The trabaho tax bill, explained

The ‘Trabaho’ tax bill, explained

The Tax Reform for Attracting Better and Higher Quality Opportunities Bill — or the Trabaho bill, for short — is the second package of the Tax Reform for Acceleration and Inclusion (TRAIN) law.

The bill adds and amends a number of sections under the 1997 National Internal Revenue Code, with the main goal of matching the country’s relatively high corporate income tax (CIT) rate with those of its Southeast Asian peers.

At 30%, the Philippines’ current CIT stands well above the standard 20% rate set in Thailand and Vietnam.

While the first package of the TRAIN law sought to increase Filipinos’ take-home pay by reducing personal income taxes, the Trabaho bill aims to incentivize corporate investments in the country.

Better conditions for big business means more investments in the Philippines, which in turn is better for the economy. Sounds good, right?

What does the private sector think about the bill?

Various business groups have criticized the bill’s “rationalization” of tax incentives — referring to the proposal to scrap supposedly redundant perks that firms registered with investment promotions agencies currently benefit from.

The Trabaho bill proposes a series of fiscal incentives to those that qualify under its Strategic Investments Priority Plan. These incentives include:

a three-year income tax holiday (ITH)
allowable deductions up to five years for labor, training, infrastructure building, and research and development expenditures

After these prescribed time limits, the business would be subject to the regular tax scheme. However, once the three-year ITH expires, the business can apply for a special rate of 18% in 2021, which can further drop to 13% in 2029.

Under the current set-up, eligible companies can enjoy an ITH of up to nine years, with a 5% tax on gross income. Meanwhile, other incentives aren’t time-bound at all. While the standard CIT would be slowly lowered under the Trabaho bill, critics claim that the scrapped perks and tightened eligibility rules under this new system would ultimately drive out investors.

Multiple versions. Multiple problems.

Last week, on Sept. 10, the House of Representatives passed the Trabaho bill on its third and final reading.

This version would cut CIT incrementally to a regionally competitive 20% by 2029.

On the other hand, the Senate version, filed by Senate President Vicente C. Sotto III, would slash 5% off the CIT by next year “for a more immediate impact.” This, while also delaying the rationalization of tax incentives for another two years afterwards.

President Rodrigo R. Duterte in his recent State of the Nation Address said that he wanted tax reform fast-tracked and on his desk for signing before the end of the year.

The reason? This bill — and the TRAIN Law as a whole — is expected to partially fund the government’s Build, Build, Build program.

However, according to Fitch Ratings and Moody’s Investors Service, the “watered-down” tax reform proposed by this bill would only succeed in cutting down tax revenues entirely.

The Department of Finance (DOF) recently proposed their own, more stringent amendments to the bill, arguing that the rationalization of tax incentives would do little to balance out the lowered CIT. Incentives aren’t removed, they said. Companies simply have to meet the new conditions to get them.

Finance Undersecretary Karl Kendrick T. Chua says that based on DOF estimates, the current House version could result in a loss of P62 billion in tax revenues. The Senate version could cost up to P130 billion, and with no tax rationalization — effective or not — to mitigate it.

Neither the House, nor the Senate opted to follow the DOF’s suggestions.

Why? Because elections. — DOF

With the filing of candidacy for the 2019 midterm elections only a few weeks away, one possible reason that legislators may be wary of pushing for tough tax policies may be that voters don’t take kindly to paying more taxes.

“Tax policy, as we know, is never the best way to be reelected,” said Finance Secretary Carlos G. Dominguez.

Mr. Chua, however, remained hopeful, as there is “ample time” to pass the second package before legislators get caught up in the election frenzy.

“The important thing now is to get the hearings started so that the debate is done objectively, not [subject to] hearsay or opinions,” he said.