Second tax package to target eco-zone tax holiday loopholes

PACKAGE TWO of the comprehensive tax reform program will eliminate a loophole that allows companies to shift expenses in order to maximize profits earned by projects enjoying tax holidays.

Finance Undersecretary Karl Kendrick T. Chua said that some firms abuse the tax holidays granted to them by investment promotion agencies such as the Board of Investments ( BoI) and the Philippine Economic Zone Authority (PEZA), among others.

“If I am a conglomerate or a business there’s a line that is subject to income tax holiday and so I don’t pay tax. And then there’s a line or project that is subject to the regular (rate). So what is keeping me from moving my expenses from the project that has income tax holiday to the regular so that I can pad my expenses?” Mr. Chua told reporters on the sidelines of the Economic Journalists Association of the Philippines Economic Forum last Friday.

“So that is the leakage, an example that happens when you have a dual system,” he added.

Some income tax holidays given by PEZA involve the exemption of accredited firms from the 32% corporate income tax, and instead paying a lower 5% special tax on gross income. Tax perks under the BoI involve the exemption from taxes and duties on imported spare parts, wharfage dues, and tax credits, among others.

Mr. Chua said that the Finance department is currently reviewing data on these incentives generated by the Tax Incentives Management and Transparency Act, to determine whether benefits from the fiscal perks are reinvested in the Philippines.

He said earlier that the review will be completed within the third quarter, and will be submitted as a proposal to Congress by the fourth quarter.

The first package remains pending with the Senate committee on ways and means.

The department said it is ready to handle simultaneous deliberations when the second package is submitted.

The package, which is expected to be revenue neutral, would leave the government P500 billion in foregone corporate income tax by reducing the top rate from 32% to about 25%, but will be compensated by the same amount by withdrawing some tax perks according to Mr. Chua.

“It’s offsetting. What we recover is going to be used to reduce the corporate tax rate for it to be balanced and fair. So that’s the idea. There would be no (additional) revenue, or little,” he said.

Finance Secretary Carlos G. Dominguez III has said that the fiscal incentives will be performancebased, and targeted to firms that reinvest their tax savings in the Philippines, generating more jobs and taxes. —