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. This can create 15,000 jobs.
11 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Year 2021 2023 2025 2027 2029 CIT rate 28% 26% 24% 22% 20% Direct job creation 92,455 223,892 406,556 655,756 991,900 Indirect job 50,697 122,769 222,932 359,578 543,900 creation Total 143,152 346,661 629,488 1,015,334 1,535,800 (IO method) Total 262,467 537,878 980,531 1,569,408 2,259,475 (DSGE method) Sources: PSA, and DOF estimates
1. The IO method incorporates the lowering of the (corporate income tax) CIT rate. 2. The DSGE method incorporates both the reduction in CIT rates and the recovery of fiscal incentives, and represents an upper bound for the job estimates. 3. The significant reduction in the CIT frees up more capital for firms to invest and, in turn, create jobs. 4. The impact on jobs from the lowering of the CIT rate is strongly positive, and slightly higher after the fiscal incentives recovery. 5. For instance, job creation can reach about 140 thousand in 2021 with a 28% CIT rate and can reach around 1.5 million in 2029 with a 20% CIT rate. 12 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 3 RESPONSE A. The decline in investment pledges is not 3. Package 2 will accurate. Despite the claim that Package 2 is causing a decrease in investments, PSA lower investment, reported a 60% year-on-year increase in FDI pledges for the second quarter of 2019, both foreign and signaling confidence in the policies of the Duterte administration despite Package 2. B. The far majority of FDI do not need domestic. incentives. C. In 2018, the largest investment came from BOI firms and they do not receive forever incentives. D. In the past, approved investments were low even without Package 2, so how can critics blame lower investment solely on Package 2? 13 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
1. Philippine Statistics Authority (PSA)’s report on the doubling of foreign direct investment (FDI) pledges during the first half of 2019 shows that fears of investment flight due to the expected passage of CITIRA are unfounded.
2. Specifically, the PSA reported that foreign investment pledges in the second quarter amounted to P49.58 billion, up 60.2% from P30.95 billion a year ago. The report is based on data from 6 of the 7 investment promotion agencies monitored by the Philippine Statistics Authority (PSA), which include the Board of Investments (BoI), Philippine Economic Zone Authority (PEZA), Clark Development Corporation (CDC), Subic Bay Metropolitan Authority (SBMA), Authority of the Freeport Area of Bataan (AFAB), BoI-Autonomous Region in Muslim Mindanao (BoI-ARMM) and Cagayan Economic Zone Authority (CEZA).
14 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION The far majority of FDI do not need incentives. 1. The gap between FDI and approved foreign investments is widening. This suggests that the majority of foreign investment do not need incentives. 2. PEZA approved investments have been generally declining since 2012 and 2015, even without the proposed CITIRA. 3. In 2018, BOI approved investments was higher than PEZA, suggesting that there is no need for forever incentives to attract investment. 4. Prior to 2012, PEZA approved foreign investments was sometimes higher than the whole Philippine FDI. This suggests that approved investment never or only partly materializes.
15 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION The far majority of FDI do not need incentives.
Approved foreign investments by investment promotion 1. Wider gap between total FDI agency and foreign direct investments, in USD billions and approved FDI means most 11 investors don’t need incentives. 9.80 4. Prior to 2013, PEZA approved FDI 9 were consistently higher than total FDI. This suggests that many approved 7 investment don’t materialize. 2. PEZA approved investments have been declining even without 5
USD billions CITIRA.
3 1.97 1 1.30 3. BOI approved investments are 0.13 higher than PEZA, suggesting that -1 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 firms don’t need forever incentives BOI PEZA Other IPAs FDI to invest. Source: PSA
16 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. At the aggregate, FDI reached record highs in recent years despite declining approved foreign investments.
17 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Historically, PEZA attracted the most foreign investments, followed by the BOI.
18 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION First quarter approved investments generally peak during election years. Approved foreign investments in Q1 140
119 120
100
80 64 60 50
PHP PHP billions 47 37 40 32 26 22 22 23 18 21 19 20 14 14 5 6 4 0
Source: PSA Note: Orange bars represent election years. 19 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 4 RESPONSE A. Package 2 provides superior and performance-based 4. Package 2 will miss incentives to attract the right investors leaving China. B. Moreover, Package 2 offers superior incentives to the out on the opportunity largest firms that the President can grant over and above the standard incentive package. to attract investments C. The sooner we enact Package 2, the faster we remove uncertainty and the quicker the investment exiting China amid the will come. D. The Philippines will never attract much investment if US-China trade war. it continues to use incentives as band-aid solution instead of addressing infrastructure, government efficiency, and doing business concerns. This is what we are prioritizing now. E. Progress in achieving the 10-point socioeconomic agenda is advancing strongly. This is what investors look for. 20 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 4 RESPONSE F. Most investments have not left China. They 4. Package 2 will miss are on a wait-and-see mode and assessing the impact of the trade war on their out on the opportunity business. G. Some investments have left China and they to attract investments go to countries like Vietnam not because of incentives. exiting China amid the H. Vietnam is the preferred manufacturing US-China trade war. destination for exports because of its free trade agreements (FTA), transport networks, low labor cost, proximity to China, and better governance.
21 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
World Bank 2005 World Economic Forum 2017-18
22 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Progress in achieving the 10-point socioeconomic agenda is advancing strongly.
23 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION Vietnam is preferred for export manufacturing because… 1. Free trade agreements (FTAs) A. Upcoming: Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Vietnam – EU FTA (EVFTA) 2. Vietnam’s proximity to China A. Situating manufacturing centers (e.g. Hai Phong) close to traditional hubs in China (e.g. Shenzhen) B. Many factories in Vietnam are foreign-owned, easier transfer of intangible assets 3. Transport networks A. Proximity to regional shipping routes B. 114 seaports C. Extensive railway network (e.g. Kunming, China – Hai Phong) 4. Low labor costs A. Monthly minimum wages range: USD 125 to USD 180 5. Governance A. Relatively stable government that continues to prioritize infrastructure investment
Source: https://www.china-briefing.com/news/vietnam-overtaking-china-us-export-manufacturing/ 24 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION Signed Free Trade Agreements (FTA) with Japan, China, Korea and the USA Japan China Korea USA Philippines Yes No No No Indonesia Yes No No No Malaysia Yes No No No Thailand Yes Yes No No Singapore Yes Yes Yes Yes Vietnam Yes No Yes No
Source: Asia Regional Integration Center 25 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 5 RESPONSE A. Removing the forever incentives does not mean 5. Package 2 will that we will reduce the competitiveness of incentives. make tax incentives B. Package 2 provides more competitive and performance-based incentives such as additional regionally less deductions for labor, training, R&D, local inputs, infrastructure, reinvestment, depreciation, and net operating loss carryover. These additional competitive. options are available to qualified activities which are not present in the current incentives system and in many other countries. All these can incentivize the right type of investment. C. Moreover, firms can re-apply for incentives after the initial availment period as long as they qualify and innovate. 26 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ITH and special rate incentive package durations in CITIRA (by location) 25
20 Section 297. Relocating from urban areas 19
Section 296. Recovering areas 15 Section 295. Agribusiness or outside urban areas 10 10 7
Duration (in years) Duration 5 5
0 NCR Laguna, Bulacan, Cavite, Rizal Other areas Relocating to recovering areas Base ITH Base special rate Section 295 ITH Section 295 special rate Section 296 ITH Section 296 special rate Section 297 ITH Section 297 special rate
27 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Additional 3 years of incentives for: A. Registered activities relocating outside Metro Manila and selected urbanized areas adjacent to Metro Manila B. Agribusiness projects of registered enterprises located outside Metro Manila and urban areas C. Projects located in less developed areas or those recovering from armed conflict or a major disaster
28 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Maximum and minimum duration of ITH in ASEAN
30
25 25
20 20 20
15 15 15 15 15 *renewable if qualified 12
10 9 7
4
Duration (in years) Duration 5 5 5 4 4 5 3 3 3 2 1 0 1 Vietnam Myanmar Cambodia Philippines Thailand Lao PDR Malaysia Singapore Brunei Philippines Indonesia (CITIRA) Darussalam (Current)
Philippines (current): AFAB and APECO can give 20 years ITH Source: PWC, OECD, DOF staff research, IPA charters 29 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Maximum and minimum duration of special tax rates in ASEAN
50
40
40
Forever Forever
30 *renewable if qualified 25
19 20
Duration (in years) Duration 15 10 10 10 5 3 5 5 5 2 1 0 1 1 Cambodia Thailand Malaysia Myanmar Vietnam Philippines Indonesia Singapore Philippines (CITIRA) (current)
30 * Philippines (current): 5% of Gross Income Earned (GIE) is equivalent to about 15% of net income, on average. Duration has no bounds (forever). Sources: PWC , DOF staff research, IPA charters CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Maximum and minimum duration of income tax incentives across ASEAN
50
40
40 Forever
30 28 Forever 25 *renewable if qualified 19 20 20
20 18 Duration(in years) 15 16
9 10
4 5 5 3 3 3 2 2 0 1 1 1 Cambodia Lao PDR Thailand Myanmar Philippines Brunei Malaysia Indonesia Vietnam Singapore Philippines (CITIRA) Darussalam (Current)
Notes: Cambodia – Securities (3), Rice (9) Malaysia – biotechnology companies Lao PDR – Under developed areas without adequate infrastructure Indonesia – SEZs Thailand – A1 and A2: Knowledge based R&D, infrastructure related Vietnam – Category 3: High technology, tach parks, software, powerplants, ports Myanmar – SEZ Singapore – Pioneer/ development and expansion incentive 31 Brunei – high tech parks Philippines (current) – forever; ADAB and APECO fiscal incentives are cumulative up to 20 years CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Comparison of ITH and special rate packages in the Philippines and Indonesia (by investment amount) 40
30 Forever *renewable if qualified 20 2
7 25 Duration (in years) Duration 10 20 15 15 12 7 8 0 USD 7 to 35m In SEZ, below USD In SEZ, USD 35 to Relocated to Over USD 35m In SEZ, over USD All ecozones (Indonesia) 35m (Indonesia) 70m (Indonesia) recovering areas (Indonesia) 70m (Indonesia) (Philippines, (Philippines, CITIRA) current)
ITH Special rate Sources: PWC, country website 32 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Comparison of ITH and special rate packages in the Philippines and Malaysia (by sector)
40
30 Forever
*renewable if qualified 20 7 10 10 Duration (in years) (in Duration 15 12 10 10 8 5 5 0 Production of Waste ecopark MSC*, R&D Less-developed Relocated to Biotechnology All ecozones machinery and operators, high (Malaysia) areas recovering areas (Malaysia) (Philippines, equipment; technology (Malaysia) (Philippines, CITIRA) current) agricultural, hotel, companies and tourism sectors (Malaysia) (Malaysia)
*Multimedia Super Corridor (MSC) Sources: PWC, country website ITH Special rate 33 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Comparison of ITH and special rate packages in the Philippines and Thailand (by sector)
30
*renewable if qualified Forever 20
7 5 10
Duration (in years) Duration 15 12 13 12 10 11 8 6 0 B1: Supporting A4: Domestic A3: High Targeted core A1 and A2: Nationally Relocated to All ecozones industry supply chain technology technology Knowledge based strategic sector recovering areas (Philippines, (Thailand) (Thailand) (Thailand) (Thailand) R&D, (Thailand) (Philippines, current) infrastructure CITIRA) related ITH Special rate (Thailand) Sources: PWC, country website 34 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Comparison of ITH and special rate packages in the Philippines and Vietnam (by sector) 40
30 Forever *renewable if qualified 20 24 7
10 14 Duration (in years) (in Duration 9 5 12 4 8 4 4 4 0 2 2 Cat.5: Non-urban Cat.4: Steel, Cat.3: High Cat.2: Education, Cat.1: Education, Relocated to Ecozones* industrial parks forrestry, irrigation, technology, tach healthcare, cultural, healthcare, cultural, recovering areas (Philippines, (Vietnam) crafts, agriculture parks, software, and sports located and sports located (Philippines, CITIRA) current) (Vietnam) powerplants, ports in non-dfficult areas in dfficult areas (Vietnam) (Vietnam) (Vietnam)
ITH Special rate
*Category 1 and 2 have lower special rates at 10 percent Sources: PWC, country website 35 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
1. Depreciation allowance of qualified capital 3. Enhanced net operating loss carry- expenditure: over (NOLCO) (3 years over 5 years) a. 10% for buildings 4. Exemption from customs duty on b. 20% for machineries imported capital equipment and raw materials 2. Additional deduction of up to: a. 100% for research and development (R&D) b. 100% for training c. 100% for country-wide infrastructure development d. 50% for labor expense e. 50% for domestic input expense f. 50% for reinvestment allowance in manufacturing industry
36 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Summary of additional deductions incentives in ASEAN countries
Additional deductions (percent)
Country Investment/ Capital Infrastructure Domestic R&D Labor Training reinvestment expenditure development input allowance
Current 50** Philippines CITIRA 100 50 100 100 50 50
Cambodia
Indonesia 30
Lao PDR
Malaysia 100 200 60
Myanmar
Singapore 150 100 100
Thailand 300 200 100 25
Vietnam 10
**Additional deduction of 50% of the incremental labor expense if the prescribed ratio of capital assets to annual labor is met, additional deduction of 100% of the incremental labor if located in less-developed areas (cannot be availed of simultaneously with the ITH). Cells in red: no additional deductions 37 Sources: Deloitte, KPMG, PWC CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 6 RESPONSE
A. The main cause of uncertainty is the long delay of 6. Package 2 will legislating the reform. Investors prefer to wait until Package 2 is passed before investing. The cause uncertainties. sooner it is passed, the faster investment will flow in. B. The urgency is especially critical given the changing global environment and the US-China trade war. C. The DOF has been consistently pro-active and did not waste time in submitting the proposed package 2 last January 2018, immediately after the passage of TRAIN in Dec 2017. The House approved and transmitted TRABAHO last September 2018, but the Senate conducted only one hearing before the mid-term elections. 38 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
39 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 7 RESPONSE
A. The title of CITIRA is about the amendment to 7. Package 2 will the National Internal Revenue Code (NIRC). B. The NIRC provides the regular tax rates, reduced violate the one-bill tax rates, exemptions, and the institutions to administer and oversee tax collection, like the BIR, BOC, the various congressional oversight one-subject rule by committees, and other agencies such as DBM in charge of monitoring the earmarked funds. including fiscal C. Thus, including the incentives of IPAs such as reduced rates and exemptions of IPAs, and the incentives and FIRB governance of these incentives through the FIRB provisions in the bill. is consistent with the provisions of the NIRC.
