ctrp ppt v2 kp4 mb - iro.ph ppt v2 kp4 mb.pdf · draft for discussion. subject to change. in...

DRAFTFORDISCUSSION.SUBJECTTOCHANGE.

Comprehensive tax reform programAsofNovember16,2018 2:55PM


16November2018 DEPARTMENT OF FINANCE 1

Package 1: TRAIN

Package 1B:Tax amnesty and

motor vehicle user charge

(MVUC)

Package 1A: Personal income tax, consumption tax, and

transaction taxesTRAIN (RA 10963)

Package 2: TRABAHO

Package 2+:Alcohol and tobacco

excise tax, and mining tax

Corporate income tax and fiscal

incentives

Personal income tax and

consumption tax

Comprehensive Tax Reform ProgramDRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Package 3

Property valuation and taxes

Capital income and financial taxes

Package 4

Comprehensive Tax Reform ProgramDRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Package 2Corporate income tax and

incentives reform


Source: Asian Development Bank and PWC

The Philippines has the highest corporate income tax rate in the ASEAN region.


Source: OECD, individual country statistics offices, and DOF staff calculations.

CIT revenue is increasing, but efficiency is very low.


- 14 IPAs - 136 investment

laws 200 non-investment laws

- 546 ‘ecozones’ and freeports

We grant the most generous fiscal incentives since they are in lieu of all taxes and given forever.

Source: Individual country finance agencies and investment promotion offices.

We have a complex tax incentives system.


14 Investment Promotion Agencies (IPAs)

We have a complex tax incentives system


Source: PEZA, IPAs, and DOF staff calculations

IPA No. of ecozones

AFAB 1

APECO 1

BCDA 1

BOI -

CDC 1

CEZA 1

PEZA 528

PIA 1

PPMC 1

PRA -

TIEZA 8

SBMA 1

RBOI-ARMM 1

ZCSEZA 1

TOTAL 546

We have a complex tax incentives system


● Firms with no incentives pay the regular rate of 30% of net taxable income

● Firms with incentives pay between 6% and 13%

For example, almost all of the 90,000 SMEs pay the regular 30% rate.

Source: DTI and TIMTA

Huge inequity under the current system:


Tax incentives in billion pesos

Type of tax

Income tax

Customs duties

Subtotal

Import VAT (gross)

Local VAT (gross)

Local business tax

Subtotal for incentives

Leakage

Total

No. of recipients

2015

86

18

104

160

37

TBD

301

43

344

2,844

2016

121

57

179

TBD

TBD

TBD

TBD

TBD

TBD

3,102

Source: TIMTA, DOF estimates

Estimated forgonerevenue due to tax incentives


FDI pales in comparison to our neighbors.

Source: BSP, UNCTAD, and DOF calculations

Despite giving the most generous and forever incentives…

Draftfordiscussion.Subjecttochange.Draftfordiscussion.Subjecttochange.

DEPARTMENT OF FINANCE 110

At the aggregate, FDI reached record highs in recent years despite declining approved foreign investments.



Historically, PEZA attracted the most foreign investments, followed by the BOI.



First quarter approved investments generally peak during election years.

145 6

119

32

64

18 21

4

47

22 19

50

37

2226 23

14

0

20

40

60

80

100

120

140PH

Pbillion

sApprovedforeigninvestmentsinQ1

Source:PSANote:Purple barsrepresentelectionyears.


Export competitiveness has been in decline.

Domestic industries have weak linkages to export industry.

Reliance on imported parts, thus weak domestic content.

Source: PSA, UNCTAD, DOF calculations

Despite giving the most generous and forever incentives…


Cost-benefit analysis of fiscal incentives


This is done so that we can determine if the tax incentives given to recipients benefit our economy more than it costs.Note: Evaluation of the past performance does not necessarily indicate future priority or preference over some industries.

“Ex-post” cost-benefit analysis


Efficiency Equity Simplicity

However, incentives may be justified if they provide net benefit to society as a whole.

Tax incentives usually violate the principles of:


1. Estimating implicit labor subsidyWhat is the cost for each job created?

3. Estimating net government revenue Do we generate more revenue from the tax we forego?

2. Performing a counterfactual analysisDo firms with registered activities for incentives perform better in terms of job creation, R&D investments, productivity, etc. when compared to non-registered firms?

4. Accounting of direct and indirect cost and benefitDo total benefits from incentives, both private and social, outweigh total costs?

Cost-benefit analysis: Methods

In 2015, to create 1 job, it costs taxpayers around P2.4 million.Note: In 2015, 123,725 jobs were created, and the total tax expenditure was P301 billion. If this is adjusted for VAT refund,

the implicit labor subsidy would be P1.4 million.

