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
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 –
Individuals - http://www.derrenjoseph.com/2018/01/an-act-to-provide-for-reconciliation.html
Corporations - http://www.derrenjoseph.com/2018/02/us-exposed-owner-of-international.html
Note: The above reference link was live on March 2018, but it has since been taken down.
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overhaul the outdated National Internal Revenue Code (NIRC) which was adopted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 the 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 a raw material in the
manufacturing of petrochemical products, or in the refining of petroleum
products, or as a replacement fuel for natural gas-fired combined cycle power
- · 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
- · Possible adjustments to the 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
The Philippines. Time will tell but there is
a hope that while tax is considered by investors, there are more important