Temper the TRAIN fare (Part 2)
We all want our country and our government to succeed. There is just no one way to express it, and certainly, not just one frame of mind is required for that success.
I want to share this Sunday some points taken up in an exchange of views between heads of committees of the Management Association of the Philippines in one breakfast forum, and allow me to inject my own perspective as well.
Special Economic Zone entities. Employment generation is an important flipside of tax given up by way of incentives. There is truth though that Philippine talent is an attraction to foreign investment. But we should not to make it difficult to access this talent because the country does not have a global monopoly on talents.
Incentives must be viewed therefore not only in light of the fiscal but also of the operational. Some incentives are almost revenue-neutral but carry lots of premium in terms of keeping it simple for the registered enterprise.
For example, we need not collect from exporters registered with the Philippine Economic Zone Authority (PEZA) what they will be entitled to refund anyway, like value-added tax (VAT). Local governments need not collect local business taxes if they enjoy an automatic allocation from the special tax collected (for instance, from the five percent collected, the three percent of the base goes to national and the two percent goes to local government). There is no unfairness here or deprivation from the local government. Only simplicity and ease of doing business.
Competitiveness will also be helped if they continue to enjoy duty-free importation. Customs duty is globally on the decline anyway, and in time will be kept to a bare minimum.
In my view, if we double the five percent Gross Income Tax of PEZA-registered enterprises to 10 percent (instead of tripling it to 15 percent), this should be survivable. But the rest of the tax regime should be preserved to maintain the sector’s competitiveness and investment attractiveness.
Telcos. Package 2 of the Tax Reform for Acceleration and Inclusion (TRAIN) law, or TRAIN 2, proposes to impose an additional franchise tax of three percent on telco companies. It seems we can be apathetic, except that all business taxes get passed on to us consumers.
Just how much of it in additional telco fees will be passed on? It should be understood that all VAT taxpayers have an effective VAT rate after deducting input VAT. For a telco company, that effective VAT rate can be between five and six percent. So if you add three percent franchise tax based on gross revenue without the benefit of additional input VAT, it’s like increasing the current VAT rate for telcos to more than 18 percent. This will be the highest VAT/business tax rate in the region, if not globally. The cost will need to be passed on, and consumers, now needing telco services like the basic need for medicine, will bear the cost.
Airlines. One of the best things that ever happened to the average Filipino is that travel became affordable because of cheaper airfare for international flights, and especially for domestic ones. Cheaper flights resulted in more domestic tourism that pumped new business into hotels, lodgings, restaurants, transportation, and retail in various cities or sites of attraction. With travel not limited to a privileged few, tourism became one of the most inclusive and productive local activities.
How much of all the business in this ecosystem will be impacted by removing the few remaining tax breaks given to domestic airlines? If TRAIN 2 imposes franchise tax on them, not in lieu of, but in addition to regular corporate income tax and VAT, and remove the rest of its tax incentives, the president of the Philippine flag carrier said it would cost them $200 million annually. Much of that will be passed on to consumers. Maybe cost of travel is not an issue for some, but for those who operate on a tight budget, it could spell the difference between flying to another place within the country and driving instead to a nearby resort.
Schools. What is the difference between non-stock and stock corporations if they are both non-profit anyway? The difference in the way private schools are owned, whether non-stock or stock, should not matter if they are both nonprofit. But non-stock ones are constitutionally exempt from all taxes while the stock ones are subject to 10 percent tax. TRAIN 2, which cannot amend the Constitution, would increase the tax rate for private stock educational institutions to 30 percent and thus widen the discrepancy of treatment among entities of the same institution and purpose.
Not to be overshadowed is the fact that they serve the same purpose as government-owned schools. If private schools become unaffordable to the middle class, and they cannot be accommodated in overcrowded public schools, or they crowd out the students from poor families, are out-of-school youth acceptable collateral damage?
Corporate income tax. The proposal to reduce corporate income tax (CIT) by 1 percent annually is good as it is predictable. But because the Philippines’ CIT is about a third higher than others in the region, the proposed rate of reduction would not be impactful. It was suggested during the breakfast forum that at least two percent reduction annually is reasonable and might be an acceptable improvement to the bill. To mitigate the impact of lower CIT, apart from incentive rationalization, legislation to improve tax administration and enforcement should not be overlooked.
I understand the point intimated that if the government concerns itself with each and every industry issue, they may not have a tax reform. I also understand that whether we like it or not, the government and the private sector are in this together. Tempering the risk for business, our people, and our economy makes sense. An open mind will be a good start – from both sides.
* * * Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the Chairman of the Tax Committee, and the Vice Chairman of EMERGE (Educated Marginalized Entrepreneurs Resource Generation) program, of the Management Association of the Philippines (MAP). Email your comments and questions to aseasyasABC@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.