IN an interview in June, Finance Secretary Carlos Dominguez 3rd said two major objectives of the Department of Finance (DoF) for this year are the on-time passage of the national budget, and the passage of the second package of the Comprehensive Tax Reform Program (CTRP), which addresses corporate income taxes and fiscal incentives. The budget appears to be safe, which is good news, but it is now mid-October, and the passage of the tax reform measures seems increasingly uncertain.
The reason for this is that there has been bitter resistance from business groups, the Philippine Economic Zone Authority (PEZA) and the Department of Trade and Industry (DTI) to the “rationalization” of tax perks given to business locators.
Even though the DoF has repeatedly pointed out, correctly, that the gradual 10-percent reduction in corporate income taxes contained in House Bill (HB) 4157 — or the “Corporate Income Tax and Incentives Rationalization Act” (Citira), which is the reform package’s most valuable feature from a business point of view — panic over the potential loss of incentives has already scuttled one version of the bill. The same thing may happen to the current version, if the Senate does not exercise some resolve.
HB 4157 was approved by the House of Representatives last month, and is currently being debated at the committee level in the Senate.
In the latest developments, PEZA and DTI have tacitly accepted the inevitability of fiscal incentive reform, but have switched tactics to push for a much longer “sunset” period for current active incentives. The DoF wants to bring current incentives in line with the reform program — which would mean eliminating at least some of them — within five years; PEZA and DTI have called for a longer time frame of up to 10 years. This would supposedly give established companies a longer time to adjust before applying for incentives under the new scheme, but the DoF is having none of that, and has refused to compromise on the five-year window.
On Wednesday, a new threat to the passage of the tax reform bill emerged in the form of Lufthansa Technik Philippines (LTP), the commercial aircraft maintenance, repair and overhaul (MRO) provider based in Manila. LTP expressed concerns that the “needs” of MROs (of which it is by far the country’s largest) have been overlooked in the tax reform package, specifically, exemptions on Customs duties and value-added tax for spare parts and components it imports to service aircraft. Without these exemptions, LTP warned, it might be forced to abandon the Philippines altogether, and certainly cannot consider expanding its operations.
LTP’s complaint actually does raise a valid general point with respect to fiscal incentives. Since the main provision of the tax reform bill — the reduction in the corporate income tax rate from 30 percent to 20 percent — was done with competitiveness in mind, the fiscal incentive program must also be designed to be competitive. In the case of tax exemptions for MROs, however, a review of the tax framework of other countries reveals that the sort of exemptions the LTP is requesting is not universal practice. The MRO industry has been lobbying for years in places such as the US and India for exemptions from Customs duties and other taxes, with only mixed success; the Philippines’ program as it is now is not particularly more or less competitive than any comparable market.
The opponents of the Citira bill have tried every conceivable argument against it, but have failed to make a compelling case for its withdrawal or serious amendment. It is time for the Senate to recognize the long-term benefits of the bill, end the debate, and pass it to the President’s desk for his signature.