40 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 7 RESPONSE
A. There are two requirements of the one-bill one- 7. Package 2 will subject rule: completeness and germaneness. B. The one-bill one-subject rule is sufficiently complied with where the title is comprehensive enough to violate the one-bill embrace the general objective it seeks to achieve, and if all the parts of the statute are related and germane one-subject rule by to the subject matter embodied in the title or so long as the same is not inconsistent with or foreign to the general subject and title (Farinas vs. The Executive including fiscal Secretary). C. The reduction of the corporate income tax, the incentives and FIRB rationalization of fiscal incentives, the expansion of the power of the FIRB, and the repeal of the provisions under the charters of the IPAs are not different subject provisions in the bill. matters as all pertain to the corporate taxation in the country. Thus, CITIRA does not violate the constitutional requirement that every bill shall embrace only one subject which shall be expressed in the title thereof. 41 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
A. The constitutional prohibition of more than one subject in an act does not impose any limitation on the comprehensiveness of the subject, which may be as comprehensive as the legislature chooses to make it, provided, it constitutes, in the constitutional sense, a single subject and not several. To constitute plurality of subject, an act must embrace two or more dissimilar and discordant subjects, that by no fair intendment can be considered as having any legitimate connection with or relation to each other. Within the meaning of the constitutional provision, matters which apparently constitute distinct and separate subjects are not so where they are not incongruous and diverse to each other. Generally speaking, the courts are agreed that a statute may include every matter germane, referable, auxiliary, incidental, or subsidiary to, and not inconsistent with, or foreign to, the general subject or object of the act. (Casco Company et. al. vs. Public Utility District No. 1 of Thurston Country et. al., 137 Wash. Dec. 726 [[37 Wn. 2d 777]])
42 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
B. A legislation may contain any number of provisions, no matter how diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and may be considered in furtherance of such subject by providing for the method and means of carrying out the general subject. (Farinas vs. The Executive Secretary)
C. The constitutional requirement as now expressed in Article VI, Section 26(1) "should be given a practical rather than a technical construction. It should be sufficient compliance with such requirement if the title expresses the general subject and all the provisions are germane to that general subject. (Sumulong vs. Comelec)
43 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
Provisions alleged to be violative of the rule
● Provisions reorganizing and defining the functions of the Fiscal Incentives Review Board (Section 30 of House Bill No. 4157 inserting new Sections 298 and 299, to the National Internal Revenue Code of 1997, as amended)
44 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
ONE-SUBJECT RULE: The rule
● The "One-Subject Rule", is enunciated in Article VI, Section 26(1) of the 1987 Constitution, to wit:
Sec. 26(1). Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.
● The Rule mandates that where the subject of a bill is limited to a particular matter, the lawmakers along with the people should be informed of the subject of proposed legislative measures. This constitutional provision, thus, precludes the insertion of riders in legislation, a rider being a provision not germane to the subject matter of the bill.
45 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
ONE SUBJECT RULE: Cases
Purpose of the rule • The purpose of the constitutional directive that the subject of a bill should be embraced in its title is to apprise the legislators of the purposes, the nature and scope of its provisions, and prevent the enactment into law of matters which have not received the notice, action and study of the legislators and the public. In this case, legislators will be apprised of the amendments to be made as the bill is set to be deliberated in the committee and plenary. • The proscription is aimed against the evils of the so-called omnibus bills and log-rolling legislation (Log-Rolling) as well as surreptitious and/or unconsidered encroaches (Riders). Omnibus Bills are acts containing several subjects with unrelated matters representing diverse interests, the main object of such combination being to unite the members of the legislature who favor any one of the subjects in support of the whole act. (Fariñas vs. Executive Secretary) • The Rule is required to prevent surprise or fraud upon the legislature by means of provisions in bills of which the titles gave no information, and which might therefore be overlooked and carelessly and unintentionally adopted; and to fairly apprise the people, through such publication of legislative proceedings as is usually made, of the subjects of legislation that are being considered, in order that they may have opportunity of being heard thereon by petition or
otherwise if they shall so desire. (De Guzman Jr. vs. COMELEC) 46 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
ONE SUBJECT RULE: Cases
In general • “The constitutional prohibition of more than one subject in an act does not impose any limitation on the comprehensiveness of the subject, which may be as comprehensive as the legislature chooses to make it, provided, it constitutes, in the constitutional sense, a single subject and not several. To constitute plurality of subject, an act must embrace two or more dissimilar and discordant subjects, that by no fair intendment can be considered as having any legitimate connection with or relation to each other. Within the meaning of the constitutional provision, matters which apparently constitute distinct and separate subjects are not so where they are not incongruous and diverse to each other. Generally speaking, the courts are agreed that a statute may include every matter germane, referable, auxiliary, incidental, or subsidiary to, and not inconsistent with, or foreign to, the general subject or object of the act.” (Casco Company et. al. vs. Public Utility District No. 1 of Thurston Country)
47 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
ONE SUBJECT RULE: Cases
• “A general title may be said to be one which is broad and comprehensive, and covers all legislation germane to the general subject stated. It is not an objection that it covers more than the subject of the body of the act, but it most, in any event, cover less. It is not necessary that it index the details of the act, or give a synopsis of the means by which the object of the statute is to accomplished. All matters which are germane to the subject may be embraced in one act. Under the true rule of construction, the scope of the general title should be held to embrace any provisions of the act, directly or indirectly related to the subject expressed in the title and having a natural connection thereto, and not foreign thereto. Or, the rule may be stated as follows: Where the title of a legislative act expresses a general subject or purpose which is single, all matters which are naturally and reasonably connected with it, and all measures which will, facilitate the accomplishment of the purpose so stated are properly included in the act and are germane to its title. (Gruen vs. State Tax Commission)
48 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
ONE SUBJECT RULE: Cases
Completeness of Title • The Constitution does not require Congress to employ in the title of an enactment, language of such precision as to mirror, fully index or catalogue all the contents and the minute details therein. It suffices if the title should serve the purpose of the constitutional demand that it inform the legislators, the persons interested in the subject of the bill and the public, of the nature, scope and consequences of the proposed law and its operation. (Lidasan vs. COMELEC and Tio vs. Videogram Regulatory Board) • The Court held that it should be sufficient compliance with such requirement if the title expresses the general subject and all the provisions are germane to that general subject. (Sumulong vs. COMELEC) • Of course, the Constitution does not require Congress to employ in the title of an enactment, language of such precision as to mirror, fully index or catalogue all the contents and the minute details therein. It suffices if the title should serve the purpose of the constitutional demand that it inform the legislators, the persons interested in the subject of the bill and the public, of the nature, scope and consequences of the proposed law and its operation. (Lidasan vs. Comelec)
49 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
ONE SUBJECT RULE: Cases
• An act having a single general subject, indicated in the title, may contain any number of provisions, no matter how diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and may be considered in furtherance of such subject by providing for the method and means of carrying out the general subject. (Fariñas vs. Executive Secretary)
Liberal interpretation of the rule • To determine whether there has been compliance with the constitutional requirement that the subject of an act shall be expressed in its title, the Court laid down the rule that – Constitutional provisions relating to the subject matter and titles of statutes should not be so narrowly construed as to cripple or impede the power of legislation. The requirement that the subject of an act shall be expressed in its title should receive a reasonable and not a technical construction. It is sufficient if the title be comprehensive enough reasonably to include the general object which a statute seeks to effect, without expressing each and every end and means necessary or convenient for the accomplishing of that object. Mere details need not be set forth. The title need not be an abstract or index of the Act. (Fariñas vs. Executive Secretary)
50 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
ONE SUBJECT RULE: Cases
• If the law amends a section or part of a statute, it suffices if reference be made to the legislation to be amended, there being no need to state the precise nature of the amendment. To lend approval to such a plea is to construe the above constitutional provision as to cripple or impede proper legislation.” (Alalayan vs. National Power Corporation)
• The constitutional requirement as now expressed in Article VI, Section 26(1) "should be given a practical rather than a technical construction. It should be sufficient compliance with such requirement if the title expresses the general subject and all the provisions are germane to that general subject." (Sumulong vs. Comelec)
51 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
ONE SUBJECT RULE: Opinion
• From the above, Section 26(1) of Article VI of the 1987 Constitution is sufficiently complied with where the title is comprehensive enough to embrace the general objective it seeks to achieve, and if all the parts of the statute are related and germane to the subject matter embodied in the title or so long as the same are not inconsistent with or foreign to the general subject and title.
• The Reduction of corporate income tax, the rationalization of fiscal incentives, the expansion of the power of the FIRB and the repeal of the provisions under the charters of the IPAs are not different subject matters as all pertain to the corporate taxation in the country. Thus, the provisions being germane, anciliary, incidental and subsidiary to the provisions of the NIRC, CITIRA does not violate the constitutional requirement that every bill shall embrace only one subject which shall be expressed in the title thereof.
52 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 8 RESPONSE
A. There is no contract in the first place as firms fill 8. Package 2 will out an application form. B. Tax incentives are not entitlements, but violate the non- privileges. In fact, tax payment is a duty. C. There is no vested right in a tax exemption, more impairment clause by so when the latest expression of legislative intent renders its continuance doubtful. providing a sunset for D. Being a mere statutory privilege, a tax exemption of an IPA locator may be modified or withdrawn current incentives. at will by the granting authority. (Republic vs. Caguioa) E. The non-impairment clause under the Constitution cannot be invoked in the case of a revocation of the tax incentives as the clause yields to the government’s police power and power to tax. 53 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
54 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
55 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
1. The government validly exercises a regulatory and governmental function pursuant to its police power and power of taxation in granting incentives. The government is not acting in its private capacity so as to make such incentives an inducement of valid and substantial consideration for entities to register. Lastly, the incentives also emanate from a regulatory law and not from executive fiat alone. 2. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. (PAGCOR vs. BIR) 3. A tax exemption cannot be grounded upon the continued existence of a statute which precludes its change or repeal. (Republic of the Philippines vs. Caguioa)
56 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
Provisions alleged to be violative of the rule
● Sunset provision of incentives (Section 30 of House Bill No. 4157 inserting a new Section 310 to the National Internal Revenue Code of 1997, as amended)
57 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: The rule
● Section 10, Article III of the Constitution provides:
SECTION 10. No law impairing the obligation of contracts shall be passed.
● The Supreme Court has ruled that the purpose of the non-impairment clause is to safeguard the integrity of contracts against unwarranted interference by the State. As a rule, contracts should not be tampered with by subsequent laws that would change or modify the rights and obligations of the parties. (Goldenway Merchandising Corporation vs. Equitable PCI Bank)
58 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases Limitations to the rule ● “It has long been settled that police power legislation adopted by the State to promote the health, morals, peace, education, good order, safety, and the general welfare of the people prevail not only over future contracts but even over those already in existence, for all private contracts must yield to the superior and legitimate measures taken by the State to promote public welfare.” (Surigao del Norte Electric Cooperative vs. Energy Regulatory Commission)
● The non-impairment clause under the Constitution cannot be invoked in the case of a revocation of the tax incentives as the non-impairment clause yields to the government’s police power (La Bugal B’laan Tribal Association, Inc. vs. Ramos) and power to tax (Republic of the Philippines vs. Caguioa).
