Comprehensive Tax Reform Program (CTRP) Package 1 and 2. Philippine Economic Briefing 9 March 2018 Davao City

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1 Comprehensive Tax Reform Program (CTRP) Package 1 and 2 Philippine Economic Briefing 9 March 2018 Davao City

2 Package 1 Key provisions Fiscal impact Package 2 Contents Rationale of the reform DOF proposal 9/27/2016 DEPARTMENT OF FINANCE 2

3 Package 1 3/9/2018 DEPARTMENT OF FINANCE 3

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7 Estate tax and donor s tax Estate tax Lowered from the highest 20% rate to a single rate of 6% for net estate with standard deduction of PHP 5 million to simplify the system as well as exemption for the first PHP 10 million for the family home. Donor s tax Lowered from the highest 15% rate to a single rate of 6% of net donations above PHP 250,000 yearly. 3/9/2018 DEPARTMENT OF FINANCE 7

8 Indicative pump prices and effective tax rates Dec 2017 Jan 2018 Jan 2019 Jan 2020 Diesel (PHP per L) Diesel (ETR, percent) Gasoline (PHP per L) Gasoline (ETR, percent) Sources: DOE and DOF staff estimates Note: Dec 2017 prices are based on mid-december common prices of diesel and gasoline from the DOE. The data is available at: DEPARTMENT OF FINANCE 8 3/9/2018

9 Price effect of excise on inflation 2018 (maximum effect) Commodity Share of CPI (%) CPI 2016 Share of petroleum products as input (%) 1 Net impact of excise to prices (%) 2,3 Inflation rate (%) 4,5,6 Diesel Gasoline LPG Kerosene Food Transportation Electricity Others % Total Notes: 1. Transportation share is the daily average of jeepney and bus operation in Metro Manila based on thenational Tax Research Center computation. Electricity share is based on the Department of Energy power statistics. 2. The net impact of the excise is obtained by multiplying the share of oil as input and the price increase as a result of theexcise. 3. The increase in the price of the petro products as a resultof an increase in excise tax using the petro prices in Metro Manila in Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS Overall inflation computed from the weighted average of commodity inflation based on the share of CPI 6. Percentage point on top of the BSP projected inflation. 3/9/2018 DEPARTMENT OF FINANCE 9

10 Oil excise mitigating measure Cash transfer The poorest 10 million households will receive cash transfers of PHP 200 per month in 2018 and PHP 300 per month in 2019 and The amount is enough to offset the moderate but temporary increase in prices. DSWD to implement based on Listahanan, Pantawid Pamilyang Pilipino Program, and social pension beneficiaries as base budget: PHP 24 billion + admin cost 7% = PHP 25.7 billion 2019 budget: PHP 36 billion + admin cost 7% = PHP 38.5 billion 2020 budget: PHP 36 billion + admin cost 7% = PHP /9/2018 billion DEPARTMENT OF FINANCE 10

11 Coal excise tax Increase the rate from PHP 10 per metric ton to PHP 50, PHP 100, and PHP 150, respectively, in 2018, 2019, and 2020, covering both domestic and imported coal. Domestic coal remains VAT exempt. 3/9/2018 DEPARTMENT OF FINANCE 11

12 Impact on electricity All figures in PHP Generation Transmission Coal Diesel/Bunker Grid (Meralco) Grid (non-meralco, NEA) Grid (non-meralco, CDA) SPUG (NEA, coal powered) SPUG (CDA, coal powered) SPUG (NEA, diesel/bunker powered, full pass-through) SPUG (CDA, diesel/bunker powered, full pass-through) SPUG (NEA, diesel/bunker powered, subsidized) SPUG (CDA, diesel/bunker powered, subsidized) Sources: DOE, Kuryente.org, and DOF staff estimates Notes: Estimates are based on the following assumptions: i) An additional PHP 2.50 per liter increase in the excise tax of diesel and bunker fuel. ii) An average increase to PHP 100 in excise tax per MT of coal. Estimated monthly increase in cost at 100 kwh monthly consumption level, various cases kwh consumption Current cost per kwh Current total cost iii) Removal of VAT exemptions on transmission charges and CDA-registered cooperatives. Additional cost Distribution UCME Total Estimated new total cost Percent increase DEPARTMENT OF FINANCE 12

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15 Value added tax Repeal of 54 out of 61 special laws with non-essential VAT exemptions, thereby making the VAT system fairer. o Exceptions in tax code: cooperatives (except electric coops), and condo and association dues. VAT on medicines for diabetes, high cholesterol, and hypertension exempted starting o Exceptions in special laws: PAGCOR and casino, domestic coal, renewable energy, credit surety, countryside barangay business enterprise, mini-hydro, and tourism. Purchases of senior citizens and people with disability continue to be exempted from the VAT. For the average Filipino, this will not have an impact as the VAT exemption removal will only affect groups enjoying exemptions. 3/9/2018 DEPARTMENT OF FINANCE 15

