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Comprehensive Tax Reform Program

(CTRP)
Package 1 and 2
Philippine Economic Briefing | 13 April 2018
Clark, Angeles City, Pampanga
Contents
•Package 1
• Key provisions
• Fiscal impact
•Package 2
• Rationale of the reform
• DOF proposal

9/27/2016 DEPARTMENT OF FINANCE 2


Package 1

4/13/2018 DEPARTMENT OF FINANCE 3


4/13/2018 DEPARTMENT OF FINANCE 4
4/13/2018 DEPARTMENT OF FINANCE 5
4/13/2018 DEPARTMENT OF FINANCE 6
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.

4/13/2018 DEPARTMENT OF FINANCE 7


Indicative pump prices and effective tax rates
Dec 2017 Jan 2018 Jan 2019 Jan 2020
Diesel (PHP per L) 36.35 39.15 41.39 43.07
Diesel (ETR, percent) 0.0 7.2 12.2 15.6
Gasoline (PHP per L) 47.85 50.65 52.89 54.57
Gasoline (ETR, percent) 10.1 15.5 19.1 20.5
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:
https://www.doe.gov.ph/sites/default/files/pdf/price_watch/petro_mm_2017_december_19.pdf
DEPARTMENT OF FINANCE 8
Price effect of excise on inflation
2018 (maximum effect)
Share of Net impact of excise to prices
Share petroleum (%)2,3 Inflation
CPI
Commodity of CPI products rate
2016
(%) as input (%)4,5,6
(%) 1 Diesel Gasoline LPG Kerosene

Food 36 163 10 0.9 0.6 0.2 0.9 0.3


Transportation 6 128 30 2.8 1.8 0.5 2.7 0.1
Electricity 7 124 7 0.7 0.4 0.1 0.6 0.0
Others 51 135 6 0.6 0.4% 0.1 0.6 0.3
Total 100 144 0.7
Notes:
1. Transportation share is the daily average of jeepney and bus operation in Metro Manila based on the National 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 the excise.
3. The increase in the price of the petro products as a result of an increase in excise tax using the petro prices in Metro Manila in 2016
4. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 2011
5. 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.
4/13/2018 DEPARTMENT OF FINANCE 9
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 2020.
• 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.
• 2018 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 38.5
billion
4/13/2018 DEPARTMENT OF FINANCE 10
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.

4/13/2018 DEPARTMENT OF FINANCE 11


Impact on electricity
Estimated monthly increase in cost at 100 kWh monthly consumption level, various cases
Additional cost
Current Estimated
kWh Current Generation Percent
All figures in PHP cost per new total
consumption total cost Transmission Distribution UCME Total increase
kWh cost
Coal Diesel/Bunker

Grid (Meralco) 100 7.80 780.00 2.00 4.40 8.18 0.00 0.38 14.96 794.96 1.92
Grid (non-Meralco, NEA) 100 8.80 880.00 2.00 4.40 5.91 0.00 0.38 12.69 892.69 1.44
Grid (non-Meralco, CDA) 100 8.80 880.00 2.00 4.40 5.91 7.18 0.38 19.87 899.87 2.26
SPUG (NEA, coal powered) 100 11.30 1130.00 4.00 0.00 0.00 0.00 0.38 4.38 1134.38 0.39
SPUG (CDA, coal powered) 100 11.30 1130.00 4.00 0.00 0.00 10.17 0.38 14.55 1144.55 1.29
SPUG (NEA, diesel/bunker powered, full pass-through) 100 11.30 1130.00 0.00 71.00 0.00 0.00 0.00 71.00 1201.00 6.28
SPUG (CDA, diesel/bunker powered, full pass-through) 100 11.30 1130.00 0.00 71.00 0.00 10.17 0.00 81.17 1211.17 7.18
SPUG (NEA, diesel/bunker powered, subsidized) 100 11.30 1130.00 0.00 0.00 0.00 0.00 0.38 0.38 1130.38 0.03
SPUG (CDA, diesel/bunker powered, subsidized) 100 11.30 1130.00 0.00 0.00 0.00 10.17 0.38 10.55 1140.55 0.93
Sources : DOE, Kuryente.org, a nd DOF s taff es tima tes
Notes : Es tima tes a re ba s ed on the fol l owi ng a s s umptions :
i ) An a ddi tiona l PHP 2.50 per l i ter i ncrea s e i n the exci s e tax of di es el a nd bunker fuel .
i i ) An a vera ge i ncrea s e to PHP 100 i n exci s e tax per MT of coa l .
i i i ) Remova l of VAT exemptions on tra ns mi s s i on cha rges a nd CDA-regi s tered coopera tives .

