Tax perk re­moval ‘un­con­sti­tu­tional’

Peza of­fi­cial says 2nd re­form pack­age to vi­o­late ex­ist­ing con­tracts with eco­zone firms

Philippine Daily Inquirer - - BUSINESS - By Roy Stephen C. Canivel @roy­canivel_INQ

The Duterte ad­min­is­tra­tion’s sec­ond tax re­form pack­age would in­val­i­date ex­ist­ing gov­ern­ment con­tracts with in­vestors, a move that the Philip­pine Eco­nomic Zone Au­thor­ity (Peza) has called “un­con­sti­tu­tional.”

Elmer San Pas­cual, man­ager of Peza’s pro­mo­tion and pub­lic re­la­tions, said the tax pack­age would go against a con­sti­tu­tional pro­vi­sion that pro­tected ex­ist­ing gov­ern­ment con­tracts.

This was due to the fact that the tax pack­age would strip the tax incentives be­ing en­joyed by ex­ist­ing com­pa­nies reg­is­tered un­der Peza, even though these perks were promised in their agree­ments with the gov­ern­ment agency.

Filed as House Bill 7438, the pack­age wanted to lower the cor­po­rate in­come tax while re­duc­ing the tax perks be­ing of­fered by the gov­ern­ment.

Un­der the bill, com­pa­nies that ben­e­fit from the cur­rent tax perks could keep these incentives for the span of a tran­si­tional pe­riod of no less than five years.

The longer the com­pany has re­ceived the incentives, the shorter the tran­si­tion pe­riod would be. Af­ter which, they would have to com­ply with the new set of perks listed un­der the pro­posed bill.

“On our part, we can­not agree to that. We can­not leg­is­late a law which would vi­o­late con­tracts, es­pe­cially con­tracts [with the] gov­ern­ment. There is a pro­vi­sion in our Con­sti­tu­tion [re­gard­ing] the in­vi­o­la­bil­ity of a con­tract,” San Pas­cual said.

Ac­cord­ing to the Bill of Rights of the 1987 Con­sti­tu­tion, no law im­pair­ing the obli­ga­tion of con­tracts shall be passed.

This de­vel­oped as the Duterte ad­min­is­tra­tion moved to re­form the coun­try’s tax sys­tem. The first pack­age of the re­form pro­gram took ef­fect last Jan­uary and raised or in­tro­duced taxes on oil prod­ucts, cig­a­rettes and al­co­holic drinks, ve­hi­cles and sugar-sweet­ened bev­er­ages. The new taxes were aimed at re­cov­er­ing the lost rev­enues from the re­duc­tion in in­come taxes caused mainly by the in­crease in the tax-free an­nual in­come to P250,000.

The un­cer­tainty now arises in the sec­ond tax re­form pack­age on the ra­tio­nal­iza­tion of incentives. This was man­i­fested in the de­cline in Peza in­vest­ment pledges in some sec­tors last year and the over­all drop of pledges for the first two months of 2018.

Un­der the ex­ist­ing rules, a Peza-reg­is­tered com­pany would pay a 5-per­cent gross in­come earned (GIE) tax in lieu of all taxes, a perk which es­sen­tially has no ex­pi­ra­tion date. This GIE tax would only take ef­fect for com­pa­nies that have used up their in­come tax hol­i­days of four to six years.

The bill, which echoes the pro­posal made by the Depart­ment of Fi­nance (DOF), would re­move that perk. Com­pa­nies that have en­joyed the in­cen­tive for more than a decade could keep the perk for only two more years.

“Our con­tract with our in­vestors [means] that as long as you are do­ing your reg­is­tered [busi­ness] ac­tiv­ity, you would con­tinue to en­joy 5-per­cent GIE tax. That’s per­pet­ual. If they would leg­is­late [a law] vi­o­lat­ing that con­tract, that is, we think, and I per­son­ally think, in vi­o­la­tion of the Con­sti­tu­tion,” he said.

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