Corporate income tax reform and fiscal incentives ... · Headline CIT rate (percent) Revenue productivity (percent) Vietnam 2012 7.3 25 29 Malaysia 2015 6.5 24 27 Singapore 2015 3.5

5/25/18 DEPARTMENTOFFINANCE

DRAFTFORDISCUSSION.SUBJECTTOCHANGE.

ComprehensiveTaxReformPackagePackage2

Corporateincometaxreformandfiscalincentivesmodernization

Asof25May2018



I. Background:corporateincometaxandfiscalincentivesregime

II. Rationaleforreform:costandbenefits

III. Proposedreform

Content



Features Rate Legalbasis

Regularcorporateincometax(CIT)rate

Domesticcorporationandresidentforeigncorporations

Non-residentforeigncorporation

30%ofnettaxableincome

30%ofgrossincome

Sec.27(A)and28(A)oftheNationalInternalRevenueCode(NIRC)

Sec.28(B)ofNIRC

MinimumCIT(MCIT)fordomesticcorporationsandresidentforeigncorporations

2%ofgrossincome

Sec.27(E)and28(A) (2)ofNIRC

Optionalstandarddeduction(OSD)inlieuofitemizeddeductions

40%ofgrossincome

Sec.34(L)ofNIRC

Regularcorporateincometax(CIT)regime



17%20% 20% 20%

24% 24% 25%

30%

0%

5%

10%

15%

20%

25%

30%

35%

Singapore Cambodia Thailand Vietnam LaoPDR Malaysia Indonesia Philippines

Source:PWCandADB

ComparativeCITratesinASEAN



• 14Investmentpromotionagencies(IPAs):theBOI,PEZA,and12otherspecialeconomiczoneauthorities,whichareauthorizedtogranttaxincentivesundertheirrespectivecharters.

• 123 investmentlaws(3NIRC,69speciallaws,and51franchise)and192non-investmentlawsthatprovidetaxincentives.

• IncomeTaxHoliday(ITH) isthecenterpieceoftheincentivessystemfollowedbythe5% GrossIncomeEarned(GIE)tax,andcustomsdutyexemption.TheGIEisgivenindefinitelyandisinlieuofincome,VAT,andlocaltaxes.

• Since2015,TaxIncentivesManagementandTransparencyAct(TIMTA)lawrequiresreportingofthetaxincentivesgrantedforregisteredinvestments.

• 50yearsofpickingwinnersthrutheIPP,whichstartedin1968(RA5186).

Taxincentivessystem



Bataan Technology Park Inc.

14investmentpromotionagencies



SpecialrateROHQ,Internationalcarriers,proprietaryeducationalinstitutionsandnon-profithospitals,non-residentcorporations, cinematographicfilmowner, lessor,anddistributor

ExemptionsGOCCs(GSIS,SSS,PHIC,PCSO*,LWDs)Regionalorareaheadquarters,Sec.30(AtoK)– labor,agricultural,mutual savingsbanks,non-stockcorporations, chamberofcommerce,non-stockandnon-profit educationalinstitutions, governmenteducationalinstitutions.

*TaxableasofJan2018

NationalInternalRevenueCodeExemptionsandspecialrates



123INVESTMENT-RELATEDFISCALINCENTIVELAWSbySECTOR

AGRARIAN REFORM/AGRICULTURE/FOOD……………………… 8 AIR TRANSPORT SERVICES ……………….…………………… 4AUTOMOBILE ……………………………………………… 1 BANKS/FINANCIAL INSTITUTIONS………………………………….. 5BOOK PUBLISHING INDUSTRY……………………………………… 1 COMMUNICATION/POSTAL SERVICES…………………………….. 42 DUTY-FREE SHOPPING ……………………………………………. 1ECOZONES (LOCATORS/DEVELOPERS/OPERATORS)………… 11 ENERGY/ OIL INDUSTRY ……………………………………………. 14 ENVIRONMENT/ POLLUTION CONTROL………………………….. 3 EXPORTERS …………………………………………….. 2GAMES AND AMUSEMENT…………………………………………… 5HEALTH ………………….……………………………………………. 1HOUSING …………………………………………… 1INFRASTRUCTURE ……………………………………………. 1IRON AND STEEL INDUSTRY……………………........................... 1