16 Other taxes: excises Mining excise tax double the rates from 2% to 4%. Cosmetic excise tax a new tax at 5% of gross receipts. Tobacco excise tax increase the rate from PHP 31.2 per pack in 2018 to o PHP 32.5 between January to June 2018, o PHP 35 per pack from July 2018 to December 2019, o PHP 37.5 per pack in 2020 and 2021, and o PHP 40 per pack in 2022 and 2023, followed by annual indexation of 4%. 3/9/2018 DEPARTMENT OF FINANCE 16

17 Other taxes: financial taxes Documentary stamp tax 100% increase except for loans (50%), and property, savings, and non-life insurance (no change). Foreign currency deposit unit (FCDU) increased from 7.5% to 15% final tax on interest income. Capital gains of non-traded stock increased from 5-10% to 15% final tax on net gains. Stock transaction tax Increase from 0.5% to 0.6% of the transaction value. 3/9/2018 DEPARTMENT OF FINANCE 17

18 Vetoed items in RA Reduced income tax rate of employees of regional headquarters, regional operating headquarters (ROHQ). 2. Zero-rating of sales of goods and services to separate customs territory and tourism enterprise zones. 3. Exemption of various petroleum products from excise tax when used as input, feedstock, raw material, refining of petroleum products, or as replacement fuel. 4. Exemption from percentage tax of gross sales/receipts not exceeding five hundred thousand pesos (P500,000). 5. Earmarking of incremental tobacco taxes following RA /9/2018 DEPARTMENT OF FINANCE 18

19 5-year summary with veto Provisions RA Total Personal income tax Corporate income tax (PCSO) Estate tax Donors' tax VAT Oil excise Automobile excise Sugar-sweetened beverage tax Tax administration Others Subtotal (tax policy) Subtotal (legislated tax admin) Total (tax policy and admin) Total as percent of GDP NA Deficit NA Package 1B Subtotal (additional revenues) Grand total Total as percent of GDP NA Deficit NA 3/9/2018 DEPARTMENT OF FINANCE 19

20 Package 2 3/9/2018 DEPARTMENT OF FINANCE 20

21 Comparative CIT rates in ASEAN 35% 30% 30% 25% 24% 24% 25% 20% 15% 17% 20% 20% 20% 10% 5% 0% Singapore Cambodia Thailand Vietnam Lao PDR Malaysia Indonesia Philippines Source: PWC and ADB

22 Tax incentives system 14 Investment promotion agencies (IPAs): the BOI, PEZA, and 12 other special economic zone authorities, which are authorized to grant tax incentives under their respective charters. 123investment laws (3 NIRC, 69 special laws, and 51 franchise) and 192 non-investment laws that provide tax incentives. Income Tax Holiday (ITH)is the centerpiece of the incentives system followed by the 5%Gross Income Earned (GIE) tax, and customs duty exemption. The GIE is given indefinitely and is in lieu of income, VAT, and local taxes. Since 2015, Tax Incentives Management and Transparency Act (TIMTA) law requires reporting of the tax incentives granted for registered investments. 50 years of picking winners thru the IPP, which started in 1968 (RA 5186).

23 Comparative income tax holiday / special rate in ASEAN countries Country Maximum years of incentives Philippines extension + GIE forever Brunei Darussalam 20 Cambodia 9 Indonesia 20 Lao PDR 20 Malaysia extension Myanmar 5 to 7 Singapore 3 Thailand 8 Vietnam 2 to 4

24 CIT revenue is rising as the economy grows

25 However, efficiency is quite low. Country Year CIT revenues (percent of GDP) Headline CIT rate (percent) Revenue productivity (percent) Thailand Vietnam Malaysia Singapore China Philippines Indonesia Lao Cambodia 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

26 2015 estimated forgone revenue due to tax incentives. Type of tax Revenue (in billions PHP) Income tax 86.3 Customs duties 18.1 Import VAT (gross) Local VAT (gross) 37.0 Local Business Tax Leakage TBD TBD Total 301.0

27 Due to tax incentives, tax rates are very unequal. Major Sector Special Regime (Special Income Tax Rate) Regular Regime ETR, incentive recipients (%) ETR, regular firms (%) Agriculture and Fishery Economic and Low-cost Housing Energy Manufacturing Mining and Quarrying - 30 PPP Projects - 30 Services Tourism Unfilled/ Unspecified Registered Activity

