Viewpoint: Marivic Españo
Taxation is not a very politically popular area. We are therefore pleased about the political will displayed by the current administration in overhauling the country’s 20-year-old tax system. A series of tax reform packages have been laid out under the Tax Reform for Acceleration and Inclusion (TRAIN) strategy, with the first of five such packages taking effect on January 1, 2018.
In addition to promoting simplicity, fairness and efficiency in the tax system, TRAIN is projected to raise revenue to finance the Build, Build, Build (BBB) infrastructure programme. Many workers enjoyed tax-free take-home pay after the implementation of the new individual income tax system. As a result, we can expect to see happier, more productive employees, and less pressure to increase wages in the short term. Furthermore, the reforms introduced a simplified tax on gross receipts of 8% for individuals engaged in business. Meanwhile, the capital gains tax on the sale of shares was increased so that it aligns with the tax on other passive income. Importantly, foreign investors should still be able to benefit from the exemptions provided under the country’s trade deals.
While the reforms increase excise duty, this mostly targets goods consumed by higher-income groups or those that have a negative impact on people’s health or the environment. Furthermore, the revenue collected from these excise taxes in the initial months of 2018 have offset the loss of revenue from the income tax reduction, suggesting that the budget required to finance the BBB programme can be realised.
The Department of Finance is actively involving the business community and foreign investors in discussions around the second TRAIN reform package and this is very welcome. We can expect a staggered reduction in corporate income tax from 30% to either 25% or 20% in 2019. The Philippines has reiterated that it welcomes and will continue to encourage foreign investment, and a fiscal incentive system will remain in place for preferred industries and sectors. The system will be rationalised by establishing one set of incentives to be offered by all investment promotion agencies. Furthermore, the incentives will be targeted, time bound and performance based. The new package will include incentives to encourage investment and innovation – such as additional deductions for research and development, training and labour expenses – as well as investment and reinvestment allowances. The current offerings, such as income tax holidays, Customs duty exemptions and preferential tax on gross or net income, will be retained, though time bound. Specific incentives will be implemented, focused on encouraging economic activity in areas away from traditional urban areas. This will complement the infrastructure programme, which aims in part to improve rural incomes by encouraging investment in the countryside. The taxation system is continuously being streamlined to make it more efficient and transparent. Most front-line services are now being delivered in a shorter time and with less documents required, and the IT platform used for electronic filing and payments has been updated. While there are other areas that we would like to see reformed, we welcome the fact that the tax authorities are sincerely listening to taxpayers and addressing their concerns.
Inclusion is a major element of the tax reform programme, and this has been achieved through a lower income tax for workers and a simplified tax for small business owners. Furthermore, part of the revenue from the reforms has been earmarked to provide direct subsidies to those who need them most. Improvement in rural incomes is possible as businesses respond to the incentives to relocate to less urbanised areas, complemented by the ongoing infrastructure programme. Overall, the programme aims to provide the basis needed to support the growth of the economy. As a result of better infrastructure and improved public finances, more investment can be expected, which will translate into more jobs and help eliminate poverty.
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