123INVESTMENT-RELATEDFISCALINCENTIVELAWSBYSECTOR

JEWELRY ………………………………………………... 1LABOR ……………………………………………... 2

MICRO, SMALL AND MEDIUM SCALE ENTERPRISES…………………………………...... 2MINING ……………………………………………… 2SHIPPING INDUSTRY …………………………………… 3

SPORTS ……………………………………………… 1TOURISM …………………………………………….. 2VETERANS …………………………………………….. 2VARIOUS SECTORS REGISTERED UNDER BOI……….. 4 *LOCAL GOVERNMENT CODE …………………………….. 1*NATIONAL INTERNAL REVENUE CODE ………………… 1*CUSTOMS MODERNIZATION ANDTARIFF ACT ……………………………………………..……….. 1

TOTAL 123



Country Maximum years of incentivesPhilippines 4+8extension+GIEforever

Brunei Darussalam 20

Cambodia 9

Indonesia 20

Lao PDR 20

Malaysia 5+5extension

Myanmar 5to7

Singapore 3

Thailand 8

Vietnam 2to4

Comparativeincometaxholiday/specialrateinASEANcountries



• Taxinvestmentallowances• HigherdeductionsforR&D,training,labor,etc.

• Accelerateddepreciation• Netoperatinglosscarryover• Customsdutyexemption• Exportsubsidies

Otherincentives



CITrevenueisrisingastheeconomygrows



Country YearCITrevenues(percentof

GDP)

HeadlineCITrate(percent)

Revenueproductivity(percent)

Vietnam 2012 7.3 25 29

Malaysia 2015 6.5 24 27

Singapore 2015 3.5 17 21

China 2012 3.5 25 14

Indonesia 2015 2.7 25 11

Lao 2012 2.4 28 9

Cambodia 2012 1.3 20 7

Thailand 2012 6.1 20 31

Philippines 2015 3.7 30 12

Revenue productivity is calculated as the ratio of tax revenue as a share of GDP divided by the tax rate. Source: OECD iLibrary, IMF Fiscal Monitor database, World Bank, PWC

However,efficiencyisquitelow.



Investmenttaxincentives:Cost



TypeoftaxRevenue(inbillions

PHP)Incometax 86.3

Customsduties 18.1Import VAT(gross) 159.8LocalVAT(gross) 37.0

Local tax TBDLeakage TBDTotal 301.0

2015estimatedforgonerevenueduetotaxincentives



Note:VATandlocaltaxincentiveswerenotincludedintheestimation.

EstimatesoftaxincentivesFrom2011to2014

Taxincentives(in billionPHP) 2011 2012 2013 2014

Incometaxincentives 61.3 87.3 77.5 88.2

ITH 45.6 64.4 56.4 58.4

SpecialRate 15.7 22.9 21.2 29.7

Customsdutiesincentives 83.0 69.8 69.3 38.0

Total 144.3 157.1 146.8 126.2

RatiotoGDP 1.5% 1.5% 1.3% 1.0%

RatiotototalNGexpenditures 9.3% 8.8% 7.8% 6.4%

RatiotototalNGrevenues 10.6% 10.2% 8.6% 6.6%



TypeofIncentiveAmountoftaxincentives

(inbillionPHP)

Ratio to2015GDP(%)

Ratioto2015NG

expenditures(%)

Ratio to2015NGrevenues

(%)

Incometax holiday 53.8 0.4 2.4 2.6SpecialRate(5%GIE) 32.5 0.2 1.5 1.5TotalincentivesonincomeTax 86.3 0.7 3.9 4.1Totalincentivesoncustomsduties 18.1 0.1 0.8 0.9Total 104.4 0.8 4.7 5.0

2015taxincentivesestimates(followingtheTIMTAlaw)



IPA Taxexpenditureonincometaxholiday (ITH)