28 PHL Foreign direct investment (FDI) has been growing

29 ASEAN FDI in 2015 (% of GDP) Philippines Thailand Indonesia Malaysia Vietnam Lao PDR Cambodia Source: World Bank

30 As a result, overall exports has dropped as a share of GDP, reflecting lack share of competitiveness. 4.6 Philippine total exports 55 PHP trillions Percent of GDP 1.6 Exports (total, PHP trillions), left Exports (total, percent of GDP), right Sources: PSA, DOF staff estimates

31 The Philippines has one of the lowest exports as a share of GDP among the ASEAN Total exports of ASEAN5 countries as a share of GDP Philippines Indonesia Malaysia Thailand Vietnam 100 Percent of GDP Sources: WDI, DOF staff estimates

32 Proposed reform Lower the corporate income tax(cit) rate Beginning Jan 1, 2020, reduce the CIT rate by 1 percentage point for every 0.15 percent of GDP (or PHP 26 billion in 2018) reduction of investment tax incentives two years ago. The goal is to reduce the CIT rate from 30% to 25% by 2022, while expanding the tax base by 0.75 percent of GDP (or PHP 130 billion in 2018 prices).

33 General principles of the incentives reform Performance-based Clear attainment of actual investment, job creation, exports, countryside development, and research and development, else incentives are revoked. Targeted To minimize leakages and distortion in the tax system, tax incentives should be given to activities with significant positive externalities as specified in the strategic investments priority plan(sipp). Timebound There should be sunset provision in the grant of tax incentives. Transparent Monitoring of tax incentives should be institutionalized and reported by government.

34 Proposed reform Governance of incentives othe Fiscal Incentives Review Board s (FIRB) function is expanded as follows: To serve as the overall administrator of all IPAs and incentives To review all IPA policy decisions To approve all IPA grant of investment tax incentives To grant tax subsidies to GOCCs and government offices (current function). othe DOF, as chair of FIRB, shall have veto power as the custodian of fiscal prudence and responsibility. The Secretary of Finance can cancel or suspend the grant of incentives upon the review and recommendation of the FIRB. odof to be co-chair of BOI, PEZA, and all other IPAs. oneda to be a member in all 14 IPAs.

35 Proposed reform Broaden the tax base orepeal of 123 special laws on investment tax incentives and consolidate into a single omnibus incentives law. orepeal NIRC exemptions of GOCCs, proprietary educational institutions and hospitals, RHQs, ROHQs, income of resident foreign corporation from foreign currency transactions, nonresident cinematographic film owner, lessor or distributor and owner or lessor, vessels, aircraft, machineries and other equipment.

36 Proposed reform Rationalize investment tax incentives o One single menu of incentives applicable to all IPAs. o No double registration of activities. oonly new investment/activities shall be granted income tax incentives. Expansions are signs of profitability and need not be given incentives. oexpansions can avail only of exemption from customs duty of capital equipment. odefinition of exporter: at least 90% of sales are actually shipped out to a foreign country. o Domestic firms allowed if in the strategic investments priority plan. o One-year relocation incentive for firms moving out of Mega Manila. osuperior incentives for lagging regions, conflict and calamity-stricken regions.

37 Proposed reform o Incentives menu Income tax holiday Replace the 5% gross income earned (GIE) tax in lieu of all taxes with a reduced corporate income tax rate of 15% based on net taxable income. Other income-based incentives: investment tax allowance, double deduction for research and development and training expenses, 50% deduction for labor, deduction for infrastructure and reinvestment of profit. Exemption from customs duty. No more VAT incentives: All firms to pay VAT and prove they export to be able to get a refund. The VAT will not no longer be used as an investment incentive and cannot be used in the separate customs territory argument, especially for vertical zones (i.e., buildings). No more local tax incentives: LGU local business tax will not be committed by NG.

38 Proposed reform Existing income tax holiday (i.e., 4 years) will be allowed to continue but no extension. Existing GIE incentives will be allowed 2 to 5 more years as transition period. oreceiving for more than 10 years: 2 years oreceiving between 5 and 10 years: 3 years oreceiving below 5 years: 5 years

39 Succeeding tax reform packages Package Package 2+ Package 2+ Coverage Remove VAT exemption of coal and casino (inserted in Package 2) Increase alcohol and tobacco excise Target congress ratification December 2018 June 2018 Package 2+ Comprehensive mining tax December 2018 Package 3 Property taxation and valuation December 2018 Package 4 Capital income and financial taxes December 2018

40 Thank you. 9/27/2016 DEPARTMENT OF FINANCE 40