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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

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Package 1

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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.

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Indicative pump prices and effective tax rates Dec 2017 Jan 2018 Jan 2019 Diesel (PHP per L) Diesel (ETR, percent) Gasoline (PHP per L) Gasoline (ETR, percent)

36.35 0.0 47.85 10.1

39.15 7.2 50.65 15.5

41.39 12.2 52.89 19.1

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

Jan 2020 43.07 15.6 54.57 20.5

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Price effect of excise on inflation 2018 (maximum effect)

Commodity

Share of CPI (%)

Net impact of excise to prices Share of (%)2,3 petroleum Inflation CPI products rate 2016 as input (%)4,5,6 Diesel Gasoline LPG Kerosene (%) 1

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

100

144

Total

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

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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

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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.

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Impact on electricity Estimated monthly increase in cost at 100 kWh monthly consumption level, various cases All figures in PHP

kWh consumption

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)

100 100 100 100 100 100 100 100 100

Additional cost

Current cost per kWh

Current total cost

7.80 8.80 8.80 11.30 11.30 11.30 11.30 11.30 11.30

780.00 880.00 880.00 1130.00 1130.00 1130.00 1130.00 1130.00 1130.00

Generation Coal

Diesel/Bunker

2.00 2.00 2.00 4.00 4.00 0.00 0.00 0.00 0.00

4.40 4.40 4.40 0.00 0.00 71.00 71.00 0.00 0.00

Transmission

Distribution

UCME

Total

8.18 5.91 5.91 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 7.18 0.00 10.17 0.00 10.17 0.00 10.17

0.38 0.38 0.38 0.38 0.38 0.00 0.00 0.38 0.38

14.96 12.69 19.87 4.38 14.55 71.00 81.17 0.38 10.55

Estimated new total cost

Percent increase

794.96 892.69 899.87 1134.38 1144.55 1201.00 1211.17 1130.38 1140.55

1.92 1.44 2.26 0.39 1.29 6.28 7.18 0.03 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 .

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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

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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%.

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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

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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

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5-year summary with veto

(in billions of pesos, unless indicated otherwise) Provisions 2018 Personal income tax -146.6 Corporate income tax (PCSO) 0.5 Estate tax -2.1 Donors' tax -1.7 VAT 39.2 Oil excise

2019 -161.0 0.5 -2.1 -1.8 48.7

RA 10963 2020 2021 -177.1 -195.0 0.6 0.7 -2.1 -2.1 -2.0 -2.2 58.1 58.4

2022 -214.4 0.7 -2.1 -2.4 45.8

Total -894.2 3.0 -10.5 -10.0 250.3

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 Tax administration Others Subtotal (tax policy) Subtotal (legislated tax admin) Total (tax policy and admin) Total as percent of GDP Deficit Package 1B Subtotal (additional revenues) Grand total Total as percent of GDP Deficit

54.5 26.6 44.9 63.3 26.6 89.9 0.5 3.3 38.9 38.9 128.8 0.7 3.0

58.2 35.0 49.6 109.2 35.0 144.2 0.8 3.5 30.9 30.9 175.1 0.9 3.4

61.5 42.3 58.2 145.4 42.3 187.7 0.9 3.5 34.0 34.0 221.7 1.1 3.3

65.1 50.7 59.5 136.0 50.7 186.8 0.8 3.4 37.5 37.5 224.3 1.0 3.2

68.8 60.4 66.3 117.4 60.4 177.8 0.7 3.4 41.4 41.4 219.2 0.9 3.3

308.1 215.1 278.5 571.3 215.1 786.4 NA NA 182.7 182.7 969.2 NA NA

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Package 2

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Comparative CIT rates in ASEAN 35% 30%

30% 25% 20%

20%

20%

20%

Cambodia

Thailand

Vietnam

24%

24%

Lao PDR

Malaysia

25%

17%

15% 10% 5% 0% Singapore

Source: PWC and ADB

Indonesia

Philippines

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. Country

Year

CIT revenues (percent of GDP)

Headline CIT rate (percent)

Revenue productivity (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 2015

30 25

12

Indonesia

3.7 2.7

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. Type of tax

Revenue (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. Major Sector

Agriculture and Fishery Economic and Low-cost Housing Energy Manufacturing Mining and Quarrying PPP Projects Services Tourism Unfilled/ Unspecified Registered Activity

Special Regime (Special Income Tax Rate) ETR, incentive recipients (%) 6.3

ETR, regular firms (%) 30

9.1

30

10.0 10.2 12.0 9.6

30 30 30 30 30 30

13.5

30

Regular Regime

PHL Foreign direct investment (FDI) has been growing…

ASEAN FDI in 2015 (% of GDP) 10.0

9.4 8.7

9.0 8.0 7.0

6.1

6.0 5.0 3.7

4.0 3.0 2.0

2.0

2.3

2.3

Thailand

Indonesia

1.0 Philippines

Source: World Bank

Malaysia

Vietnam

Lao PDR

Cambodia

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

55 50

51 46

47

47

49 46

45

47

43

40

PHP trillions

3.4

35

37 35

2.8

32

32

30

31 28

29

28

28

25 20

2.2

15 1.6

Exports (total, PHP trillions), left Exports (total, percent of GDP), right

1.0

Sources: PSA, DOF staff estimates

10 5 0

Percent of GDP

4.0

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 140 120

Percent of GDP

100 80 60 40 20 0

Sources: WDI, DOF staff estimates

Philippines

Indonesia

Thailand

Vietnam

Malaysia

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, 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).  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 Package

Coverage

Target congress ratification

Package 2+

Remove VAT exemption of coal December 2018 and casino (inserted in Package 2)

Package 2+

Increase alcohol and tobacco excise

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

Thank you.

9/27/2016

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