perks were promised in their agreements with the government agency.

Filed as House Bill 7438, the package wanted 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 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.

“On 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,” San Pascual said.

According to the Bill of Rights of the 1987 Constitution, no law impairing the obligation of contracts shall be passed.

This developed as the Duterte administration moved to reform the country’s tax system. The first package of the reform program took effect last January and raised or introduced taxes on oil products, cigarettes and alcoholic drinks, vehicles and sugar-sweetened beverages. The new taxes were aimed at recovering the lost revenues from the reduction in income taxes caused mainly by the increase in the tax-free annual income to P250,000.

The uncertainty now arises in the second tax reform package on the rationalization of incentives. This was manifested in the decline in Peza investment pledges in some sectors last year and the overall drop of pledges for the first two months of 2018.

Under the existing rules, a Peza-registered company would pay a 5-percent gross income earned (GIE) tax in lieu of all taxes, a perk which 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 bill, which echoes the proposal made by the Department of Finance (DOF), would remove that perk. Companies that have enjoyed the incentive for more than a decade could keep the perk for only 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,” he said.