59 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases Contracts covered by the rule ● If the grant of an exemption does not constitute a contract, but is merely “a spontaneous concession by the legislature, not connected with any service or duty imposed” it is REVOCABLE by the power which made the grant. A state may, at its pleasure, withdraw and exemption which is a mere gratuity possessing no element of a contract, even though the corporation may have incurred expenses on the faith thereof. (Tax Principles and Remedies by Justice Japar B. Dimaampao)
● Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. (PAGCOR vs. BIR)
60 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases
● The government validly exercises a regulatory and governmental function pursuant to its police power and power of taxation in granting incentives. The government is not acting in its private capacity so as to make such incentives an inducement of valid and substantial consideration for entities to register. Lastly, the incentives also emanate from a regulatory law and not from executive fiat alone.
61 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases
● The rights granted under the Certificates of Registration and Tax Exemption (SBMA Registration) of private respondents are not absolute and unconditional as to constitute rights in esse – those clearly founded on or granted by law or is enforceable as a matter of law.
These certificates granting private respondents a "permit to operate" their respective businesses are in the nature of licenses, which the bulk of jurisprudence considers as neither a property nor a property right. The licensee takes his license subject to such conditions as the grantor sees fit to impose, including its revocation at pleasure.
A license can thus be revoked at any time since it does not confer an absolute rightWhile the tax exemption contained in the Certificates of Registration of private respondents may have been part of the inducement for carrying on their businesses in the SBF, this exemption, nevertheless, is far from being contractual in nature in the sense that the non-impairment clause of the Constitution can rightly be invoked. (Republic of the Philippines vs. Caguiao)
62 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Cases
Republic of the Philippines vs. Caguioa: 1. There is no vested right in a tax exemption, more so when the latest expression of legislative intent renders its continuance doubtful. Being a mere statutory privilege, a tax exemption may be modified or withdrawn at will by the granting authority. 2. A tax exemption cannot be grounded upon the continued existence of a statute which precludes its change or repeal. 3. The rights granted (under the Certificates of Registration and Tax Exemption of private respondents) are not absolute and unconditional as to constitute rights in esse – those clearly founded on or granted by law or is enforceable as a matter of law. 4. Applying this principle, the Supreme Court held that while the tax exemption contained in the SMBA Certificates of Registration of private respondents may have been part of the inducement for carrying on their businesses in the Subic Bay Freeport, this exemption, nevertheless, is far from being contractual in nature in the sense that the non-impairment clause of the Constitution can rightly be invoked.
63 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
INVIOLABILITY OF CONTRACTS RULE/ NON-IMPAIRMENT CLAUSE: Opinion
• Package 2 follows the country’s tax policy, which is determined by Congress. It is the inherent power of the State to tax. It is the responsibility of all taxpayers to pay taxes.
• Incentives are not entitlements, but privileges that must be earned. When firms apply for incentives, they do so under the prevailing incentive structure, which can be changed by Congress.
• If tax incentives, can never be changed, then it is telling Congress it has no power to change tax policy.
64 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 9 RESPONSE
A. Being a mere statutory privilege, a tax exemption 9. The sunset provision may be modified or withdrawn at will by the will violate the due granting authority. B. Further more, no new tax is being imposed and process clause in CITIRA does not tax past transactions. relation to the principle C. The legislative power to tax involves the power to determine the subject thereof - who to tax, who of non-retroactivity of to exempt, the removal of the incentives, being statutory privileges, is being exercised under tax laws. authority of a law that is valid or the Constitution itself. It is a valid exercise of legislative power. D. Jurisprudence allows tax laws to apply retroactively so long as the law itself provides for its retroactive application (Hydro Resources vs CA) and the same is not so harsh to constitute the violation of the due process clause (Central Azucarera de Don Pedro vs CTA). 65 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
Provisions alleged to be violative of the rule
● Sunset provision of incentives (Section 30 of House Bill No. 4157 inserting a new Section 310 to the National Internal Revenue Code of 1997, as amended)
● Argument: Removing the incentives means changing the taxation regime of an RBE.
66 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
DUE PROCESS CLAUSE: The rule
● Section 1, Article III of the Constitution provides:
SEC. 1. No person shall be deprived of life, liberty, or property without due process of law xxx.
● The due process clause in taxation requires that a tax must be for public purpose, it must be imposed within the territorial jusridcition, and that there is no arbitrariness or oppression in the assessment and collection thereof.
● One may be deprived of life, liberty and property as long as the due process – notice and hearing – have been complied with.
● Any deprivation of life, liberty and property with due process if done: (a) under authority of a law that is valid or the Constitution itself; and (b) after compliance with fair and reasonable methods of procedure presented by law.
67 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
PROSPECTIVITY OF LAWS PRINCIPLE: Cases
• Taxes may be imposed retroactively by law but unless so expressed by such law, these taxes must only be imposed prospectively. (Hydro Resources vs. CA)
• Tax laws are neither political nor penal in nature, and they are deemed laws of the occupied territory rather than the occupying enemy. (Hilado vs. Collector)
• The “ex post facto” rule, except for the penalty imposed (not the interest), would be inapplicable. A harsh retroactivity of the law, however, may make it inequitable and violative of the constitution; similarly, due process is violated if the tax is oppressive. (Central Azucarera de Don Pedro vs. CTA)
• Property taxes and benefits assessments on real estate, retroactively, are not open to the objection that they infringe upon the due process of law clause of the Constitution; that taxes on income are not subject to the constitutional objection because of their retroactivity. (Fernandez vs. Fernandez)
68 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 10 RESPONSE
A. The provisions under CITIRA, delegates to the 10. Package 2 will violate President the power to advance the scheduled reduction on RCIT and to grant incentives to the principle of non- highly desirable projects through the ascertainment of standards as provided. It does delegation of taxing power not leave these powers upon factual matters within the control of the President. by allowing the President B. As held by the Supreme Court, there is no undue to adjust the CIT rate and delegation of the legislative power when only the discretion as to the execution of a law is given. grant incentives to highly This is constitutionally permissible. (Abakada Guro Party List vs. Executive Secretary) desirable projects. C. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. (Abakada Guro Party List vs. Executive Secretary) 69 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 10 RESPONSE
D. There are several provisions in the tax 10. Package 2 will violate code that gives precedence. the principle of non- 1. Section 106A (old NIRC provision) gives the President the power to raise delegation of taxing power the VAT rate from 10 to 12 percent if by allowing the President conditions are met. 2. Section 148 gives the President the to adjust the CIT rate and power to suspend the next oil excise increase if conditions are met. grant incentives to highly 3. Section 27A gives the President the desirable projects. power to lower the CIT rate if conditions are met.
70 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
Provisions alleged to be violative of the rule
● Provisions allowing the President to advance the scheduled reduction on RCIT (Section 7 and 8 which amends Sections 27 and 28, respectively, of the National Internal Revenue Code of 1997, as amended)
● Provision giving the president the power to grant incentives to highly desirable projects (Section 30 of House Bill No. 4157 inserting a new Section 301 , to the National Internal Revenue Code of 1997, as amended)
71 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
NON-DELEGATION OF THE TAXING POWER: The rule
• Section 28, Article VI of the Constitution provides:
SEC. 28. (2) The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.
• The principle of separation of powers ordains that each of the three branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim potestas delegata non delegari potest (what has been delegated cannot be delegated). (Gerochi vs. DOE)
72 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
NON-DELEGATION OF THE TAXING POWER: Cases
Requirements for valid delegation • In the face of the increasing complexity of modern life, delegation of legislative power to various specialized administrative agencies is allowed as an exception to this principle. All that is required for the valid exercise of this power of subordinate legislation is that the regulation be germane to the objects and purposes of the law and that the regulation be not in contradiction to, but in conformity with, the standards prescribed by the law. These requirements are denominated as the completeness test and the sufficient standard test.
• Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature such that when it reaches the delegate, the only thing he will have to do is to enforce it. The second test mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's authority and prevent the delegation from running riot.
73 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
NON-DELEGATION OF THE TAXING POWER: Cases
• There is no undue delegation of legislative power but only of the discretion as to the execution of the law. This is constitutionally permissible. “Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. In the above case, the Secretary of Finance becomes merely the agent of the legislative department, to determine and declare and even upon which its expressed will takes place. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions action as the executive alter ego or subordinate (Abakada Guro Party List (etc.) vs. Ermita, G.R. No. 168056, September 1, 2005)
• As held by the Supreme Court in a similar case, there is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. (Abakada Guro vs. Executive Secretary)
74 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
NON-DELEGATION OF THE TAXING POWER: Opinion
• In CITIRA, what will be delegated is only the power to ascertain a fact, that is, that adequate savings have been realized, as certified by the Secretary of Finance, on the basis of which the president may advance the scheduled reduction of corporate income tax rate. The authority to advance the reduction of tax rate is made contingent upon a specified fact or condition (realization of adequate savings). It does not leave the power to reduce corporate income tax rate upon factual matters within the control of the President.
75 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
DUE PROCESS CLAUSE: Why is there no violation of this rule?
● Being a mere statutory privilege, a tax exemption may be modified or withdrawn at will by the granting authority.
● No new tax is being imposed.
● CITIRA does not tax past transactions.
● The power to tax involves the power to determine the subject thereof--who to tax, who to exempt, the removal of the incentives, being statutory privileges, is being exercised under authority of a law that is valid or the Constitution itself. It is a valid exercise of legislative power.
● Jurisprudence also allows that tax laws apply retroactively so long as the law itself provides for its retroactive application.
76 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 11 RESPONSE A. The Department of Finance (DOF) is mandated to generate and manage financial resources of the government. In 2020, it 11. Governance of fiscal is mandated to raise PHP 4.1 trillion pesos. incentives is not part of B. Despite this mandate, the DOF has very limited involvement in the granting of incentives. the Department of i. In the Philippines, DOF is a member of the board of only 2 out of 13 IPAs. Finance's portfolio. ii. Even as a member, it is a miniscule voice in the PEZA board (1 out of 13 board members) and the PIA board (1 out of 10 board members). C. In Indonesia, income tax incentives require Minister of Finance approval. D. In Thailand, the tax agency is responsible for approving tax incentives to international business centers and for R&D activities. E. In Malaysia, Thailand, and Vietnam, the Ministry of Finance is a member of the board that grants fiscal incentives. 77 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
VISION
• A strong economy with stable prices and strong growth;
• A stable fiscal situation with adequate resources for government projects and budgetary which could be adequately financed;
• A borrowing program that is able to avoid the crowding-out effect on the private sector, and minimizes costs;
• A public sector debt profile with long maturities and an optimum mix of currencies that minimizes the impact of currency movements;
• A strong economic growth with equity and productivity
MANDATE MISSION Under Executive Orders 127, 127-A and 292, the Department of Finance is responsible Our economy must be one of the most dynamic and active in the world, globally for the following: competitive and onward looking. The DOF shall take the lead in providing a solid • Formulation, institutionalization and administration of fiscal policies in foundation for the achievement of this objective, by building a strong fiscal coordination with other concerned subdivisions, agencies and instrumentalities position, through the following: of the government; • Formulation, institutionalization and administration of sound fiscal policies; • Generation and management of the financial resources of government; • Improvement of tax collection efficiency; • Supervision of the revenue operations of all local government units; • Mobilization of adequate resources on most advantageous terms to meet • Review, approval and management of all public sector debt, domestic or foreign; budgetary requirements; and • Sound management of public sector debt; and • Rationalization, privatization and public accountability of corporations and assets owned, controlled or acquired by the government. • Initiation and implementation of structural and policy reforms 78 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
IPA DOF board membership
Aurora Pacific Ecozone (APECO) None Authority of the Freeport Area of Bataan (AFAB) None Bases Conversion and Development Authority (BCDA) None Board of Investments (BOI) None Clark Development Corporation (CDC) None Cagayan Economic Zone Authority (CEZA) None Member Philippine Economic Zone Authority (PEZA) (1 voice out of 13 members) Member PHIVIDEC Industrial Authority (PIA) (1 voice out of 10 members) Poro Point Management Corporation (PPMC) None Subic Bay Metropolitan Authority (SBMA) None Tourism Infrastructure and Enterprise Zone Authority (TIEZA) None Zamboanga City Special Economic Zone Authority (ZCSEZA) None Regional Board of Investments - ARMM (RBOI-ARMM) None 79 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Country Incentives administration Finance agency involvement Role Board Notes
Philippines Board of Investments, various investment promotion agencies No Limited The DOF is a member in only the PEZA board (1 out of 13) and the PIA (current) (AFAB, APECO, BCDA, BOI, CDC, CEZA, PPMC, RBOI-ARMM) administrative board (1 out of 10). involvement
Philippines Fiscal incentives review board (FIRB) Approval Chair The FIRB shall administer, regulate, audit, and evaluate granting of (CITIRA) incentives.
