CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Package 2 COMPREHENSIVE TAX REFORM PROGRAM Corporate income tax and incentives reform Key concerns and responses http://taxreform.dof.gov.ph/publication/recent-presentations/ As of 17 September 2019 1 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Top concerns of stakeholders A. Economic 1. Package 2 will be inflationary. 2. Package 2 will result in job losses. 3. Package 2 will lower investment, both foreign and domestic. 4. Package 2 will miss out on the opportunity to attract investments exiting China amid the US-China trade war. 5. Package 2 will make tax incentives regionally less competitive. 6. Package 2 will cause uncertainties. B. Legal 7. Package 2 will violate the one-bill one-subject rule by including fiscal incentives and FIRB. 8. Package 2 will violate the non-impairment clause by providing a sunset for current incentives. 9. Package 2 will violate the due process clause by providing sunset provisions. 10. Package 2 will violate the principle of non-delegation of taxing power by allowing the President to adjust the CIT rate and grant incentives to highly desirable projects. 2 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Top concerns of stakeholders C. Governance 11. The governance of fiscal incentives is not part of the mandate of Department of Finance. 12. The Fiscal Incentives Review Board (FIRB) will duplicate the incentive approval process, adding another layer of bureaucracy. 13. The investment promotion plan (IPP) already targets specific industries to be given incentives. 14. A cost-benefit analysis (CBA) should be conducted to determine the impact of incentives on the economy. D. Taxation 15.Package 2 will impose new taxes. 16.Lowering the CIT rate will not benefit the country. 17.The gross income earned (GIE) incentive should be retained because it reduces corruption and tax evasion. E. Rhetoric 18.Package 2 will kill the goose that lays the golden egg. 19.The present incentives system is not broken so why fix it? 20.PEZA is ready for war. 3 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Top concerns of PEZA F. PEZA 21.PEZA should be exempted from Package 2. 22.PEZA firms will move to other countries. 23.PEZA is prudent in giving incentives. 24.PEZA and its firms have been consistently pictured in a negative and undesirable way. 25.PEZA has the duty to respond on behalf of the PEZA locators. 26.PEZA incentives have more benefit than cost but these are not acknowledged by DOF. 27.PEZA was not consulted by DOF and was not given a chance by the President and the economic team to be heard. 28.PEZA will no longer be a one stop shop. 29.PEZA cannot promote SME development without incentives. 30.PEZA cannot promote regional development without incentives. 31.PEZA cannot develop the local value chain without incentives. 32.PEZA has contributed PHP 10.05 trillion to the economy from 2015 to 2017. 4 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. CONCERN 1 RESPONSE A. Package 2 will gradually lower the 1. Package 2 will corporate income tax rate from 30% to 20%. This will remove the pressure for be inflationary. firms to increase prices. B. Inflation impact of Package 2 is limited to 0.34 percentage points (ppt) over the medium-term, or less than 0.1 ppt per year. C. Inflation in August 2019 reached a 3- year low of 1.7 percent and is expected to average 3 percent in 2020. D. This means inflation, even with Package 2, is expected to be 3.1 percent. 5 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION Sector Estimated inflationary impact over the medium-term (percentage points) Food manufacturing 0.00 Fishing 0.00 Livestock/meat 0.00 Tobacco and cigarettes 0.01 Garments manufacturing 0.00 Renewable energy 0.10 Hospital (IPA) 0.00 Hospital (regular) 0.00 Restaurant and hotel 0.10 Housing 0.01 Telecomms 0.18 Total inflationary from reforms 0.41 Total price impact from reduction in CIT (DSGE) -0.07 Total inflationary impact 0.34 Source: TIMTA data, PSA, and DOF estimates 6 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION Notes on the methodology for inflation impact estimation (1/3) 1. The industrial classification of firms in the TIMTA data are categorized, and the ones with potential inflationary impact are chosen (i.e, those that are included in the CPI basket). a. The following industries are included: food manufacturing, fishing, livestock/meat, tobacco, garments manufacturing, RE, hospital, restaurants, and housing. 2. The following assumptions are included in the estimation: a. For all sectors, the value-added share is assumed to be 43 percent (source: 2012 IO table). b. For the manufactured goods, the export mix is very hard to determine or not publicly available. It is assumed that 30 percent of the output is consumed domestically. For the sectors which are all domestically consumed, such as housing and education, no export mix assumption is implemented. c. The domestic RBE output is estimated by multiplying the RBE total sales with the domestic consumption assumed share. d. This is then divided by the total PHL sectoral output from the national accounts to get the share of the economy that will be affected. 7 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Notes on the methodology for inflation impact estimation (2/3) 3. The price increase estimates are estimated using the following methods: a. For sectors in the TIMTA, a profit-equalization method is used. In summary, this assumes that a firm raises prices and hence, net revenues, in order to preserve its net income before and after the reform. b. For sectors outside the TIMTA and subject to franchise tax, such as telecoms and airlines, the additional franchise tax of 3 percent is used as the price increase assumption. c. For sectors outside the TIMTA and enjoying special rates, such as education and health, the same profit equalization method is used on a sample of financial statements. d. The price increase due to VAT is assumed to be the full 12 percent. For products with VAT exemptions, such as raw agricultural products, a share of VATable output is assumed. e. For customs duty, since it has the same base as VAT, ratio and proportion is used to estimate the effective customs duty rate. f. The total price increase due to the various taxes is estimated by combining the 3 effects. 8 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Notes on the methodology for inflation impact estimation (3/3) 4. All the sectors are subject to some sharing of additional cost between the firms and consumers. For goods which are more likely to be elastic, such as food manufactures, it is assumed that 75 percent is passed on to consumers. Meanwhile, for goods which are more likely to be inelastic, such as tobacco and health, it is assumed that the full price increase is passed on to the consumer. 5. The share of RBE to total PHL output, the total estimated price increase, the weight in the CPI basket, and the assumed cost passed on to consumers are then multiplied to estimate the sectoral inflationary impact. 6. All sectors are added to get the full inflationary impact, plus the inflationary impact estimated from DSGE due to the reduction in CIT, at -0.07 ppt. The total estimated inflationary impact of P2 revised DOF proposal is 0.34 ppt over the medium-term as firms transition from the current regime to the proposed regime. 9 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. CONCERN 2 RESPONSE A. Package 2 will lower the corporate income tax rate. This 2. Package 2 will will incentivize firms to create around 1.5 million jobs over the 10-year period. B. Package 2 will provide performance-based incentives to result in job losses. promote job creation. A. For every job created, the firm can deduct 150% of the compensation. B. For every training provided, the firm can deduct 200% of the training cost. C. For buying local, the firm can deduct 150% of the input cost. This will help expand the domestic supply chain. D. For investing outside NCR and poorer regions, the firm can get longer incentives and help countryside job creation. C. Package 2 will remove unnecessary incentives. Even without incentives, majority of firms will continue to operate and retain jobs because there is a profitable market or factors of production are abundant to 10 warrant continued operation. CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. CONCERN 2 RESPONSE D. A structural adjustment fund of PHP 500 2. Package 2 will million is available as a contingent fund for unforeseen job displacement. This does not result in job losses. mean jobs will be loss. It means we are ready to face any scenario. E. A training fund of PHP 5 billion is available to improve skills for the BPO sector to help them move up the job ladder. F. A infrastructure fund of PHP 15 billion is available to enhance competitiveness of the ecozones.