Tax Reform in the Philippines
The Philippines is an amazing country. This week, the Philippines was deemed the "best country to invest in," based on rankings released by US News and World Report. The study gauged the countries based on 65 attributes and included 21,000 respondents worldwide. US News and World Report said it used criteria developed by The Wharton School of the University of Pennsylvania and Y&R's BAV Group.
Despite this, The Philippines has a mere four percent share in the FDI figures as against topnotcher Singapore’s 52 percent and second placer Indonesia’s 13 percent. The Philippines has also been ranked sixth in terms of “tax regimes and overall competitiveness,” the statistics also said.
It’s amazing how much there are parallels between tax reform in the Philippines and in the USA. Both countries have populist leaders who advocate economic nationalism. Driven by the Executive, in December 2017, both nations somewhat hastily and controversially passed legislation that promised to dramatically change the tax landscape.
I’ve already spoken about US tax reform here –
In the Philippines, the Comprehensive Tax Reform Program (CTRP) aims to raise revenues for the administration's infrastructure programs. The administration’s priorities are build, build, build. The Tax Reform for Acceleration and Inclusion (Train) Law or Republic Act No 10963 took effect on January 1, 2018. Or more accurately package 1 (or Train 1) took effect from January 1st as the government seeks to overhaul the outdated National Internal Revenue Code (NIRC) which was adopted 20 years ago. It is expected that the tax code would be reformed using 6 or so Train packages. Package 1 dealt with individual taxes and excise duties. Package 2 should deal with corporate tax reform.
Train relatively decreases the tax on personal income, estate, and donation. However, it also increases the tax on certain passive incomes, documents (documentary stamp tax) as well as excise tax on petroleum products, minerals, automobiles, and cigarettes. The Train law also imposes new taxes in the form of excise tax on sweetened beverages and non-essential services (invasive cosmetic procedures) and removes the tax exemption of Lotto and other PCSO winnings amounting to more than P10,000.
To international investors however, there has been some concern over –
- · The veto on the 15% special tax rate for employees of Regional Headquarters (RHQ), Regional Operating Headquarters (ROHQ), Offshore Banking Units, and Petroleum Service Contractors and Subcontractors. These employees will be taxed using the regular income tax table
- · The veto on the excise tax exemption of petroleum products used as input, feedstock, or as raw material in the manufacturing of petrochemical products, or in the refining of petroleum products, or as replacement fuel for natural gas fired combined cycle power plants.
- · The veto on the zero rating of sales of goods and services to separate customs territory and tourism enterprise zones, specifically, the areas under the Tourism Infrastructure Enterprise Zone Authority (Tieza).
Impact on Expatriates in the Philippines:
- · Possible reduction in the number of topmost managerial positions of regional operating headquarters (ROHQs). High earning ROHQ employees (earning PHP975,000 and up) have been disallowed from enjoying a 15% special tax rate, putting them in the regular tax schedule at par with non-alien resident taxpayers.
- · Possible adjustments to housing budgets of expatriates. Affected companies may become creative on relocation packages – i.e. ratios between house rental and monthly utilities.
- · Probable rise in housing choices.
- · Possible requests for increased salaries from domestic help and drivers.
- · Surge in rental car services and rates.
Package 2 or Train 2 was laid before Congress this week. It proposes to gradually lower the Corporate Income Tax (CIT) rate from 30 to 25 percent while modernizing incentives for companies to make these “performance-based, targeted, time-bound, and transparent”. At the moment, the Philippine Economic Zone Authority (PEZA) has much autonomy in negotiating incentives for inbound investors. Going forward, the government takes more control of the process. There is much concern about the extent to which a shift in, or elimination of incentives, would affect investor sentiment and behavior.
Will this range of reform impact on investment in the Philippines. Time will tell but there is a hope that while tax is considered by investors, there are more important criteria.