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TRAIN 2: A Tax Reform for Businesses

PACKAGE 2 of the Tax Reform for Acceleration and Inclusion (TRAIN) has been met with protests, especially from the Philippine Economic Zone Authority (PEZA) and the Board of Investments (BoI). One of the notable features which remains to be the most controversial portion of the Comprehensive Tax Reform Program is the incentive reform.

In the House of Representatives, there are actually four bills proposing the incentives reform, namely House Bill (HB) No. 7214 (Suansing and Suansing), HB 7458 (Cua, Abu, and Gonzales), HB 7364 (Garin and Batocabe), and HB 231 (Singson).

Recently, a substitute bill has been filed with the House committee on ways and means, and was approved on Aug. 7, 2018. The Committee agreed to formally name the bill TRABAHO (Tax Reform for Attracting Better And High-quality Opportunities), instead of TRAIN 2.

REFORMING THE INCENTIVES SYSTEM

In all the four incentive reform bills, the general feature is the reorganization of the Financial Incentives Review Board (FIRB) as the principal authority on the issuance of incentives. The investment promotion agencies, such as PEZA, BoI, etc., will only be able to endorse the issuance of incentives where it will still be subject to the approval of FIRB.

The Secretary of Finance will act as co-chair to the head of FIRB with the power to veto recommendations to the Board. By extension, the Secretary of Finance shall also act as the co-chair to all existing and future investment promotion agencies.

In the current system, certain incentives can be availed for indefinite renewals. Under the reformed tax system, the incentives will now be time-bound. The new incentives system will also have to complement with the Strategic Investments Priority Plan (SIPP), targeting regions and industries lagging behind in development and those considered to be high-priority by the government.

Both HB 7214 (Suansing and Suansing) and HB 7458 (Cua, Abu, and Gonzales) propose the same types of incentives and duration of said incentives. On the other hand, HB 231 (Singson) and HB 7364 (Garin and Batocabe) propose different sets.

The Income Tax Holiday (ITH) can be availed for three years under HB 7214, 7458, and 7364 and up to eight years (four years initially, with a possible four-year extension) under HB 231. The preferential 15% CIT (Corporate Income Tax) can last for five years (HB 7214, 7458, and 7364) or up to fifteen years (HB 231).

The five percent tax on gross income earned will be removed under HB 7458 and HB 7214, but they have notably been retained under HB 7364 and HB 231, albeit available only for a fixed length.

Other incentives are customs duty exemptions on the importation of capital equipment and allowable deductions on labor, training, research and development.

There are also additional incentives that can be beneficial to certain industries, such as the reinvestment allowances to be provided to the manufacturing industry (HB 7214 and HB 7458), duty exemptions on raw materials (HB 7364), and entitlement of the mining industry to receive incentives (HB 7364).

TRAIN 2: A Tax Reform for Businesses

IMPROVING THE TAX ADMINISTRATION

The easily overlooked portions of TRAIN 2 are the administrative changes that seek to address the inefficiency in the Philippine tax system.

Currently, the Philippines has an inefficient tax system. Per the Doing Business 2018 report, the Philippines is ranked at 105 in the ease of paying taxes. Further, businesses have to pay twenty types of taxes and spend an average of 182 hours to comply with tax payments.

In both HB 7214 and HB 7458, the Secretary of Finance will be authorized to request any tax-related information from the Bureau of Internal Revenue (BIR). The BIR Commissioner will also be granted the authority to counteract tax avoidance measures by redistributing and reallocating a taxpayer’s income and deductions.

The more important administrative change proposed by TRAIN 2 is the modernization of the BIR’s system. Under TRAIN 2, filing via electronic channels, record-keeping of electronic receipts, and implementing electronic sales reporting systems will be allowed. It also seeks to improve the current electronic systems of BIR.

In HB 7458, the Commissioner will be authorized to serve subpoena duces tecum and assessment notices, and further clarifies that the Commissioner can issue Letters of Authority as well.

Another unique proposal in HB 7458 is the imposition of harsher penalties on tax evaders and other violators of the tax code, ranging from doubling the current penalties to as much as raising it ten-fold.

These changes, while not quite as expansive as the first two features of TRAIN 2, aim to improve the ease of paying taxes and broaden the taxpayer base.

As TRAIN 2 draws near, businesses need to reassess their current tax plan and see if it would still be applicable. Just as there are many pitfalls to the tax reform package, there could be opportunities as well — opportunities that business owners might miss if they did not have proper guidance.

If you are a decision maker and want to know the right tax information for your business, you can attend our Executive Tax Briefing (ETB). For more information, e-mail us at consult@acg.ph.

This article was originally published in BusinessWorld.

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