Indonesia Indonesia Investment Coordinating Board (BKPM), The National Approval Not a Income tax incentives require Minister of Finance approval. Council for SEZ member
Malaysia Malaysia Investment Development Authority, various IPAs, Audit Member Minister of Finance approves projects for reinvestment allowance and Ministry of Industrial Development Sabah, Ministry of Industrial for projects in the following sectors: transportation, communications, Development Sarawak (for discretionary incentives); Inland services, and utilities. Revenue Board of Malaysia (for statutory incentives)*
Singapore Singapore Economic Development Board (for discretionary Evaluation Not a A Pioneer certificate or Development Expansion Incentive company must incentives); Inland Revenue Authority of Singapore (for statutory member submit regular progress reports to the EDB for the evaluation of incentives)* performance.
Thailand Thailand Board of Investment (BOI) Approval Member The BOI makes all promoted companies’ profiles available in a searchable database on its website.
Vietnam Foreign Investment Agency Vietnam Audit Member All tax legislation is prepared by the Ministry of Finance *Statutory incentives are explicitly laid out by law. Discretionary incentives are dependent upon the administering body. Source: country websites, 80 https://vietnam.oxfam.org/sites/vietnam.oxfam.org/files/file_attachments/Oxfam%20Tax%20incentive%20report%20ENG.pdf CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 12 RESPONSE
A. The IPAs will process application for 12. The Fiscal Incentives incentives and recommend to the FIRB. Review Board (FIRB) will B. The FIRB will approve or disapprove all applications for incentives. But these duplicate the incentive shall be deemed approved if not decided approval process, upon by the FIRB following the EODB- mandatory max processing time. adding another layer of C. This layered approval is good practice to ensure that decisions are prudently bureaucracy. made. For instance, major investment projects go through three levels of approval: ICC technical, ICC cabinet, and NEDA board approval.
81 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Approval/disapproval of incentives
IPAs recommend the tax incentives to be given to registered enterprises
BOI Board of Investments
BOI determines the priority sectors through the Strategic Investment Priority RBOI- Plan (SIPP) ARMM
82 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 13 RESPONSE A. There are 133 investment and 209 non- 13. The investment investment laws (total of 342) that provide incentives outside the tax promotion plan (IPP) code. B. The IPP covers 815 industries out of currently in place 1,265 (64 percent of all industries) already targets based on the 5-digit PSIC. C. As a result, up to 69 percent of the specific industries for country’s GDP can potentially be given incentives. growth. D. This implies that the current targeting is not focused.
83 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Current incentives system: 133 investment-related fiscal incentive laws EO 22 Reducing the Rates of Duty on Capital Equipment RA 8550 Fisheries and Aquatic Resources RA 9275 Water Quality Management RA 7353 Rural Banks
PD 66 Export Processing Zone Authority PD 87 Oil Exploration and Development Act RA 8407 Manila Jockey Club, Inc. RA 9513 Renewable Energy
RA 9003 Ecological Solid Waste Management Program RA 9136 Electric Power Industry Reform Act of 2001 RA 8756 Regional or Area Headquarters RA 7916 PEZA
EO 226 Omnibus Investment Code of 1987 RA 9178 Barangay Micro Business Enterprises RA 9379 Defining Handline Fishing RA 10771 Green Jobs
EO 290 Natural Gas Vehicle Program RA 9295 Philippine Domestic Shipping RA 9400 Amending RA 7227-BCDA RA 7906 Thrift Banks
PD 529 Petroleum Exploration Concessionaires RA 9490 Aurora Special Economic Zone RA 7844 Develop Exports RA 9593 Tourism Act of 2009
PD 538 Phividec Industrial Authority RA 9501 Magna Carta for Small Enterprises RA 10817 Halal Export Development PD 1869 PAGCOR
RA 10068 Promotion of Organic Agriculture RA 10083 Aurora Special Economic Zone RA 7884 National Dairy Authority RA 7151 Cebu Air, Inc.
RA 10601 Agricultural And Fisheries Mechanization RA 10654 Unregulated Fishing PD 972 Coal Development Act of 1976 RA 7961 CRUZTELCO
RA 10816 Farm Tourism In The Philippines PD 705 Forestry Code of the Philippines RA 6847 Philippine Sports Commission RA 8098 BEAM, Inc.
RA 8099 Sagay Broadcasting Corporation (SBC) RA 8065 Isla Cellular Communications, Inc. RA 8144 Azimuth Broadcasting Corp. RA 8158 Jorge D. Bayona
PD 1174 Amending Coal Development Act of 1976 RA 7156 Mini-Hydro Electric Power RA 8446 Fil-Asia Racing Club EO 182 CARS Program
RA 7308 National Seed Industry RA 8047 Book Publishing Industry RA 7942 Philippine Mining Act of 1995 RA 7076 Mining
RA 8423 Traditional and Alternative Health Care RA 8479 Downstream Oil Industry RA 10926 Smart Communications Inc. RA 9267 Securitizations Act
RA 7922 Cagayan Special Economic Zone of 1995 RA 10900 Bell Telecommunication Philippines Inc. PD 1590 Philippines Airlines, Inc. RA 9856 REIT Act of 2009
RA 7718 Infrastructure Projects by the Private Sector RA 7903 Zamboanga City Special Economic Zone Authority RA 8066 Isla Paging Company RA 8424 NIRC
RA 7471 Philippine Overseas Shipping Development Act RA 6848 Al-Amanah Islamic Investment Bank RA 7909 Pacific Airways Corporation RA 10863 CMTA
RA 7859 Worldwide Communications, Inc. RA 7953 Philippine Racing Act, Inc. RA 8145 Radyo Pilipino Corporation RA 7900 High Value Crops
RA 7962 Philippine Broadcasting Corporation RA 7963 Cebu Broadcasting Company RA 8169 GV Broadcasting System Inc RA 7969 Central CATV, Inc.
RA 10884 Urban Development and Housing Act of 1992 RA 7966 ABS-CBN Broadcasting Corporation RA 8339 Air Philippines Corporation RA 8095 Islatel Corporation
RA 8502 Jewelry Industry Development Act of 1998 RA 7967 Pacific Broadcasting System, Inc. RA 8097 Partido Broadcasting Center RA 9511 National Grid Corp. DEPARTMENT OF FINANCE 84 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. (cont.) Current incentives system: 133 investment-related fiscal incentive laws
RA 7939 Island Country Telecommunications, Inc. RA 7227 Bases Conversion and Development Authority RA 8060 Palawan Broadcasting Corporation . RA 8071 VisMin Radio and Television Broadcasting Network, Inc.. RA 8004 Millenia Telecommunications Corporation RA 9337 Philippine Airlines, Cebu Pac, Aboitiz Air Transport, Pacific Airways RA 8063 Beacon Communications System, Inc. RA 8120 Andres Bonifacio College Broadcasting System, Inc. RA 7583 Aboitiz Air Transport Corporation RA 8128 Oriental Mindoro Management Resources Corporation (OMARCO) RA 8067 Radio Gubat Network, Inc. RA 7918 Amending Art. 39 Incentives to Registered Enterprises RA 8080 Asian-Pacific Broadcasting Company, Inc. RA 8004 Millennia Telecommunications Corporation RA 8096 Allied Broadcasting Center, Inc. RA 9301 Amendment to RA 7471 –Overseas Shipping RA 8094 Ipil Broadcasting News Network, Inc. PD 1491 Philippine Veterans Investment Development Corp RA 8121 M.S. Network Management, Inc. RA 8748 Amending RA 7916- Special Economi Zone Act of 1995 RA 8116 VIMCONTU Broadcasting Corp. EO 619 Special Economic Zones inside the Clark Freeport RA 8123 Royal Broadcasting Corporation RA 7277 Self-Development and Self-Reliance of Disabled Persons RA 8119 Good News Sorsogon Foundation Inc. RA 8102 Ultimate Entertainment Inc RA 8132 Jose M. Luison and Sons, Inc. RA 7160 LGC RA 8154 Prime Broadcasting Network, Inc. RA 8032 Philippine Radio Corporation RA 8149 Tagbilaran Broadcasting System RA 7783 Major Telecoms EO 488 Compressed NatGas (AFTA) EO 97-A Subic Special Ecozone RA 8180 downstream oil industry RA 9367 Biofuel Program RA 10378 Recognizing Principle of Reciprocity RA 8298 Metro Manila Turf Club, Inc. RA 7925 Public Telecommunications Policy Act RA 8147 Southern Broadcasting Network RA 7111 Overseas Workers Investment Fund Act RA 8122 Swara Sug Media Corporation RA 10972 Infocom Communications Network, Inc RA 7816 Manila Broadcasting Company RA 4540 Clavecilla Radio System ( Globe Telecoms) RA 8027 Kaissar Broadcasting Network, Inc RA 7633 International Communications Corporation PD 972 Coal Development Act of 1976 RA 8068 Agusan Telecommunications Foundation Inc RA 8153 Rex Electronics Communications System PD 1442 Exploration and Development of Geothermal Resource RA 7299 as amended by RA 10773 Eagle Broadcasting Corporation RA 11321 Sagip Saka Act RA 11089 Streamtech Systems, Inc. RA 11151 Innove Communication RA 11256 Gross International Reserves RA 11285 Energy Efficiency Act
DEPARTMENT OF FINANCE 85 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Current incentives system: 209 non-investment-related fiscal incentive laws RA 6657- Comprehensive Agrarian Reform Law RA 9040- AFP Benefits & Allowances RA 7820- Partido Development Administration RA 9509– Barangay Livelihood and Skills Act of 2008 PD 857- Philippine Port Authority RA 6982- Social Amelioration Program In The Sugar Industry RA 7291- Veterans Federation of the Philippines RA 9509– Barangay Livelihood and Skills Act of 2008 RA 8044- National Youth Commission RA 6958- Mactan Cebu International Airport Authority RA 7686- Dual Training System RA7798- “Education Act Of 1982” RA 10618- Rural Farm Schools RA10604- Iloilo State University Of Science and Technology RA 6038- Total Electrification of the Philippines RA792- Camiguin Polytechnic State College RA 9720- Ifugao State University RA 7945- Dr. Emilio B. Espinosa, Sr. Memorial State College RA 8193- Jose Rizal Memorial State College RA 8292- Higher Education Modernization Act RA 9746- University Of Antique RA 8365- Rizal Technological University RA 10228- Central Philippines State University RA 9497- Civil Aviation Authority Of The Phils RA 10143- Philippine Tax Academy RA 8794- Motor Vehicle User’s Charge Autonomous Region RA 7653- New Central Bank Act RA 6766- Cordillera Autonomous Region RA 9854- Caraga State University RA 8438- Cordillera Autonomous Region RA 6768- Balikbayan Program RA 10585- Cotabato State University RA 9054- ARMM RA 9174– Amending RA 6768 - Balikbayan Program RA 8492- National Museum Act of 1998 RA 10066- Strengthening the NCCA P PD1127- Asia Foundation RA 8367- Non-stock Savings and Loan Association Act of 1997 RA 9510- Credit Information System RA 10073- Girl Scouts of the Philippines RA 9721- Romblon State University RA 9521- National Book Development Trust Fund RA 7278- Boys Scouts of the Philippines RA 7355- Manlilikhang Bayan RA10594- Talisay City State College RA 7306- People’s Television Network,Incorporated (PTN, Inc.) PD 1362-Radio Broadcasting & Television RA 10390- Amending RA 7306 – PTN, Inc. RA 9273– Capiz State University RA 8370- Children’s Television Act of 1997 RA 7354- Philippine Postal Corporation RA 9313–Samar State University RA10598- Compostela State College RA 9520- Amending the Cooperative Code of the Philippines RA 10744- Credit Surety Fund Cooperative Act RA 9314– Batanes State College RA 9159– J.H. Cerilles State College RA 7356- National Commission for Culture& the Arts RA 10086- Strengthening Peoples' Nationalism RA 9403–Bataan State University (BPSU) RA 9029- Partido State University RA 9442- Amending theMagna Carta for Disabled Persons RA 9167- Film Development Council RA 10584-Kalinga State University RA 8557–Philippine Judicial Academy RA 7917- Amending Section 8 of BCDA of 1992 RA 7079- Campus Journalism Act of 1991 RA 7168– Philippine Normal University RA 8688–Cebu Normal University RA 3676- Ramon Magsaysay Award Foundation RA 7079- Campus Journalism Act of 1991 RA7666– Sorsogon State College RA 9138- Guimaras State College RA 6807- Davao Oriental, State College Of Science &Technology RA 7373- Eastern Visayas Science High School RA 9456– Bukidnon State University RA 9158– Leyte State University RA 7306- People’s Television Network,Incorporated (PTN, Inc.) RA 8525- Adopt-A-School Program RA 9055- Aklan State University RA 9500- University of the Philippines RA 8461–Philippine Science High School Lanao Del Norte Campus RA 8547–Ilocos Sur Polytechnic State College RA 9722 – Bohol