Taxexpenditureonspecialincometaxrate

Taxexpenditureoncustomsduties

Totaltaxexpenditure

Philippine EconomicZoneAuthority(PEZA) 25.9 25.8 14.9 66.6

BoardofInvestments(BOI) 26.8 1.9 0.7 29.4

ClarkDevelopmentCorporation (CDC) 0.3 2.1 1.6 4.1SubicBayMetropolitanAuthority(SBMA) 0.6 2.0 0.4 3.0AuthorityoftheFreeportAreaofBataan(AFAB) 0.0 0.2 0.6 0.8CagayanEconomicZoneAuthority(CEZA) - 0.5 0.0 0.5TourismInfrastructureandEnterpriseZoneAuthority (TIEZA) 0.1 - - 0.1PoroPointManagementCorporation(PPMC) - 0.1 0.0 0.1ZamboangaCitySpecialEconomicZoneAuthority (ZCSEZA) 0.0 0.0 - 0.0BasesConversionandDevelopmentAuthority (BCDA) 0.0 - - 0.0

Total 53.8 32.5 18.1 104.4

2015taxincentivesbyIPAandbytypeoftaxincentive(inbillionsPHP)



Sector Total tax expenditure on income and duty

Percentage to total tax expenditure

Manufacturing (industrial goods, machines, electronics, electrical products, etc.)

30.8 29.4

Services (call center, BPO, etc.) 14.0 13.4

Services (warehousing, logistics, utilities, operator of sea ports and airports, etc.)

7.8 7.5

Manufacturing (vehicles, vehicle accessories, transport equipment) 7.6 7.3

Energy (coal, diesel, etc.) 6.1 5.9

Energy (renewable) 5.1 5.0

Services (software development, IT-related services, gaming and other computer-related activities, etc.)

4.8 4.6

Manufacturing (wood, glass, paper, plastic, ceramic, rubber products, etc.)

3.9 3.7

Economic and low-cost housing 3.6 3.5

Tourism (accommodation, hotels, resort, etc.) 2.6 2.5

Manufacturing (food, food processing) 2.4 2.3

Others (agriculture and fishery, other manufacturing, other services, etc.) 15.7 15.0

Total 104.4 100.0

2015topbeneficiariesoftaxincentivesbysector(inbillionsPHP)



MajorSector SpecialRegime(SpecialIncomeTaxRate) RegularRegime

ETRoftaxincentiverecipients(%)

ETR ofregularfirms(%)

AgricultureandFishery 6.3 30EconomicandLow-costHousing 9.1 30

Energy 10.0 30Manufacturing 10.2 30MiningandQuarrying - 30PPPProjects - 30Services 12.0 30Tourism 9.6 30Unfilled/UnspecifiedRegisteredActivity 13.5 30

Duetotaxincentives,taxratesareveryunequal.



IPA Import VAT LocalVAT

Exempt Exemptpurchases 0%purchasesAFAB 1,363.5 3.3 9.4BOI 77.2 8,896.9 2,666.3CDC 9,195.9 961.4 1,571.2CEZA 1.7 0.2 30.3PEZA 147,828.4 3,313.1 17,565.9PPMC 0.2 0.0 0.3SBMA 1,358.2 761.9 947.1TIEZA - 0.0 0.0ZAMB - 67.7 201.4Total 159,825.1 14,004.5 22,991.8

2015taxincentivesonvalueaddedtax(VAT),perIPA(inmillionsPHP)



Investmenttaxincentives:Benefits



PHLForeigndirectinvestment(FDI)hasbeengrowing…



Butcanbebetter…



2.0 2.3 2.3

3.7

6.1

8.7 9.4

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Philippines Thailand Indonesia Malaysia Vietnam Lao PDR Cambodia

Source: World Bank

ASEANFDIin2015(%ofGDP)



51

46 47 4749

46 47

43

37

3235

3231

28 29 28 28

0

5

10

15

20

25

30

35

40

45

50

55

1.0

1.6

2.2

2.8

3.4

4.0

4.6

Percento

fGDP

PHPtrillions

Philippinetotalexports

Exports(total,PHPtrillions),left

Exports(total,percentofGDP),right

Sources: PSA,DOFstaffestimates

OverallexportshasdroppedasashareofGDP,reflectinglossofcompetitiveness



0

20

40

60

80

100

120

140

Percento

fGDP

TotalexportsofASEAN5countriesasashareofGDP

Philippines Indonesia Malaysia

Thailand Vietnam

Sources:WDI,DOFstaffestimates

ThePhilippineshasoneofthelowestexportsasashareofGDPamongtheASEAN5.