Source: IPA submissions, TIMTA, DOF estimates.

P2,434,662

Result #1(Implicit labor subsidy)


In general, registered firms, when compared to non-registered firms…

● Have the same employment relative to size● Have similar average wages, but pay top management higher● Spend more on fixed assets, but do not spend higher on R&D● Have the same level of exports relative to sales● No difference in productivity Source: PSA ASPBI, TIMTA, DOF estimates

Result #2(Counterfactual analysis using propensity score matching)


On average, for every peso we grant as incentive, we collect 34 cents in taxes, even after accounting for taxes from indirect employment and domestic inputs.

If taxes from unnecessary incentives are accounted for, we collect 95 cents.

Taxes collected from:FirmsEmployeesDividends

Indirect employeesDomestic inputs

Tax incentives on:IncomeDuties (30%)VAT (net of refund)Local taxes

Source: IPA submissions, SEC, TIMTA, DOF estimates

Result #3(Net government revenue effect)


Identifying necessary and unnecessary incentives


Number of firms enjoying incentives for at least 15 years

645 firms receiving incentives for at least 15 years.

Source: TIMTA.

We have been supporting many firms unnecessarily


Source: SEC, TIMTA

Dividends declared at 164% of income tax incentives received


On average, for every peso spent on incentive, between P0.63 and P1.21 comes back in benefits, even after

accounting for employment generated and spillovers, both direct and indirect.

Source: IPA submission, PSA ASPBI, SEC, TIMTA, DOF estimates

Result #4(Accounting of total direct and indirect cost and benefit)


TRABAHO BillTax Reform for Attracting Better and

High-quality Opportunities bill(HB 8083)


The President may advance the scheduled

reduction in the CIT rate when adequate savings

are realized from the rationalization of fiscal

incentives.

Lower corporate income tax


Fair and accountable tax incentives systemEvery 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.

Package 2


Special rate (2019)18% on net taxable income after ITH for up to 5 years including the ITH

- 1.5% to province- 1.5% to municipality

Income tax holidayUp to 3 years plus 1 year extension if investing in agribusiness, or in less developed areas, or

if relocating outside Metro Manila and adjacent urban areas

Incentives menu


• Depreciation allowance of qualified capital expenditure:

• 10% for buildings• 20% for machineries

• Additional deduction of up to:• 100% for research and development

(R&D) and training• 50% for labor expense• 100% for country-wide infrastructure

development• 50% for reinvestment allowance to

manufacturing industry• 50% for domestic input expense

• Enhanced net operating loss carry-over (NOLCO) (5 years)

• Exemption from customs duty on imported capital equipment and raw materials

141

Incentives menu


• Additional 2 years of incentives for:• registered activities relocating outside

Metro Manila and selected urbanized areas adjacent to Metro Manila

• agribusiness projects of registered enterprises located outside Metro Manila and urban areas

• projects located in less developed areas or those recovering from armed conflict or a major disaster

• VAT incentives to registered enterprises whose export meet the 90% of sales threshold, and are within an ecozone or free port:

• VAT exemption on importation• VAT zero rating on domestic purchases

Incentives menu


For RBEs which availed of ITH: Continue until remaining period ends or for a period of 5 years, whichever comes first

For RBEs enjoying existing 5% GIE:

Sunset provision for existing incentives


Summary results (ETRs)


CurrentA(ITH/GIEand

RCIT)

CurrentB(GIEandRCIT)

Case1(TRABAHO)

Case2(TRABAHO)

Case3(Regular)

Case4(2029regular)

Taxrate(registeredactivity) 0/5

5(ITHconvertedto

GIE)12.5+3 25withadditional

deductions 25 20

Company1 0.0 1.9 3.6 0.0 5.8 4.6

Company2 1.1 1.1 3.3 1.2 5.2 4.2


Granting tax incentives is not the only way to

directly help firms

The government can use more efficient and targeted subsidies

The real solution in the medium-term is to address

infrastructure gaps, corruption, inefficiency in government, and complex

business regulations

Ex. lifeline subsidies, power subsidies, housing vouchers, skills training, etc.

There are other and may be better ways to support firms


Tax reform as bridging the future


Source:https://www.pinterest.com/explore/social-stratification/



Source:https://scottdeutschtalks.files.wordpress.com/2016/05/who-wants-change.jpg


Let’s be partners for change!• Formoreinformation,pleasevisit:

• Forquestions:[email protected] DEPARTMENT OF FINANCE 202

www.dof.gov.ph/taxreform/ facebook.com/DOFph

ctrp ppt v2 kp4 mb - iro.ph ppt v2 kp4 mb.pdf · draft for discussion. subject to change. in...

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