Congratulations are due to House Speaker Alan Peter Cayetano and Ways and Means Chair Joey Salceda on the swift passage of the Corporate Income Tax and Incentive Rationalization Act and Passive Income and Financial Intermediary Taxation Act in the House of Representatives. Memorably tagged CITIRA and PIFITA by Congresman Joey, it is now being heard in the Senate Ways and Means Committee which is most ably chaired by lawyer and economist Senator Pia Cayetano.
At the last hearing, I was privileged to read the statement of support of former Finance Secretaries and noted economists in favor of these pending tax reform packages. Signatories included former Prime Minister Cesar Virata, former Senator and Finance/Executive/Foreign Affairs Secretary Alberto Romulo, Former Finance Secretaries Roberto de Ocampo, Jose Isidro Camacho, Margarito Teves, and Former Planning Secretaries Cielito Habito and Arsenio Balisacan.
The collective wisdom and experience of this group in the field of fiscal and economic governance is unparalleled, gained not only during their years in office, but also in the leadership positions they now occupy. Our full statement can be accessed on this link — www.dof.gov.ph/index.php/former-dof-secretaries-eminent-economists-join-top-legislators-in-seeking-urgent-passage-of-remaining-tax-reform-packages/.
The last two sentences read: “All these reforms are necessary if the Philippines is to move forward to a future with no extreme poverty by 2040. Together, we stand ready to support these reforms in any way we can. We urge both houses of Congress to recognize the great merits of the Comprehensive Tax Reform Program and pass the remaining packages at the soonest possible time.”
Urgency is truly called for, since this congress has less than a year before election fever grips the nation and everything is pushed back for at least three more years. And the country, especially the poorest citizens, cannot wait. Philippine poverty incidence stands at over 21% vs. 11% for Indonesia, 9% for Thailand, 7% for Vietnam. (Source ASEAN Key Figures, 2018, aseanstats.org)
Moreover, the world does not stand still. This is especially relevant for CITIRA which will affect the behavior of investors, the job creators. In the ASEAN, our corporate income taxes (CIT) rates stand out uncompetitively at a high 30%, even as our ASEAN peers, which now average 22%, are moving swiftly to further lower them. (See the column of Atty. Benedicta Du-Balabad, “CITIRA and the ASEAN Tax War,” Philippine Daily Inquirer.)
To lower the corporate income tax to 20% faster, quick action is likewise needed to rationalize fiscal incentives to cover for foregone revenues from there. The strongest objections are coming from locators in PEZA (Philippine Economic Zone Authority) zones, championed by the Joint Foreign Chambers of Commerce, and the PEZA Administrator (though disowned by its Chairman and Board). Though unsubstantiated by specific data, the apprehension has been sown that any departure from the status quo of “forever incentives” will lead to huge job losses.
Recent data suggest otherwise. That as literature and research finds, incentives are not what drives FDI (foreign direct investment). And the fears of massive exit of FDI due to recent initiatives of the Department of Finance on incentives rationalization may be exaggerated.
On this, the remarks of Prof. Renato Reside of the UP School of Economics during the Senate hearing is worth quoting. He and his UP colleague, then-former Planning Secretary and now Monetary Board Member Philip Medalla, separately did the seminal work on the case for rationalising fiscal incentives as early as the mid-1990s. (See “Reside, Towards Rational Fiscal Incentives (Good Investments or Wasted Gifts),” 2006. http://www.econ.upd.edu.ph/dp/index.php/dp/issue/view/42.) These have informed bold but sadly failed efforts of five administrations.
“… based on global experience with tax incentives, certain investors get benefits they may not need, certain incentives are redundant. And while certain benefits cannot be attributed to them, there will certainly be costs to granting them. But CITIRA aims to substitute inefficient for more efficient incentives, not take them away so the question is how adjustment will take place when shifting to lower tax rates, tax credits and tax allowances and accelerated depreciation to reward marginal additions to R&D, employment and investment levels. For sure, additional investment and hence employment will also be spurred by more efficient incentives, lower tax rates and more targeted incentives.”
A possible compromise has been mentioned by Department of Trade and Industry Secretary Ramon Lopez. A UP and foreign trained economist, he served as a Director in NEDA (National Economic and Development Authority), as a top corporate executive, and as champion of SMEs at Go Negosyo, and is thus well placed to see all sides. He is recommending a longer phase-in period for the new incentive scheme for well-defined PEZA locators.
The thinking of the Foundation for Economic Freedom (FEF) is aligned with this:
“We support the phasing out of all incentives except temporarily for a small subset of labor intensive industries which unless the CIT is 25% or lower are likely to move out to other countries without incentives. Such exemptions can be phased out when the CIT is aligned with the lower CIT rates in our neighboring countries.”
Now a note on PIFITA. This well-studied bill crafted by the Department of Finance officials and consultant team, goes a long way in simplifying, harmonizing taxation of financial instruments, towards developing our capital market. The FEF has a reservation on the proposed presumptive capital gains tax of 0.1 percent per trade, as this will create friction costs that will impair liquidity and trading, and at the end hurt issuers, especially government, the biggest issuer, as well as savers. Taxing capital gains from debt securities trading as regular income would be more efficient and friendly to the development of the market.
The other tax reform packages, including Package 2+ on Sin Taxes for Universal Health Care, and Package 3 on Real Property Valuation Reform, were likewise fully endorsed by the former Finance Secretaries and the FEF.
Hopes are high that under the committed leadership in the House and the Senate, the resolute Duterte team will succeed where their predecessors have floundered — just as they did in getting the game-changing rice tariffication law passed that has lowered inflation now and for the long haul, and is en route to upgrading Philippine agriculture and reducing poverty. On the other hand, further delay will mean more uncertainty; arguably the heaviest tax — on investments, job creation, and the public good.
Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations He is Philippine Adviser of GlobalSource Partners, a New York-based network of independent analysts.