Island State University RA 8563 – Apayao State College RA 8498 –Ramon Magsaysay Technological University RA 10229–Catanduanes State University RA 10599- Palompon Polytechnic State University RA 9647– Philippine Normal University RA 8548–Bulacan National Agricultural State College RA 8562 –Bataan Polytechnic State College RA10597- Northern Iloilo State University RA 9045- Batangas State University RA 10231- Bicol State College of Applied Sciences and Technology RA10600- Surigao Del Norte State University RA 10595- Iloilo Science And Technology University RA 9157- University of Rizal System RA 8612 –Nueva Ecija University Of Science And Technology RA 10596- Mindoro State University (MINSU) RA 9395 –Southern Luzon State University (SLSU) RA 8468– Cavite State University RA 8651- Adiong Memorial Polytechnic State College RA 9744- Cebu Technological University (CTU) RA 9966- Sultan Kudarat State University (SKSU) RA 9718- Naval State University RA 9142- Zamboanga City State Polytechnic College RA 9717- Central Bicol State University RA 10085- North Luzon Philippines State College RA 7166–Electoral Reforms RA 9083- Sta. Rosa Science and Technology High School RA 7605- Philippine State College of Aeronautics RA 9998- Surigao Del Sur State University RA 9369- Automated Election System RA 9402–Laguna State Polytechnic University RA 9261–Southern Leyte State University RA 9852- Jose Rizal Memorial State University RA 8749- Clean Air Act of 1999 RA 10650- Open Distance Learning In Levels Of Tertiary Education RA 10230- Quirino State University (QSU) RA 10229–Catanduanes State University RA 10174- Peoples Survival Fund RA 9147- Conservation of Wildlife Resources RA 9486- Central Cebu Protected Landscapes RA 9847- Mount BanahawProtected Landscape RA 7157- Foreign Service Act of 1991 RA 10629- 75% Retention Of The Revenues To The IPAF RA 10067- Tubbataha Reefs Natural Park RA 7459- Incentives to Filipino Inventors RA 10165- Foster Care RA 6675– Medicines Identified By Their Generic Names RA 8980–Early Childhood Care and Development RA 7875- National Health Insurance Program RA 7719- Voluntary Blood Donation RA 9519- Mindanao University Of Science and Technology (MUST) RA 9272–Nueva Vizcaya State University RA 9289–Marikina Polytechnic College RA 10028- Breastfeeding RA 9260– The Western Philippines University RA 9312–Eastern Samar State University RA 9311–Eastern Visayas State University RA 10747- Rare Disorders RA 11054 Bangsamoro Basic Law RA 11039 Electric Cooperatives RA 11220 Davao Del Sur State College RA 11037 National School Feeding Program RA 11150 South Coutabato State College RA 11215 National Integrated Cancer Control Act RA 10932 Anti-hospital deposit RA 11291 Magna Carta of the Poor RA 11035 Balik Sscientists Program 86 DEPARTMENT OF FINANCE CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
(cont.) Current incentives system: 209 non-investment-related fiscal incentive laws
RA 9299–Negros Oriental State University (NORSU) RA10605- Pampanga State Agricultural University RA 10800–Tarlac Agricultural University RA 8282- Social Security System RA 9679- Amending the Pag-Ibig Fund RA10646- Quezon City Development Authority RA 8763- Home Guaranty Corporation RA 10001- Taxes on Life Insurance RA 8371- National Commission On Indigenous Peopl RA 9832- Don Honorio Ventura College RA 8291– GSIS Coverage and Benefits ADB – Philippines RA 9207 – Disposition of NG Center Site RA 9904 - Magna Carta for Homeowners RA 9505- Personal Equity and Retirement Account UNESCO – Florence Agreement RA 9576- Deposit Insurance Coverage RA 10846- Liquidation Framework for Banks RA 7932- Agusan Del Sur State College RA 6715- Collective Bargaining RA 10142- Liquidation of Financially Distress Enterprises RA 10583- Mountain Province State University RA 9719- Northwest Samar State University RA 8042– Overseas Employment PD 292- Southeast Asian Fisheries Development Center PD 380- Revising the Charter of NAPOCOR RA 9245- Philippine National Ear Institute RA 10801–O W WA PD1620- International Rice Research Institute (IRRI) RA 10071- National Prosecution Service PD 269- “National Electrification Administration” RA 9999- Free Legal Assistance RA 10693- Nongovernment Organizations Microfinance RA 10072- Philippine National Red Cross RA 7696- Upgrading The Benefits for Military Veterans RA 6975– Philippine National Police RA10349- Revised AFP Modernization Program RA 4917- Retirement Benefits Of Employees RA 6963- Benefits To The Family Military Personnel RA 2067- Science Act of 1958 RA 6395- Revising the Charter of the NAPOCOR RA 9257- Additional Benefits to Senior Citizens RA 9994- Additional Benefits to Senior Citizens PD 1183- Travel Tax RA 10865– Mayor Hilarion A. Ramiro Sr. Medical Center RA 6971- Productivity Incentives Act of 1990 RA 10591- Law On Firearms And Ammunition R RA 7876- Senior Citizens Center RA 10022- Migrant Workers and Overseas Filipinos Act of 1995 RA 10368–Victims of Human Rights Violations RA 10919–University of Science and Technology of Southern Philippines PD1264- Amending RA 95 - to Incorporate the Philippine National Red Cross RA 10121- Philippine Disaster Risk Reduction and Management System RA 3589- National Science Development Board RA 9146- Northwestern Mindanao State College of Science and Technology RA 10687- Unified Student Financial Assistance System For Tertiary Education RA 10699- Incentives to National Athletes & Coaches RA 9151- National Apiculture Research, Training And Development Institute PD 1171- Southeast Asian Regional Center for Graduate Study and Research in Agriculture EO 1037 – Philippine Retirement Park System
DEPARTMENT OF FINANCE 87 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Share to number Number of industries covered Count of firms, in percent SIPP 677 53.5 IPP 815 64.4 SIPP and IPP 879 69.5 Total PSIC industries at 5 digit level 1,265 100.0
Sources: PSA, DTI, and DOF estimates, Total value-added Value in Share to GDP, in percent by industries covered trillion pesos SIPP 4.0 63.2 IPP 4.4 69.4 SIPP and IPP 4.4 69.4 Total GDP 6.3 100.0 Sources: PSA, DTI, and DOF estimates
Note: value-added of covered industries were calculated based on the 2006 88 I-O table. CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
A 3-year SIPP shall be formulated by BOI and approved by the President.
1. BOI shall ensure a more targeted list covering activities with significant positive externalities. 2. Only the President may propose activities or projects not in the SIPP that may be granted tax incentives.
89 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 14 RESPONSE A. There has been little to no effort to do a regular CBA 14. There should be a analysis on the part of IPAs. i. PEZA CBA methodology has double counting and cost-benefit analysis does not show all the costs, like imports. (CBA) conducted to ii. PEZA wants to commission its first “independent audit” in 2019 after decades of existence. determine impact of iii. AFAB only completed a CBA in 2018, covering the periods 2015 to 2017. incentives on the B. NEDA prepared a partial CBA as mandated by the economy. TIMTA law but lacked data. C. The first comprehensive CBA was undertaken by the DOF in 2018. It shows that every peso spent on incentives generates 0.50 to 1.01 pesos in benefits. D. Under Package 2, the FIRB is tasked to regularly conduct CBAs. 90 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
91 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
July 2, 2019
92 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
Panel Outcome Indicators 2014 2015 2012/2015 Summary of Total employment / total assets Total employment / total sales counterfactual R&D employment / total employment Employment and Total compensation analyses compensation Total compensation / total expenses Average compensation to workers Total salaries / paid workers =1 if establishment has R&D spending R&D R&D expenses / total expenses = Registered firms Total investments / total assets performed Land assets / total assets Capital Total fixed assets / total assets significantly investments Building assets / total assets better than non- Machineries / total assets Exports Direct exports / sales registered firms Average hours worked Sales / total employment Productivity Sales / paid workers
Note: Panel data used the 2012 CPBI and the 2015 ASPBI with the 2015 TIMTA 93 Source: PSA, TIMTA, DOF estimates CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Summary of results of initial CBA analysis by DOF
Note: 2015-2017 averages 94 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 15 RESPONSE
A. Package 2 does not impose any new 15. Package 2 will taxes. In fact, it lowers the corporate income tax rate and makes the grant of impose new taxes. incentives fairer and more accountable. B. Tax payment is a duty of every taxpayer. Incentives are not entitlements but privileges that should be earned. If firms do not qualify for incentives, then they should pay the regular tax rates like everyone else.
95 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Fair and accountable tax Lower corporate incentives system income tax
96 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 16 RESPONSE
A. The Philippines has the highest CIT rate among ASEAN at 16. Lowering the CIT will 30 percent. i. Indonesia is at 25 percent (proposals for lowering not benefit the country. CIT to 20 percent are ongoing). ii. Malaysia is at 24 percent. iii. Lao PDR is at 24 percent. iv. Cambodia, Thailand, and Vietnam at 20 percent. v. Singapore has the lowest CIT at 17 percent. vi. CITIRA proposes to gradually reduce the CIT rate to 20 percent by 2029 to make us regionally more competitive. B. Lower CIT rates in the region means Philippine corporates will rather invest in our neighbors than in our own country. C. Lower corporate tax rates is associated with higher FDI intensity. 97 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Source: Asian Development Bank and PWC 98 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. CIT revenue efficiency compared to our ASEAN neighbors is low (2017)
CIT revenues Headline Revenue efficiency Country (percent of GDP) CIT rate (percent) (percent)
Vietnam 7.0 22 32.0
Malaysia 5.6 24 23.5
Thailand 4.0 20 20.0 Singapore 4.3 17 25.4 China 3.9 25 15.5 Philippines 3.8 30 12.6 Indonesia 2.6 25 10.4
Revenue efficiency is calculated as the ratio of tax revenue to GDP divided by the tax rate. Sources: OECD, and individual country statistics offices.
99 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION Due to lower CIT rates elsewhere in the region, URC Philippines has expanded internationally, investing 66% of its total capital assets abroad.
3
Revenue1 Capital assets2 Location PHP billions Percent share PHP billions Percent share Philippines 84.6 66 33.5 34 Foreign 43.2 34 63.8 66 Note: 1. Revenues are from external customers by geographical market. 2. Capital assets refer to non-current assets excluding financial, deferred tax and pension assets. 3. Most of URC subsidiaries in Asia are located in China, with a 25% CIT rate. 100 Source: 2018 audited financial statements 2018 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION It operates in 6 of the biggest economies in ASEAN.
Note: All numbers contained in the boxes represent the regular CIT rate in the respective countries. 101 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Lower corporate tax rates is associated with higher FDI intensity.
102 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 17 RESPONSE 17. The gross income Net income taxation is desirable over GIE taxation. A. Equity earned (GIE) of business GIE is unfavorable to those with high gross margins, such as service-oriented firms with virtually no cost as tax base should be of goods sold.
retained to make it B. Simpler for tax authorities difficult to cheat or Tax officials need not scrutinize the proper engage in corruption. classification of costs as direct or indirect. C. Less opportunity for transfer pricing abuse Using different tax bases for the reduced and regular corporate income tax regime complicates the tax system, thus creating more opportunities for tax arbitrage.
