Tax reform under Federalism will be “very challenging” – DFA Chief

Head of Duterte administration's team said that tax administration and revenue sharing under a federal form of government are expected to be "very challenging," despite the Department of Finance (DOF) is preparing to submit three more tax reform packages to Congress.

“There’s potential for it to become a nightmare. We are watching it very closely, particularly the revenue-sharing schemes that are going to be put forward for the [proposed] federal government,” Secretary Carlos G. Dominguez III emphasized during the the 2018 inaugural meeting of the Management Association of the Philippines (MAP) regarding the administration’s plan to shift to a federal form of government.

“Let’s just say it will be challenging, very challenging because the tendency [will be for] different federal states to retain as much revenue as they can and give the national government as much expenses,” he added.

Dominguez also announced during the MAP event that “by the end of the month, we shall also be submitting [tax reform] ‘package two plus,’ which includes taxes on tobacco, alcohol, mining, coal, and casinos.”

“By the second half of the year, we aim to submit package three, which tackles property taxation, and finally package four, which tackles passive income and financial taxes,” Dominguez added. “This ambitious yet achievable tax reform program is unlike anything we have seen before,” according to Dominguez.

Dominguez mentioned that “there will be no reduction in corporate income taxes unless there is a reduction in incentives" with regards to the second tax reform package submitted for the Congress' consideration when it resumed sessions this month and he also claimed that their approach is always balanced citing the same tack in the Tax Reform for Acceleration and Inclusion (TRAIN) Act, which slashed personal income tax rates but jacked up taxes on consumption.

“No, I don’t think so. I think it focuses the issue—what do you want: lower income tax, or less incentives that are targeted, time-bound and measured? So it focuses the mind. So if you are a company, you will balance it—do I really need this incentive, or am I better off with lower income tax? So it’s always a balanced approach giving them a choice.” Dominguez insisted on question regarding the prevention by the conditional reduction in corporate income taxes.

“The goal is to reduce the corporate income tax rate from 30 percent to 25 percent by 2022, while expanding the base by 0.75 percent of GDP or P130 billion in 2018 prices,” the DOF said.

The second tax package will also enhance compliance by simplifying the tax rules for corporations, this includes slashing the optional standard deduction to 20 percent of gross income for both individuals and corporations from 40 percent at present; allowing deductions, including net operating loss carryover and depreciation; as well as defining medium and large (on a conglomerate basis) taxpayers.

To avail of incentives, investments must be performance-based with an independent body or to be measured by the Fiscal Incentives Review Board (FIRB); time-bound, to enjoy five-year income tax holiday and/or reduced rate with no extension except for the capital equipment duty perk; targeted, or based on the three-year investment priorities plan (IPP) covering both local and foreign investors that will serve both domestic and international markets; as well as transparent, with the name of beneficiaries and tax incentives to be reported by the FIRB.

Furthermore, Dominguez said the DOF expects the target to cut the foregone revenues from fiscal incentives to be easily attainable