Reallaborproductivityhasbeenincreasing,yetrealwageshavebeenstagnant

80

100

120

140

160

180

Indicesofrealoutputperworker,andrealminimumandaveragewages(2001=100)

Reallaborproductivity Realminimumwage

Realaveragewage

Sources:National WagesandProductivity Commission,PhilippineStatisticsAuthority, andDOFstaffestimates



ThelackofincentivesisnotaleadingproblemfordoingbusinessinthePhilippines

0 5 10 15 20 25

Poorpublichealth

Inflation

Foreigncurrencyregulations

Crimeandtheft

Inadequatelyeducatedworkforce

Insufficientcapacitytoinnovate

Poorworkethicinnationallaborforce

Restrictivelaborregulations

Governmentinstability/coups

Accesstofinancing

Policyinstability

Taxrates

Taxregulations

Corruption

Inadequatesupplyofinfrastructure

Inefficientgovernmentbureaucracy

Score

MostproblematicfactorsfordoingbusinessinthePhilippines,2017

Source:WorldEconomicForumNote:Fromthelistoffactors,respondentstotheWorldEconomicForum'sExecutiveOpinionSurveywereaskedtoselectthefive mostproblematicfactorsfordoingbusinessintheircountry andtorankthembetween1(mostproblematic)and5.Thescorecorrespondstotheresponsesweightedaccordingtotheirranki ngs.



ProposedReform



• Lower the corporate income tax (CIT) rate

• Beginning Jan 1, 2020, reduce the CIT rate by 1percentage point for every 0.15 percent of GDP(or PHP 26 billion in 2018) reduction ofinvestment tax incentives two years ago.

• The goal is to reduce the CIT rate from 30% to25% by 2022, while expanding the tax base by0.75 percent of GDP (or PHP 130 billion in 2018prices).

Proposedreform



• Improve compliance by simplifying tax rules for corps.– Improve general anti-avoidance rules: allocation of income and

deduction (transfer pricing), gains and loss determination andrecognition, international taxation, and stricter definition andimplementation of related parties.

– Reduce the OSD from 40 to 20% of gross income for bothindividuals and corporation.

– Enforce theminimumcorporate income tax.– Improveadministration of allowabledeductions.– Expand definition of large taxpayer: should be conglomerate

basis.– Definemedium taxpayer.– Simplify forms and process.– Allow BIR to prosecute tax cases.

Proposedreform



§ PERFORMANCE-BASEDClear attainment of actual investment, job creation, exports, country-side development, and research and development, else incentives arerevoked.

§ TARGETEDTo minimize leakages and distortion in the tax system, tax incentivesshould be given to activities with significant positive externalities asspecified in the strategic investments priority plan.

§ TIME-BOUNDThere should be sunsetprovision in the grantof tax incentives.

§ TRANSPARENTMonitoring of tax incentives should be institutionalized and reportedby government.

Generalprinciplesoftheincentivesreform



• Governanceofincentives– TheFiscalIncentivesReviewBoard’s(FIRB)functionisexpandedas

follows:• ToserveastheoveralladministratorofallIPAsandincentives• ToreviewallIPApolicydecisions• ToapproveallIPAgrantofinvestmenttaxincentives• TogranttaxsubsidiestoGOCCsandgovernmentoffices(currentfunction).

– TheDOF,aschairofFIRB,shallhavevetopowerasthecustodianoffiscalprudenceandresponsibility.TheSecretaryofFinancecancancelorsuspendthegrantofincentivesuponthereviewandrecommendationoftheFIRB.

– DOFtobeco-chairofBOI,PEZA,andallotherIPAs.– NEDAtobeamemberinall14IPAs.

Proposedreform



• Broadenthetaxbase– Repeal of 123 special laws on investment taxincentives and consolidate into a single omnibusincentives law.

– Repeal NIRC exemptions of GOCCs, proprietaryeducational institutions and hospitals, RHQs,ROHQs, income of resident foreign corporationfrom foreign currency transactions, nonresidentcinematographic film owner, lessor or distributorand owner or lessor, vessels, aircraft,machineries and other equipment.

Proposedreform



• Rationalizeinvestmenttaxincentives– OnesinglemenuofincentivesapplicabletoallIPAs.– Nodoubleregistrationofactivities.– Onlynewinvestment/activitiesshallbegrantedincometaxincentives.