103 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Key principles of taxation and how GIE violates those principles. Principles of Gross income taxation taxation 1. Equity and 1. Unjust since it is confiscatory in nature – non-profitable firms will pay income tax despite losses uniformity incurred. 2. Unfair to high margin businesses and favorable to those with low gross margins. 3. Violates the Constitutional mandate to ensure that taxation should be uniform and equitable. (Sec 2. 28(1), Article VI) 2. Efficiency 1. Difficult to determine “true” cost of goods, especially for service industries. 2. Businesses with legitimate operating and administrative costs will not be able claim those, increasing their burden. 3. Simplicity 1. Possibly more complex and difficult for tax administration: tax officials would need to be more vigilant in scrutinizing the cost of goods sold declared because indirect costs can always be legitimized and claimed as direct business costs. 2. Using different tax bases for the reduced corporate income tax and regular income tax regime opens up more opportunities for transfer pricing abuse. 4. Neutrality 1. Impacts on the taxpayer’s behavior as this serves as a disincentive to employ more people. 104 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Top abuses of fiscal incentives
1. Export zones – leakages into domestic economy 2. Regional investment incentives and enterprise zones – diverting activities to outside the region or zone 3. Transfer pricing schemes with related entities (through sales, services, loans, royalties, and management contracts) 4. Disguising or burying non-qualifying activities into qualifying activities 5. Churning or fictitious investments (lack of recapture rules) 6. Schemes to accelerate income (or defer deductions) at the end of a tax holiday period 7. Overvaluation of assets for depreciation, tax credit, or other purposes 8. Employment and training credits – fictitious employees and phony training programs 9. Domestic firms restructure as foreign investors 10. Existing firms transform into new entities to qualify for incentives Source: Comparative Tax Policy and Administration program, Harvard Kennedy School
105 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION In 2017, an estimated 63 billion pesos in government revenues was lost due to possible transfer pricing abuse and misallocation of profits A company under three tax regimes can shift costs among activities and costs. to minimize taxable income and thus tax liability.
Possible abusive allocation schemes to minimize tax: A. Firm A can pad direct costs with indirect costs in order to minimize tax payments under the 5% GIE regime. B. Firm A can shift income under the regular to the ITH regime to minimize income tax. C. Firm A can shift direct and indirect costs under ITH to the regular regime to minimize tax payments. D. Firm A can shift indirect costs under 5% GIE regime to regular regime to claim such as deductions and minimize tax payments. E. Firm A can shift direct costs under the ITH regime to the 5% GIE regime to claim such as deductions 106 and minimize tax payments. CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. A. Firm A can pad direct costs with indirect costs in order to minimize tax payments under the 5% GIE regime.
Firm A – cost structure 100
80
Percent 60
40 Exempt Special Regular Direct costs Indirect costs Net taxable income
Note: Based on cost structure of service firms
107 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. B. Firm A can shift income under the regular to ITH regime to minimize income tax.
Firm A – cost structure 100
80
Percent 60
40 Exempt Special Regular Direct costs Indirect costs Net taxable income
Note: Based on cost structure of service firms
108 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. C. Firm A can shift direct and indirect costs under ITH to the regular regime to minimize tax payments.
Firm A – cost structure 100
80
Percent 60
40 Exempt Special Regular Direct costs Indirect costs Net taxable income
Note: Based on cost structure of service firms
109 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. D. Firm A can shift indirect costs under 5% GIE regime to regular regime to claim such as deductions.
Firm A – cost structure 100
80
Percent 60
40 Exempt Special Regular
Direct costs Indirect costs Net taxable income
Note: Based on cost structure of service firms
110 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. E. Firm A can shift direct costs under the ITH regime to the 5% GIE regime to claim such as deductions.
Firm A – cost structure 100
80
Percent 60
40 Exempt Special Regular Direct costs Indirect costs Net taxable income
Note: Based on cost structure of service firms
111 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Below is the estimated tax foregone if: 1.Special and regular activities had the same cost structure as exempt activities, and 2.Regular activities had the same cost structure as special activities. Estimated CIT foregone from potentially abusive transfer pricing in billion pesos 2011 2012 2013 2014 2015 2016 2017 Estimated leakage from Goods* 17.5 25.5 23.9 29.6 34.0 43.7 51.7 Exempt and special rate 3.0 3.7 2.9 3.0 6.9 8.1 10.3 Special and regular rate 14.5 21.8 21.1 26.6 27.1 35.6 41.4 Exempt and regular rate** 18.8 6.2 34.2 9.5 3.1 6.5 5.6 Services 8.4 10.9 11.2 10.4 8.6 8.8 11.4 Exempt and special rate 0.4 0.8 0.7 4.2 4.0 2.2 2.3 Special and regular rate 7.9 10.1 10.5 6.2 4.6 6.5 9.1 Exempt and regular rate** 7.9 6.2 7.1 10.7 9.9 17.9 18.9 Total 25.9 36.5 35.1 40.0 42.7 52.5 63.1 Sources: BIR, DOF staff estimates Notes: *Goods refer to manufacturing, and wholesale and retail trade. Services refer to all other industries. **Leakages from exempt and regular rates were not included in the total amount as they may result in double counting of leakages.
112 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 18 RESPONSE
A. Nothing is free from heaven. 18. Package 2 will kill the B. All incentives are taken from the taxes of goose that lays the golden hard working taxpayers. egg. C. Giving incentives indiscriminately means I want to share someone else, notably the poor, is deprived of social services. my blessings. D. Far from the claim that we are killing the goose that lays the golden egg, we want to reform our current tax system so that the fattened goose may share its food with everyone else. E. Like previous reforms, for instance the liberalization of airlines and telecoms, the goose will soon realize that it will be much better off if everyone benefit. 113 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
1. In 1997 to 1998, in the face of new entrants to the airline PHP 2000 2014 2015 2016 2017 2018 market, and to some extent, the Asian financial crisis, PAL billions decided to downsize its fleet from 54 to 14 and retrench 5,000 employees. This resulted in a monthly savings of PHP Total N/A 100 108 114 129 150 24 million. revenues 2. From the retrenched PAL employees, 1,400 filed a Total 0.4 0.1 5.8 4.1 -7.3 -4.3 complaint against PAL’s decision on the grounds of unfair profits labor practice and illegal retrenchment. In 2008, the Sources: Philippine Airlines and WSJ employees became victorious and PAL was charged of illegal dismissal after being unable to provide audited Air transport, passengers carried financial statements as proof that retrenchment is 25
necessary. 20 3. Although PAL’s market declined significantly, the size of the 15 aviation industry pie grew significantly post-liberalization of 10 the aviation industry in the 1990s. Millions 4. For instance, in 1995, PAL was able to carry around 4.7 5 million passengers. On 2018, despite a lower market share 0
from a base of 100 percent, PAL carried more than 9.3 Source: WDI Note: Data include passengers of both domestic and international million passengers, as the size of the overall market grew. flights. 114 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Telecommunications revenues Even with more competition, PLDT 250 returns are generally higher than in 200 150
any other period in history. 100 PHP billion Average operating profit Average net profit 50 margin (percent) margin (percent) 0 1970 to 1986 21 15 Sources: Securities and Exchange Commission (SEC) 1987 to 1995 20 25 Mobile phone subscriptions 1996 to 2012 22 16 100 1996 to 2012 33 24 80 (excluding 1998) 60
Source: Asian Survey Journal Millions 40
20
0
115 Source: WDI 115 ndicators CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 19 RESPONSE
A. We should look at the system from a larger country-level 19. The present incentives perspective, not the narrow industry or IPA level. B. We do not argue that most industries contribute system is not broken and positively to the economy. However, we cannot go on and on giving forever incentives left and right to a select there is nothing to fix. few without the national interest in mind. C. The present incentive system benefits only 3,150 firms at the expense of the rest of taxpayers and the poor who are deprived of social services when money is not used for their benefit and instead pay the incentives of highly profitable firms. D. In 2017, income tax incentives amounted to PHP 127 billion but firms paid out dividends amounting to PHP 145 billion. One wonders if the incentives only made the shareholders richer, at the expense of the rest of the country.
116 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 19 RESPONSE
C. In 2017, we gave away PHP 441 billion in 19. The present incentives incentives. About half of these are unnecessary. D. Only 3,150 firms benefitted from the incentives. system is not broken and In contrast, there are around 90,000 firms that pay the regular CIT rate and 989,166 MSMEs there is nothing to fix. that pay the regular rate, either CIT, PIT or will shift to CIT given the new sole-corp provision. E. The revenue foregone could have funded: 1. 33,000 public markets or 2. 46,000 kilometers of roads or 3. 130,000 daycare centers or 4. 450,000 classrooms. F. Package 2 is grounded on the four principles of good incentives: performance-based, time- bound, transparent, and targeted.
117 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. PHP 441 billion in foregone revenue in 2017, many of which are unnecessary incentives. In 2017, 989,166 1. Firms with no incentives pay the registered firms. regular rate of 30% of net taxable In 2017, over PHP 441 income. billion (2.8% of GDP) was granted to 3,150 2. For example, almost all of the firms. 90,000 SMEs pay the regular 30% rate. In addition, PHP 63 billion (0.4% of GDP) was 3. Firms with incentives pay between lost due to possible 6% and 13% effective tax. abuse of transfer pricing. Total: PHP 504 billion (3.2% of 2017 GDP) Source: DTI, TIMTA, and DOF estimates 118 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. PHP 441 billion in foregone revenue in 2017, many of which are unnecessary incentives. 2015 to 2017 estimated foregone revenue due to tax incentives 2015 2016 2017 Revenue Revenue Revenue Type of tax foregone foregone foregone (in billion pesos) (in billion pesos) (in billion pesos)
Income tax incentives 86.3 121.2 126.9 Income tax holiday 53.8 74.5 70.2 Special rate 32.5 46.7 56.7 Customs duties 18.1 57.4 46.5 Import VAT (gross) 159.8 202.1 267.7 Local VAT (gross) 37.0 TBC TBC Subtotal 301.2 380.7 441.1 Local business tax 1.6 1.0 TBC Possible leakage from transfer 42.7 52.5 63.1 pricing abuse Total 345.5 434.2 504.2 119 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
120 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. PHP 441 billion in foregone revenue in 2017, many of which are unnecessary incentives. 441 billion pesos of foregone revenues in 2017 could have funded…
33,000 public markets or
46,000 kilometers of roads or
130,000 daycare centers or
450,000 classrooms.
Source: DOF estimates 121 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
Package 2 promotes a fair and accountable tax incentives system.
Every peso granted as tax incentive is a peso off the budget that could have been spent for infrastructure, health, education, and social protection that benefit all, and not only a few.
122 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Summary of how incentives system in ASEAN comply with the four principles Country Performance-based Time-bound Targeted Transparent 1. There are 342 laws providing IPAs do not publicly disclose the firm Philippines 4 to 8 year ITH, incentives outside of the tax code No monitoring of firm performance. names and amounts of incentives (Current) 5% GIE forever 2. The IPP covers up to 64 percent of all received industries.
Chapter III Section 299 of the bill: 1. A strategic investment priority plan Chapter III Section 298 of the bill: 1. FIRB will be the overall administrator and approver of all 5 to 19 years, (SIPP) will be formulated to prioritize The FIRB shall publish the names of the Philippines incentives. renewable if they incentives. recipients of incentives and other (CITIRA) 2. IPAs and OGAs will be required to submit firm level data on meet the criteria 2. The SIPP shall also improve targeting related information on their costs and incentives, other costs, and benefits. of more incentives to priority areas. benefits.
Special rate and duration are dependent on investment amount (e.g. Indonesia 20 years ITH Based on main activities of the SEZ Not publicly available under USD 35 million, USD 35 to 70 million, over USD 70 million).
Must engage in big data analytics, Post-incentive reports are submitted to Malaysia Incentive artificial intelligence, financial Malaysia Development Authority (e.g. percentage of local R&D expenditure to 5 years ITH Not publicly available technology, internet of things, etc. and gross sales should be at least 1% on an annual basis). located in Cybercities. Companies receiving incentives must submit regular progress reports Pioneer companies in high technology Singapore to Economic Development Board (e.g. employment created, total 10 years ITH Expanding companies (e.g. capital Not publicly available business expenditure which generates spin-off to the economy, etc.). expenditure) A1: Knowledge based Companies must submit regular reports to BOI Thailand (e.g. paid-up A2: Infrastructure Firm names of incentives recipients are Thailand share capital at the required amount, adequate environment 8 years ITH A3: high technology disclosed on the BOI website. protection systems, debt-to-equity ratio not exceeding 3:1, etc.). A4: lower technology B1 and B2: supporting industry Vietnam gives incentives to projects with a capital investment of at Category 1: socialization projects in least USD 258.6 million and either 2 years ITH, difficult geographic areas Vietnam 1. minimum annual turnover of USD 431 million within 3 years; or 4 years special Not publicly available Category 2: socialization projects in 2. employ more than 3,000 workers. rate other areas 123 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 20 RESPONSE A. In all SONA speeches of President Duterte, the tax reform has been mentioned as a priority measure, 20. PEZA is “ready consistent with his commitment in the 10-point socioeconomic agenda. In fact, the 2016, 2018, and for war.” 2019 SONA mentioned Package 2 explicitly. B. In January 8, 2018, Package 2, co-presented by the DOF and DTI secretary, was unanimously approved in a cabinet meeting. DTI Secretary Ramon Lopez chairs PEZA, and PEZA is attached to DTI. C. This presidential and cabinet directive is the official position, nothing else. D. The DOF prefers to work together, adhere to the president’s directive and priorities, and not waste time on non-constructive statement such as “ready for war.” E. If others want war, they should at least be armed with
the correct information. 124 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
125 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION “On taxation, my administration will pursue tax reforms towards a 2016 simpler, and more equitable, and more efficient tax system that can SONA foster investment and job creation. We will lower personal and corporate income tax rates and relax the bank secrecy laws.”
