Falling on deaf ears
Majority of our senators are not inclined to support the second package of the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
According to Senate President Vicente Sotto, this was because the promises and forecasts made by the country’s economic managers when TRAIN 1 was still being deliberated upon did not happen.
TRAIN 1 reduced personal income tax rates but at the same time increased excise taxes on petroleum products, automobiles, as well as those on sugar-sweetened beverages, and expanded the valueadded tax system.
The senators assailed the economic managers, particularly those from the Department of Finance, for failing to forecast a spike in the inflation rate.
Senate Majority Leader Juan Miguel Zubiri said no senator wants to sponsor the proposed TRAIN 2.
The House of Representatives’ Ways and Means Committee earlier approved a substitute TRAIN 2 bill. It seeks to gradually slash the current 30 percent corporate income tax (CIT) by two percent every other year starting 2021 to 2029, until it reaches 20 percent. It will also rationalize the country’s investment incentives scheme, cutting back on fiscal incentives in the process.
Already, there are those who expect power rates to escalate as a result of TRAIN 2.
Laban Konsyumer president and former trade undersecretary Victor Dimagiba fears that incentives in the power sector, particularly the renewable energy industry, will be scrapped and everything will be subjected to the 12 percent value-added tax. It is also feared that TRAIN 2 would further slow down the development of clean and indigenous resources while promoting coal-based projects.
Ibon Foundation earlier said that TRAIN 1 was among the biggest factors driving the inflation rate and further inflationary surges which will likely happen in the next two years when the next two rounds of additional taxes on petroleum and oil products take effect. At present, the Philippine Economic Zone Authority grants income tax holidays to locators in special economic zones and once they expire, a perpetual five percent tax based on gross income. As proposed, the five percent tax will only be for a limited time. Fiscal incentives granted by the Board of Investments and other agencies may also suffer cutbacks.
PEZA earlier reminded the DOF that government invited investors to locate in economic zones with a promise that they would enjoy incentives provided by law.
The Philippine Ecozones Association, the umbrella organization of major ecozone developers in the country, has already warned about the negative impact to foreign direct investments in special economic zones if the proposed TRAIN 2 is enacted, citing loss of jobs, lower production output and exports, capital flight, among others.
Philea president F. Francisco Zaldarriaga said the proposed tax reform measures will reverse the progress that the private sector and government have attained in contributing to nation-building through strengthening of the industrial sectors of manufacturing, information technology, business process outsourcing, and many others.
In a position paper submitted to Finance Secretary Carlos Dominguez, Philea also said the proposed cuts in fiscal incentives may be unconstitutional since it violates the non-impairment of contracts and is tantamount to a breach of government’s contract with registered enterprises.
Meanwhile, the American Chamber of Commerce of the Philippines (AmCham) earlier said that TRAIN 2 would not necessarily encourage more FDIs to the country. In a survey among Amcham’s multinational members, many of whom are ecozone locators, 61% said the proposed transition periods under TRAIN 2 would cause their firms to end further expansion.
Around 83 percent of the respondents affirmed that fiscal incentives do compensate for higher costs of doing business in the Philippines, and that without these incentives, investors will locate elsewhere.
AmCham pointed out that as the country moves upwards on its path to becoming an advanced nation by 2040, the accompanying tax regime for this new era should ensure that growth is sustained. The group wants a faster rate of reduction for the CIT.
It added that the proposed bill creates uncertainty for existing and new members, emphasizing that tax projections, an important part of calculations of future revenues, will be handicapped by this uncertainty.
AmCham said that for over two decades, the Philippines has created a group of impressive industrial sites at former US bases and numerous PEZA zones, which were being promoted to foreign investors with attractive fiscal incentives and promises of a ‘one-stop shop’ where investors experience minimal bureaucracy.
It stressed that without PEZA and other special zones preserving their unique reputation as efficient locations for doing business, more investors will no longer make the Philippines their first choice.
Before implementing TRAIN 2, our government should have an honest-to-goodness assessment of Train 1. There is no shame in stopping TRAIN 2, if that means a better future for Filipinos and foreign investors alike.