Expansionsaresignsofprofitabilityandneednotbegivenincentives.– Expansionscanavailonlyofexemptionfromcustomsdutyofcapital

equipment.– Definitionofexporter:atleast90%ofsalesareactuallyshippedoutto

aforeigncountry.– Domesticfirmsallowedifinthestrategicinvestmentspriorityplan.– One-yearrelocationincentiveforfirmsmovingoutofMegaManila.– Superiorincentivesforlaggingregions,conflictandcalamity-stricken

regions.

Proposedreform



– Incentivesmenu• Incometaxholiday• Replacethe5%grossincomeearned(GIE)taxinlieuofalltaxeswithareducedcorporateincometaxrateof15%basedonnettaxable income.

• Otherincome-based incentives: investment taxallowance,doubledeductionforresearchanddevelopmentandtrainingexpenses, 50%deductionforlabor,deductionforinfrastructureandreinvestmentofprofit.

• Exemptionfromcustomsduty.• NomoreVATincentives: AllfirmstopayVATandprovetheyexporttobeabletogetarefund.– TheVATwillnotnolongerbeusedasaninvestment incentiveandcannotbeusedintheseparatecustomsterritoryargument,especiallyforverticalzones(i.e.,buildings).

• Nomorelocaltaxincentives: LGUlocalbusiness taxwillnotbecommittedbyNG.

Proposedreform



– Onlyinvestmentsthatmeettheseconditionswillbegiventaxincentives:• Performance-based: performancecontractbasedonactualjobcreation,exports,countrysidedevelopment,useofmoderntechnology,actualinvestment,orextentofR&D(e.g.,5%ofemploymentinR&D).AnindependentbodyorFIRBtomeasureperformance.

• Time-bound:5yearsITHand/orreducedratewithnoextension,exceptforcustomsdutyofcapitalequipment.

• Targeted: basedon3-yearSIPP,whichcancoverbothforeignanddomesticfirms(nonationalitybias),andbothexportsanddomesticmarket.

• Transparent:nameofbeneficiariesandestimatedtaxincentivestobereportedbytheFIRB.

Proposedreform



– Existingincometaxholiday(i.e.,4years)willbeallowedtocontinuebutnoextension.

– ExistingGIEincentiveswillbeallowed2to5moreyearsastransitionperiod.• Receivingformorethan10years:2years• Receivingbetween5and10years:3years• Receivingbelow5years:5years

Proposedreform



Numberoffirmsregisteredwithtaxincentivesfor15yearsandabove

No.ofyears No.offirms15-20 51021-25 13126-29 13



• Others– A3-yearSIPPshallbeformulatedbyBOIandapprovedbythePresident.• BOIshallensurethatthemoretargetedlistincludeactivitieswithsignificantpositiveexternalities.

• OnlythePresidentmaygranttaxincentivestoeconomicactivitiesnotintheIPP.

– Integratetaxexpenditurereportingintothebudgetprocess.Incentiveswillnotbebudgetedbutshouldbereportedasataxexpenditurefortransparencypurpose.

Proposedreform



• TIMTAamendments– Includeinreportingalltaxincentives,whetherinvestmentornon-investmentincentives.

– Includeinreportingalltypesoftaxpayers,especiallycooperatives.

– Mandatetheinclusionofalltaxesinthecomputationoftaxexpenditure, includingVATandlocaltaxes.

– Mandatesubmissionofmorebenefitsdatasuchasinvestment,bothapprovedandactual,jobs,exportsales,andR&Datfirmlevel.

– FIRBtoconductcostbenefitanalysisinthefuture.

Complementaryreform:TIMTAamendments



Complementaryreform:Investmentassistance&facilitation

• StrengtheninvestmentassistanceandfacilitationmandateofBOI&IPAs– EnsuretimelyactionofNGAsandLGUsonapplicationsbyprojectscoveredbySIPP.

– MayhavetobepackagedasparallelamendmentofEO226.



16

Thankyou.

Documents

Corporate income tax reform and fiscal incentives ... · Headline CIT rate (percent) Revenue productivity (percent) Vietnam 2012 7.3 25 29 Malaysia 2015 6.5 24 27 Singapore 2015 3.5