126 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
“When I ran for public office, I promised to do whatever it takes to give all Filipinos a comfortable life, even if it means fighting powerful interests. I am committed to a comprehensive tax reform, and I ask Congress to continue the job. 2018 Package 2 will lower corporate income taxes, especially for our small businesses. Lower taxes mean they will have more money to invest and create more jobs. More than 99 percent of our businesses are micro, small, or medium enterprises (MSME) and employ around 65 percent of SONA our workers. The enactment of the Package 2 is what stands between today and millions of jobs in the near future.
Congressmen Cua, Gonzales, Abu, and Garin and Batocabe, as well as the Suansing family, filed versions of Package 2 last March 2018. Salamat po and I support their push to shepherd the bill. I hope the Senate will follow suit, maybe tomorrow, sir.
This matter is urgent. Do not be part of the problem by ignoring it. I hope to sign Package 2 before the year ends. I urge Congress to pass it in a form that satisfies our goals and serves the interests of the many, not just the wealthy few.” 127 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
2019 SONA
128 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
129 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 21 RESPONSE
A. Package 2 adheres to the four key principles of good tax incentive design: performance-based, time-bound, 21. PEZA should targeted, and transparent. Exempting PEZA would be a total contradiction of these shared principles. be exempted B. In fact, in the Feb 12, 2018 PEZA board meeting, DG Plaza agreed with the DOF’s position to make incentives performance-based, targeted, timebound, and transparent. from Package 2. C. Of the PHP 441 billion worth of tax discounts and exemptions given to investors in 2017, around 80% or PHP 345 billion was granted by PEZA. D. Based on DOF’s cost-benefit analysis, around half of these incentives performed well on behalf of the Filipino people. The other half did not perform well and would have actually benefited our country had they been invested in infrastructure, education, health care, and social protection programs. 130 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 22 RESPONSE A. These are serious matters that should be 22. PEZA firms will substantiated so the DOF can understand better. If names are not given, and divestments are kept in transfer to other secret, then these might be empty threats as countries. Around USD investment pledges are increasing, contrary to their claim. 1 billion has been B. The Philippines is fast growing country with low and redirected to other stable inflation, solid external accounts, a young and dynamic labor force, and high English proficiency and countries. Companies interpersonal skills not found in neighboring countries. are preparing their exit C. According to a 2017 World Economic Forum survey, plans. granting of tax incentives is not the top nor the only reason why firms invest in the country. Firms invest when there is peace and order, better infrastructure, productive labor force, and ease in doing business.
131 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Selected cross-country indicators, averages for 2010 to 2018 10 100
PHL VIE INO MYS THA 8 80
6.6 66 6.3 6.2 61 6 60 5.5 5.4 5.3 53 5.1 52 4.9 49
4 3.8 38 40 3.1 31 Percent 30 29
2.3 2.4 24 index Years, 2 1.7 1.8 20
0 0
-1.8 -2 -20 Real GDP growth Inflation rate (percent, Current account Median age (years, English proficiency (percent, left axis) left axis) balance (percent of right axis) (index, right axis) GDP, left axis)
Sources: WDI, EF, CIA world factbook 132 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
World Bank 2005 World Economic Forum 2017-18
133 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Progress in achieving the 10-point socioeconomic agenda is advancing strongly.
134 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 23 RESPONSE A. PEZA and its predecessor, EPZA, have been giving 23. PEZA is prudent in giving incentives. incentives since 1972 or for 47 years already. In PEZA described itself as if it were “the fact, 466 PEZA firms have been receiving incentives for more than 15 years, even if the firm evil three-headed dragon devouring does not generate enough additional jobs or money that should have gone to the exports. This shows that the performance of people.” PEZA gave away P879.1 billion incentives has not been monitored for the longest of the P1.12 trillion total for IPAs. time. This is not prudent at all. B. The PHP 879.1 billion which PEZA gave as tax incentives in 2015 to 2017 is revenue foregone. Since the granted incentives cannot be monitored in terms of performance, it will be difficult to ascertain if this money if being put to good use in the form of improved infrastructure and better social services. C. Over the longer-term, it is estimated that PEZA firms have received some PHP 5.5 trillion in tax incentives from 1995 to 2017. 135 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION There are 1,169 firms enjoying incentives for more than 10 years, 968 of which are PEZA locators.
Time, in years Years AFAB BCDA BOI CDC CEZA PEZA PPMC SBMA Total
40-45 1972-1976 1 1
36-40 1977-1981 5 5
31-35 1982-1986 4 4 26-30 1987-1991 45 45 1,169 21-25 1992-1996 207 32 239
16-20 1997-2001 1 2 272 58 333
11-15 2002-2006 1 434 107 542
6-10 2007-2011 2 378 3 31 783 161 1,358
0-5 2012-2017 96 6 845 506 189 1,353 5 394 3,394
Total 98 6 1,225 511 220 3,104 5 752 5,921
Source: 2017 masterlist of registered enterprises, TIMTA
136 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Summary of total tax incentives, per IPA (2015 – 2017, in millions)
Total Incentives IPA (ITH, special rate, import and local VAT, duties) 2015 2016* 2017* 1. Philippine Economic Zone Authority (PEZA) 235,282.26 298,110.28 345,762.59 2. Clark Development Corporation (CDC) 15,825.89 36,477.42 44,494.37 3. Board of Investments (BOI) 41,039.34 36,580.71 35,038.02 4. Authority Freeport Area of Bataan (AFAB) 2,129.11 3,822.68 10,404.85 5. Subic Bay Management Authority (SBMA) 6,043.07 5,025.11 3,662.11 6. Cagayan Economic Zone Authority (CEZA) 488.46 580.06 1,693.75 7. Tourism Infrastructure and Enterprise Zone Authority (TIEZA) 81.93 13.77 27.13 8. Poro Point Management Corporation (PPMC) 53.63 43.65 25.93 9. Zamboanga City Special Economic Zone Authority (ZCSEZA) 278.05 15.38 8.35 10. Bases Conversion and Development Authority (BCDA) 3.14 0 0.09 11. Aurora Pacific Economic Zone and Freeport (APECO) - 0.47 0 TOTAL 301,225 380,670 441,117
*Does not include local VAT exemption, only import VAT exemption 137 Source: TIMTA data CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
PEZA Duty waived Import VAT waived Total Year ITH Special rate (in million pesos) (in million pesos) (in million pesos) 1995 34,070 22,830 19,808 106,308 183,016 1996 35,077 23,504 20,394 109,450 188,425 1997 36,084 24,179 20,980 112,592 193,835 1998 37,091 24,854 21,565 115,735 199,245 An estimated PHP 1999 38,098 25,529 22,151 118,877 204,654 2000 39,105 26,204 22,736 122,019 210,064 5.5 trillion has been 2001 40,112 26,878 23,322 125,162 215,474 2002 41,119 27,553 23,907 128,304 220,884 2003 42,126 28,228 24,493 131,446 226,293 given to PEZA firms 2004 43,133 28,903 25,078 134,589 231,703 2005 43,697 29,280 25,406 136,346 234,729 2006 44,260 29,658 25,733 138,104 237,755 as incentives since 2007 44,823 30,035 26,061 139,861 240,780 2008 45,386 30,413 26,388 141,619 243,806 2009 45,950 30,790 26,716 143,377 246,832 1995. 2010 46,513 31,168 27,043 145,134 249,858 2011 47,076 31,545 27,371 146,892 252,884 2012 51,112 34,249 29,717 159,485 274,564 2013 57,319 38,409 33,326 178,853 307,906 2014 44,162 29,592 25,676 137,799 237,230 2015 43,800 29,349 25,466 136,668 235,282 2016 55,469 37,169 32,250 173,079 297,966 2017 64,269 43,066 37,367 200,539 345,240 TOTAL 1,019,852 683,386 592,952 3,182,237 5,478,426 Average 44,341 29,712 25,781 138,358 238,192 138 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION Estimating the tax incentives received by PEZA from 1995 to 2017 1. The estimated value of incentives were computed through a linear growth assumption (for easy explaining) using data points from the following: A. Income tax + duties from 1999 World Bank study B. Duty + Import VAT from 2006 Reside study C. Income tax + duties + import VAT from actual 2011 to 2017 data D. IPA ratios from 2015 to 2017 actual data E. Tax incentive type ratios from 2015 to 2017 actual data F. We tried compounded but got essentially the same trend from 1999 onward.
139 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 24 RESPONSE 24. PEZA and its firms have been A. The DOF has been clear that the problem is consistently pictured in a negative with the system. A system that lacks accountability, such as the preferential tax and undesirable way. PEZA claims rate that PEZA grants forever, regardless of that these kinds of misleading performance, will result in abuse and fail to information only seek to poison encourage firms to innovate and export higher value-added products. the minds of readers and gain B. In fact, the DOF has repeatedly public sympathy at the expense of acknowledged that these incentives have PEZA and its investors. yielded some benefits in jobs created and investments in the domestic economy. C. What the Department wants is to modernize the incentives system and put it at par with ASEAN and even global standards. 140 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
The DOF’s proposed solution is thus a change in the system. Package 2 will establish a single menu of superior incentives that are performance-based, time-bound, targeted, and transparent. Under the fair and more accountable incentive regime proposed under Package 2, companies that qualify for the superior incentives can include, among others, businesses or enterprises that invest in the countryside or outside the Philippines' highly urbanized areas; that create high quality jobs; and that invest in priority sectors identified in the Strategic Investments Priority Plan (SIPP) to be developed by the Board of Investments (BOI).
141 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 25 RESPONSE 25. PEZA has the duty to respond A. The DOF is curious why PEZA is on behalf of the PEZA locators. seemingly protecting the interest of big businesses and lobbyists rather than the government and the people. B. It appears that PEZA favors subsidizing 3,150 large or foreign firms at the expense of the Filipino taxpayers and 989,166 MSMEs.
142 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
143 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 26 RESPONSE 26. PEZA incentives have more A. The results of the DOF analysis, which uses actual IPA submissions including benefit than cost. For every PHP PEZA’s, show that for every PHP 1 1 incentive, PHP 11 peso goes incentive that PEZA receives from the back to the economy through government, PHP 0.50 to PHP 1.01 goes back to the economy. exports. Taxes paid by PEZA B. DOF estimates that CIT paid by PEZA firms are greater than the firms that availed of incentives in 2015, incentives provided by the 2016 and 2017 at PHP 14.9, PHP 12.9 billion, and PHP 16.1 billion, government. PEZA data and respectively. In contrast, incentives contributions were not received were much higher at PHP 51.7, acknowledged by DOF. PHP 68.4 billion, and PHP 77.9 billion in 2015, 2016 and 2017, respectively.
144 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Summary of results of initial CBA analysis by DOF
Note: 2015-2017 averages 145 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
2015 2016 2017 (in million pesos) (in million pesos) (in million pesos) Rank IPA Income tax Income tax Income tax Income tax Income tax Income tax incentives payments incentives payments incentives payments 1 PEZA 51,720 14,836.34 68,359.45 12,849.56 77,854.55 16,079.50 2 BOI 28,686 24,601.28 34,223.36 31,428.54 33,531.08 37,283.35 3 CDC 2,458 1,083.53 15,318.04 3,351.16 12,187.36 3,673.02 4 SBMA 2,617 1,053.92 2,344.06 903.68 2,655.75 899.44 5 AFAB 176 54.2 384.21 15.75 466.4 15.61 6 CEZA 455 188.63 483.69 319.29 185.08 215.01 7 TIEZA 82 0 13.77 - 27.13 0 8 PPMC 53 24.09 40.27 13.79 25.93 14.6 9 ZCSEZA 9 2.46 15.38 3.31 7.62 2.88 10 BCDA 3 0 0 - 0.09 0 11 APECO 0 0 0 - 0 0 Total 86,259 41,845 121,182 48,885 126,941 58,183
*Does not include local VAT exemption, only import VAT exemption Source: TIMTA data
146 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 27 RESPONSE 27. PEZA was not consulted by A. Since 1995, DOF has attempted to DOF during the bill drafting and reform fiscal incentives and has was belatedly asked to consulted PEZA multiple times. participate in the deliberations. B. In the last three years, DOF consulted with PEZA in several PEZA was also not given a occasions while drafting the final chance by the President and the House version of the bill, and had economic team to be heard. The further meetings during House economic team doesn’t listen to Ways and Means deliberations. PEZA anymore. C. In fact, DOF responded to PEZA’s concerns officially.
