The Importance of the Remaining Tax Reform Packages
By Euney Marie Mata-Perez on October 11, 2021
We have seen significant progress in the Comprehensive Tax Reform Program, which is an offshoot of President Rodrigo Duterte’s campaign promise to improve the income tax system and make it progressive.
Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (Train) became effective on January 1, 2018 and lowered income tax rates for lower or middle income earning individual taxpayers. The Corporate Recovery and Tax Incentives for Enterprises (Create) or Republic Act 11534 was passed in March 2021 and lowered the regular corporate income tax rate from 30 percent to 25 percent (or 20 percent for those with total assets not exceeding P100 million and with net taxable income not exceeding P5 million) and rationalized and revised the tax incentives regime to make it performance-based, targeted, time-bound and transparent.
We also saw the passage of Republic Act 11346 (Package 2+), increasing taxes on tobacco, alcohol, and e-cigarette products to fund universal health care and to reduce the incidence of risks associated with the consumption of “sin” products.
We now look forward to the passage of the remaining packages of the tax reform program, which are Package 3 or the Real Property Valuation Reform Act and Package 4 or the Passive Income and Financial Intermediary Taxation Act (Pifita). There is also the reform of mining taxes or Package 2+.
The Real Property Valuation and Assessment Reform Act seeks to promote the development of a just, equitable, and efficient real property valuation system primarily through the introduction of single and uniform valuation based on international practices and true-marker based for real properties.
The adoption of a uniform valuation standard and a single valuation base is expected to eliminate wide disparities and achieve consistency in real property valuation, eliminating the confusion caused by multiple and conflicting real property valuations that have given rise to disputes and delayed the government’s right-of-way acquisitions.
It also seeks to establish a central database of land transactions that will make data available to help in the setting of schedules of market values and the regular updating of such to ensure that real property goes to its highest and best use. The adoption of true market-based values for taxation purposes will increase the revenues of national and local governments without adopting new tax measures or additional taxes. Proposed reforms under Package 3 seek also to enhance transparency and credibility in valuation standards in the country and confidence in the land market.
The Pifita, meanwhile, seeks to make passive income and financial intermediary taxes simpler, fairer, more efficient, and more competitive regionally by significantly reducing the number of combinations of tax bases and rates from 80 to around 36. It will also harmonize tax rates on interest, dividends, and capital gains, and business taxes imposed on financial intermediaries. Package 4 will likewise remove the documentary stamp tax imposed on non-monetary transactions.
The Pifita will give the financial sector a much-needed tax reform that could fuel and direct the movement of capital and encourage investments where these are most needed so that higher, sustainable, and more inclusive growth can be achieved.
The mining tax reform seeks to impose royalties on all metallic and non-metallic minerals and small- and large-scale mines, whether inside or outside mineral reservations. It proposes to retain the 5-percent royalty on gross output for mines located inside a mineral reservation, at the same time proposing a gradual increase in the royalty on gross output for those outside mineral reservations for a period of five years.
It also proposes to impose an additional government share on all metallic and non-metallic minerals, small- and large- scale mines whether inside or outside mineral reservations, as well as impose thin-capitalization and ring-fencing rules to control tax avoidance. The thin-capitalization rules aim to put a limit on the excessive debt funding of businesses, which would result in high interest expense deductions and thereby reduce corporate income tax liability. Ring-fencing, meanwhile, aims to prevent consolidation of income and expenses of all mining projects by the same taxpayer.
These remaining tax reform program packages are crucial to the country’s economic recovery, especially after the beating caused by the Covid-19 pandemic. These have been backed and supported by business groups and are seen as important tools to also eliminate poverty. We hope that legislators will work on their passage at the soonest possible time.
This article was published as part of the special 123rd Anniversary Eddition of the Manila Time.