DEPARTMENT OF FINANCE 12
4/13/2018 DEPARTMENT OF FINANCE 13
4/13/2018 DEPARTMENT OF FINANCE 14
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 2019.
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.
4/13/2018 DEPARTMENT OF FINANCE 15
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%.

4/13/2018 DEPARTMENT OF FINANCE 16


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.

4/13/2018 DEPARTMENT OF FINANCE 17


Vetoed items in RA 10963
1. 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 7171.
4/13/2018 DEPARTMENT OF FINANCE 18
5-year summary with veto
(in billions of pesos, unless indicated otherwise)
Provisions RA 10963
2018 2019 2020 2021 2022 Total
Personal income tax -146.6 -161.0 -177.1 -195.0 -214.4 -894.2
Corporate income tax (PCSO) 0.5 0.5 0.6 0.7 0.7 3.0
Estate tax -2.1 -2.1 -2.1 -2.1 -2.1 -10.5
Donors' tax -1.7 -1.8 -2.0 -2.2 -2.4 -10.0
VAT 39.2 48.7 58.1 58.4 45.8 250.3
Oil excise 60.2 101.8 131.9 134.4 136.6 564.8
Automobile excise 14.4 15.3 16.2 17.2 18.2 81.3
Sugar-sweetened beverage tax 54.5 58.2 61.5 65.1 68.8 308.1
Tax administration 26.6 35.0 42.3 50.7 60.4 215.1
Others 44.9 49.6 58.2 59.5 66.3 278.5
Subtotal (tax policy) 63.3 109.2 145.4 136.0 117.4 571.3
Subtotal (legislated tax admin) 26.6 35.0 42.3 50.7 60.4 215.1
Total (tax policy and admin) 89.9 144.2 187.7 186.8 177.8 786.4
Total as percent of GDP 0.5 0.8 0.9 0.8 0.7 NA
Deficit 3.3 3.5 3.5 3.4 3.4 NA
Package 1B 38.9 30.9 34.0 37.5 41.4 182.7
Subtotal (additional revenues) 38.9 30.9 34.0 37.5 41.4 182.7
Grand total 128.8 175.1 221.7 224.3 219.2 969.2
Total as percent of GDP 0.7 0.9 1.1 1.0 0.9 NA
Deficit 3.0 3.4 3.3 3.2 3.3 NA

4/13/2018 DEPARTMENT OF FINANCE 19


Package 2

4/13/2018 DEPARTMENT OF FINANCE 20


Comparative CIT rates in ASEAN
35%

30%
30%

25%
25% 24% 24%

20% 20% 20%


20%
17%

15%

10%

5%

0%
Singapore Cambodia Thailand Vietnam Lao PDR Malaysia Indonesia Philippines

Source: PWC and ADB


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.