147 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
148 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
149 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
150 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
Attempts at fiscal incentives rationalization (House of Representatives)
1995-1998 1998-2001 2001-2004 2004-2007 2007-2010 2010-2013 2013-2016 2016 – June 2019 10th 11th 12th 13th 14th 15th 16th 17th HBs 1757, 2278, HBs 938, HB 130 (Villar) CIT Only: HBs 36, 1537, 1658, HB 76 HB 8395 HBs 188, 256, 386, HBs 122, 271, 302, 2530 and 2712 3162, 4152 Pending in the 2379, 3835 & 5384 (Yap, Herrera-Dy, (Acosta) (Lapus) 746, 5426, 5631, and 1599 Substituted by HB and 4402 Committee Angara-Castillo, Quimbo, Zubiri and RA 8424 and 5732 Substituted by HB Substituted by 5241 Substituted Villafuerte Jr.) HB231 (Singson) Substituted by HB 3295 HB10596 6011 by HB 4935 HB 302 (Yap) HB3359 (Garin) HB 3295 HB 5241 Pending in the HB7364 (Batocabe, Garin) HB7214 HB 10596 HB 6011 (Salceda) (Javier) HB 4935 Committee (Suansing, Estrellita, Horacio) (Lim) (De Venecia) Approved on 3rd Approved on 3rd (Yap) HB7458 (Cua, Abu, Gonzales Jr.) rd Approved on 3rd Approved on 3 Reading. Reading. Approved on HB 1788 (Rodriguez) Reading. Transmitted to Reading. Transmitted to 3rd Reading Pending in the HB 4081 (Tambunting) Transmitted to Senate Transmitted to Senate Committee Pending in the Committee Senate Senate HB 2765 HB 4547 (Quisumbing) (Rodriguez, M., Jr.) Pending in the Pending in the Committee Committee HB 8080 (Biron) HB 4369 Pending in the Committee (Tambunting) Pending in the HB 8083 (Cua; Gonzales; Abu; Suansing, H.; Committee Suansing, E.; et al) Approved on 3rd Reading. Transmitted to Senate
Source: House of the Representatives, Senate of the Philippines 151 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
Attempts at fiscal incentives rationalization (Senate)
1995-1998 1998-2001 2001-2004 2004-2007 2007-2010 2010-2013 2013-2016 2016 – June 2019 10th 11th 12th 13th 14th 15th 16th 17th SB 1396 SB 1640 SB 2142 SB 987 SB 229 (Recto) (Villar M.) (Recto) (Recto) (Drilon) Pending in the Committee Report 784 Pending in the Pending in the Pending in the Committee Committee Considered in HB 5241 Committee Committee SB 798 SB 1839 SB 2375 SB 2379 SB 2048 (Recto) (Drilon, Flavier and (Legarda) (Villar, M.) (Legarda) Pending in the Committee Pangilinan) Committee Report 784 Pending in the Pending in the Substituted by SB Considered in HB 5241 Committee Committee SB 1906 2411 (Sotto III) SB 3136 SB 2755 Pending in the Committee SB 1910 (Lacson) (Angara) (Biazon) Committee Report 784 Pending in the CIT only: SB 1204 (Binay), SB 698 Pending in the Considered in HB 5241 Committee (Aquino), SB 317 (Angara), SB 125 Committee (Zubiri)
SB 2411 (Villar Jr., M.; Drilon; Recto; Flavier; Pangilinan; Gordon) Pending 2nd Reading
Source: House of the Representatives, Senate of the Philippines 152 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 28 RESPONSE A. Package 2 does not remove the 28. PEZA will no one-stop-shop function of IPAs, such as PEZA and BOI. They will longer be a one continue to promote and facilitate trade and investment and ensure ease of doing business in relation to stop shop. investors’ transactions with various government agencies. Also, local business tax is still part of the proposed incentive package while real property tax is largely paid by developers that do not receive incentives.
153 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 29 RESPONSE
A. PEZA does not have the sole duty to 29. PEZA cannot promote the development of SMEs. B. CITIRA proposes to lower the CIT rate promote SME to 20 by 2029. This will benefit around 989,166 MSMEs that pay the current development rate of 30 percent. C. Moreover, the EODB enacted into law without incentives. in 2018 makes it easier for small businesses to process requirements. D. Package 2 grants additional incentives to firms that buy local inputs. This will develop the MSME supply chain.
154 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Around 90,000 SMEs will benefit from the lowering of CIT to 20 percent by 2029. In 2017, 989,166 registered firms. 1. Firms with no incentives pay the regular rate of 30% of net taxable In 2017, over PHP 441 income. billion (2.8% of GDP) was granted to 3,150 firms. 2. For example, almost all of the 90,000 SMEs pay the regular 30% In addition, PHP 63 billion (0.4% of GDP) was lost due rate. to possible abuse of transfer pricing. 3. Firms with incentives pay between 6% and 13% effective Total: PHP 504 billion tax. (3.2% of 2017 GDP) Source: DTI, TIMTA, and DOF estimates 155 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
Ease of doing business
156 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 30 RESPONSE A. This is not accurate as most ecozones are 30. PEZA cannot in NCR and other highly urbanized cities or provinces. Based on the TIMTA report, of promote regional the 2,779 PEZA registered firms in 2016, development without 1,275 of these are located in NCR. This does not yet include PEZA registered firms incentives. in located in the Greater Manila Area. B. As of December 2018, 223 out of 544 ecozones are located in Metro Manila. C. Therefore, the claim that PEZA is creating jobs, livelihood, income for Filipinos in the countryside is not entirely accurate. D. Further, the proposed CITIRA comes with additional incentives for locators outside Metro Manila and its adjacent areas. 157 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
IPA No. of ecozones AFAB 1 As of 2018, there are 544 APECO 1 ecozones, all of them are BCDA - separate customs BOI - territory, meaning they CDC 1 are exempt from all taxes. CEZA 1 PEZA 531 PIA 1 Moreover, 223 or 41 PPMC 1 percent of these ecozones TIEZA 5 are in Metro Manila alone. SBMA 1 RBOI-ARMM - ZCSEZA 1 TOTAL 544
158 Source: PEZA, IPAs, and DOF staff calculations CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
Indonesia Thailand Chile
Closest economic zone to each country’s capital Capital Economic zone Distance, in kilometers Jakarta (Indonesia) Tan Jung Lesung 181km Bangkok (Thailand) Sa Kaeo 197km Santiago (Chile) Free Zone of Punta Arenas 3,022km 159 Notes: Distances were estimated using Google Maps and the location of the capital is denoted by . Source: Individual country investment promotion offices. CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
1. Additional 3 years of incentives for: A. Registered activities relocating outside Metro Manila and selected urbanized areas adjacent to Metro Manila B. Agribusiness projects of registered enterprises located outside Metro Manila and urban areas C. Projects located in less developed areas or those recovering from armed conflict or a major disaster
160 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 31 RESPONSE A. Today, the supply chain is still shallow 31. PEZA cannot despite generous incentives, and most develop the local value PEZA firms still rely on imported parts and put little value added in the assembly chain without stage before exporting. Hardly any local incentives. supplier system was created. For instance, according to latest data from PEZA, around 72 percent of their total exports is made up of imports, suggesting low value-added to the local economy. B. The proposed CITIRA also incentivizes the development of the local value chain by providing additional 50 percent deductions to domestic inputs. 161 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. PEZA exports and imports data (1/2)
Export sales Total Importation Net exports Imports to exports Net exports to Year (in USD millions) (in USD millions) (in USD millions) ratio exports ratio 1995 4,284.60 2,532.33 1,752.27 59.10 40.90 1996 6,500.38 3,861.58 2,638.79 59.41 40.59 1997 10,626.30 6,877.99 3,748.31 64.73 35.27 1998 13,269.75 9,699.07 3,570.68 73.09 26.91 1999 15,809.00 9,644.22 6,164.78 61.00 39.00 2000 20,025.06 12,125.12 7,899.94 60.55 39.45 2001 19,498.38 12,588.58 6,909.80 64.56 35.44 2002 22,775.83 13,427.69 9,348.15 58.96 41.04 2003 27,313.21 17,483.27 9,829.94 64.01 35.99 2004 30,924.09 17,825.65 13,098.44 57.64 42.36 2005 32,029.72 15,415.56 16,614.16 48.13 51.87 2006 36,077.70 29,023.50 7,054.20 80.45 19.55
Source: PEZA submission 162 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. PEZA exports and imports data (2/2)
Export sales Total Importation Net exports Imports to exports Net exports to exports Year (in USD millions) (in USD millions) (in USD millions) ratio ratio 2007 40,889.12 33,504.04 7,385.08 81.94 18.06 2008 40,543.91 31,413.69 9,130.23 77.48 22.52 2009 32,897.47 23,213.03 9,684.44 70.56 29.44 2010 40,473.64 37,440.81 3,032.83 92.51 7.49 2011 42,144.38 34,524.31 7,620.07 81.92 18.08 2012 40,023.56 32,590.75 7,432.81 81.43 18.57 2013 42,872.73 29,831.37 13,041.36 69.58 30.42 2014 44,034.29 35,618.41 8,415.87 80.89 19.11 2015 43,970.69 32,322.46 11,648.23 73.51 26.49 2016 47,926.72 30,256.67 17,670.04 63.13 36.87 2017 51,349.81 39,787.68 11,562.13 77.48 22.52 2018 54,220.70 34,168.14 20,052.56 63.02 36.98 Average 31,686.71 22,715.66 8,971.05 69.38 30.62 (24 years) Source: PEZA submission 163 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL RESPONSES
Exports of PEZA 60,000
50,000
11,562
40,000 8,416 17,670 3,033 7,620 11,648 7,385 9,130 7,433 13,041
7,054 30,000 9,684
13,098 16,614 9,830 20,000 39,788 37,441 9,348 35,618 33,504 34,524 7,900 6,910 31,414 32,591 32,322 29,024 29,831 30,257 6,165 3,571 23,213 10,000 3,748 17,483 17,826 15,416 12,125 12,589 13,428 2,639 9,699 9,644 1,752 6,878 3,862 - 2,532 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Import component (in USD millions) Net exports (in USD millions)
Source: PEZA submission 164 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. Composition of PEZA exports
Goods exports Goods and services exports 45,000.00 60,000
40,000.00
50,000 35,000.00 3,490 6,291 11,562
30,000.00 40,000 17,670 11,648 25,000.00
30,000 20,000.00 39,788
32,322 15,000.00 30,257 20,000 39,788
10,000.00 32,322 30,257
5,000.00 10,000
- -812 2015 2016 2017 - (5,000.00) 2015 2016 2017
Import component (in USD millions) Goods net export (in USD millions) Import component (in USD millions) Net exports (in USD millions)
Note: Services exports in PEZA based on BPO revenues per TIMTA 165 Source: PEZA submission to DOF and TIMTA 2015-2017 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 32 RESPONSE 32. PEZA has contributed A. The method of cost-benefit analysis used by PEZA to obtain the PHP 10.05 PHP 10.05 trillion to the trillion amount is not correct. To get economy from 2015 to the PHP 10 trillion number, PEZA 2017. added up the total of exports, investment, and capital equipment, and raw materials, which are from the expenditure side; and wages and taxes, which are from the income side. This means they double- counted and ultimately bloated their contribution to the economy.
166 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
CONCERN 32 RESPONSE 32. PEZA has contributed B. PEZA also used incomplete cost data. C. PEZA cite its supposed benefits, the PHP 10.05 trillion to the bulk of which are exports, it does not economy from 2015 to mention that its imports are almost as 2017. high as exports. Data submitted by PEZA to DOF shows that their total exports contain on average 72 percent imported inputs from 2015 to 2017. High import-dependency further suggests that export industries under PEZA have not encouraged the development of backward linkages.
167 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change. ADDITIONAL INFORMATION
DOF PEZA Demand Supply in percent of in PHP trillion total claim in PHP trillion in PHP trillion Exports 7.0 70.0 6.9 Imports 0.0 0.0 -4.9 Local purchases of capital equipment and raw materials* 0.8 7.6 0.8* Investment 0.8 7.5 0.8 Wages 1.3 12.5 1.3 Taxes Paid 0.3 2.7 0.3 Total 10.05 100 2.8 1.5
168 CTRP – Package 2: Key concerns (as of 17 September 2019) Draft for discussion. Subject to change.
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