Tax Reform in the Philippines: Everything You Need to Know About the TRABAHO Bill
During his fourth State of the Nation Address, President Rodrigo Duterte requested the Congress to pass the “Tax Reform for Attracting Better and Higher-quality Opportunities” bill, more commonly known as TRABAHO bill. It is the second installment of the administration’s comprehensive tax reform program, which aims to create a simple, equitable tax system that brings prosperity to all Filipinos.
The TRABAHO bill seeks to gradually reduce the corporate income tax (CIT) from 30% to 20% by 2029. The bill also proposes to rationalize the tax incentives granted within Special Economic Zones and Board of Investments as under the Investment Incentives Act. Under the proposed bill, tax incentives will not be eliminated. Rather, they will be made transparent, targeted, and performance-based.
Lower Corporate Tax Rate in the Philippines
The Philippines currently has a corporate income tax rate of 30% for both domestic and foreign firms. This is higher compared to other countries in the region, such as Singapore (17%); Cambodia, Thailand, and Vietnam (20%); and China and Indonesia (25%). If passed into law, the TRABAHO bill, starting 2021, will incrementally lower the corporate tax rate by 2% every two years, reaching the 20% CIT goal by January 2029.
Creating a Simple and Fair Tax Code
Currently, the eligibility requirements and guidelines for tax incentives are codified across 336 different laws. Under the TRABAHO bill, all activities that qualify for tax incentives will be consolidated in a Strategic Investment Priorities Plan (SIPP). Though the tax perks are generous, they are limited to a small percentage of registered businesses. According to the Department of Finance, there were 915,000 registered firms in the Philippines in 2015. Of these, 2,844 availed of tax incentives worth Php 301 billion. Big businesses and multinational corporations were the primary beneficiaries. The vast majority (99.7%) of businesses paid the full 30% CIT. The bill seeks to create a fairer system in which all registered businesses can receive a reduced CIT of 20%.
Rationalizing Tax Incentives
The TRABAHO bill will tie tax incentives to the country’s economic objectives. The SIPP will prioritize industries that offer the following:
- Creation of high-quality jobs
- Stimulate local industries
- Promotion of higher-value exports
- Promotion of market competitiveness
- Use of new and modern technology
- Address missing gaps in the supply/value chain
- Spread economic growth to rural areas
- Introduce innovation in its product, process, marketing or business model (i.e., a pioneer industry)
The full list of qualifying industries is still being developed by the Board of Investments (BOI) and will be updated every three years. These businesses may receive perks such as a 5-year income tax holiday, reduced CIT of 15%, and a 5-year exemption from customs duties.
There are also targeted tax incentives such as:
- Up to 10% or 20% deduction for depreciation for qualified capital expenditure
- Up to 50% deduction of direct labor expense
- Up to 50% deduction for re-investments to manufacturing industry
- Up to 100% deduction on research and development expenses
- Up to 100% deduction on infrastructure development
- Up to 100% deduction on training expenses
- Enhanced NOLCO (5-year carry-over)
To retain incentives, a company’s economic contributions must be measurable — which are usually determined by factors such as export sales, actual investments, actual job creation, investments in lagging regions, investment and employment in research and development, added supply chain linkages, and spillover into the local economy.
Changes to Current Tax Incentive Scheme
Besides introducing targeted incentives and a lower CIT, the bill also seeks to change some existing incentives. The income tax holiday (ITH) of 4-6 years may be reduced to 3-5 years, depending on the circumstance. The tax exemption on foreign businesses establishing their regional headquarters in the Philippines will be removed. The 5% tax on gross income earned (GIE) also will be removed. Related-party transactions will be subjected to greater scrutiny by the Bureau of Internal Revenue (BIR) to ensure taxes are not avoided or minimized.
Incentives Granted Before TRABAHO Bill
The TRABAHO bill will offer sunset provisions for companies currently availing tax incentives. Businesses granted an income tax holiday, prior to the passage of the bill, can continue their ITH for its set duration, or up to five years, whichever comes first. The 5% GIE incentive will follow the following schedule:
- Two years for firms availing of the incentive for 10 years or more
- Three years for firms availing for 5-10 years
- Five years for firms availing for less than 5 years
Passage of the TRABAHO Bill in the Philippines
The TRABAHO bill was passed in the House of Representatives during the 17th Congress, however, it has yet to pass in the Senate. Some legislators voiced concern that the loss of certain incentives would discourage foreign investments in the country. Proponents of the bill claim that the reduced CIT more than covers those losses.
In a Palace briefing, bill sponsor Representative LRay Villafuerte noted that tax incentives are one of many factors important to foreign investors. He states that “..infrastructure and ease of doing business also rank high among investors’ considerations.”
The government is already addressing these concerns. Revenue from TRABAHO will help finance Duterte’s “Build, Build, Build” initiative, which has earmarked 180 billion for infrastructure projects. Lawmakers also passed the Ease of Doing Business Act in 2018, aimed at cutting red tape and reducing corruption in the government.
On the opening day of the 18th Congress, four modified versions of TRABAHO bill were introduced. Majority Leader Martin Romualdez said this signals that the bill is a priority for lawmakers. He anticipates the bill will pass both Houses by the end of 2019.
Benefits of the TRABAHO Bill to Businesses in the Philippines
Despite substantial government expenditures, foreign direct investments are lower in the Philippines than in other countries in the region. Furthermore, various micro, small and medium-sized enterprises do not benefit from current tax incentives. The TRABAHO bill is expected to attract foreign investments through a lower CTI of 20%, and ensure that international and domestic businesses will enjoy the same rate. Incentives will be rationalized, simplified, and targeted. Through its reforms, the Philippines can create a business-friendly environment, attract quality jobs, and spark growth throughout the country.