• 123 investment 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).
Comparative income tax holiday /
special rate in ASEAN countries
Country Maximum years of incentives
Philippines 4 + 8 extension + GIE forever
Brunei Darussalam 20
Cambodia 9
Indonesia 20
Lao PDR 20
Malaysia 5 + 5 extension
Myanmar 5 to 7
Singapore 3
Thailand 8
Vietnam 2 to 4
CIT revenue is rising as the economy grows
However, efficiency is quite low.
CIT revenues Headline Revenue
Country Year (percent of CIT rate productivity
GDP) (percent) (percent)
Thailand 2012 6.1 20 31
Vietnam 2012 7.3 25 29
Malaysia 2015 6.5 24 27
Singapore 2015 3.5 17 21
China 2012 3.5 25 14
Philippines 2015 3.7 30 12
Indonesia 2015 2.7 25 11
Lao 2012 2.4 28 9
Cambodia 2012 1.3 20 7
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
2015 estimated forgone
revenue due to tax incentives.
Revenue
Type of tax
(in billions PHP)
Income tax 86.3
Customs duties 18.1
Import VAT (gross) 159.8
Local VAT (gross) 37.0
Local Business Tax TBD
Leakage TBD
Total 301.0
Due to tax incentives, tax
rates are very unequal.
Special Regime
Major Sector Regular Regime
(Special Income Tax Rate)
ETR, ETR,
incentive recipients (%) regular firms (%)
Agriculture and Fishery 6.3 30
Economic and Low-cost
9.1 30
Housing
Energy 10.0 30
Manufacturing 10.2 30
Mining and Quarrying - 30
PPP Projects - 30
Services 12.0 30
Tourism 9.6 30
Unfilled/ Unspecified
13.5 30
Registered Activity
PHL Foreign direct investment
(FDI) has been growing…
ASEAN FDI in 2015 (% of GDP)
10.0 9.4
9.0 8.7

8.0

7.0
6.1
6.0

5.0

4.0 3.7

3.0
2.3 2.3
2.0
2.0

1.0

-
Philippines Thailand Indonesia Malaysia Vietnam Lao PDR Cambodia

Source: World Bank


As a result, overall exports has dropped as a share
of GDP, reflecting lack share of competitiveness.
Philippine total exports
4.6 55

51
50
4.0 47
49
45
46 47 46 47
43 40
3.4
35

Percent of GDP
37
PHP trillions

35
32 32 30
2.8 31
29 28
28 28 25
20
2.2
15
Exports (total, PHP trillions), left 10
1.6
Exports (total, percent of GDP), right
5
1.0 0

Sources: PSA, DOF staff estimates


The Philippines has one of the lowest
exports as a share of GDP among the ASEAN5.
Total exports of ASEAN5 countries as a share of GDP
140
Philippines Indonesia Malaysia
120 Thailand Vietnam

100
Percent of GDP

80

60

40

20

Sources: WDI, DOF staff estimates


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).
General principles of the incentives reform
 Performance-based
Clear attainment of actual investment, job creation, exports, country-
side 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).

 Time bound
There should be sunset provision in the grant of tax incentives.

 Transparent
Monitoring of tax incentives should be institutionalized and reported
by government.
Proposed reform
• Governance of incentives
o The 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).
o The 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.
o DOF to be co-chair of BOI, PEZA, and all other IPAs.
o NEDA to be a member in all 14 IPAs.
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.
Proposed reform
• Rationalize investment tax incentives
o One single menu of incentives applicable to all IPAs.
o No double registration of activities.
o Only new investment/activities shall be granted income tax incentives.
Expansions are signs of profitability and need not be given incentives.
o Expansions can avail only of exemption from customs duty of capital
equipment.
o Definition 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.
o Superior incentives for lagging regions, conflict and calamity-stricken
regions.
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.
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.
o Receiving for more than 10 years: 2 years
o Receiving between 5 and 10 years: 3 years
o Receiving below 5 years: 5 years
Succeeding tax reform packages
Target congress
Package Coverage
ratification
Remove VAT exemption of coal
Package 2+ December 2018
and casino (inserted in Package 2)
Increase alcohol and tobacco
Package 2+ June 2018
excise

Package 2+ Comprehensive mining tax December 2018

Package 3 Property taxation and valuation December 2018

Capital income and financial


Package 4 December 2018
taxes
Thank you.

9/27/2016 DEPARTMENT OF FINANCE 40

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