DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Understanding the
TRAIN Law and the CTRP:
Vision, Implications, Impact

As of 11/2/21 08:47 AM
Tuesday, November 02, 2021 DEPARTMENT OF FINANCE 1
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1. Vision 2. CTRP

4.
3. TRAIN
Inflation

Tuesday, November 02, 2021

5.
DEPARTMENT OF FINANCE 2
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Vision for the Philippines

Tuesday, November 02, 2021 DEPARTMENT OF FINANCE 3

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Vision for the Philippines

By 2022 By 2040
(5 years from now) (22 years or one
generation from now)
21.6% 13-15%
Poverty rate reduced
Extreme poverty
eradicated
3,500 5,000 3,500 11,000
at least

USD USD USD USD

Increase in Gross Increase in Gross
National Income (GNI) National Income (GNI)

Tuesday, November 02, 2021 DEPARTMENT OF FINANCE 4

 DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Why tax policy reform is

needed: A deficient tax system
Cause Effect
Outco
Inflation High tax
rates
me
Special
treatment Inequity
and
Narrow
exemptio
tax base Complexi
ns
(only ty
Lack of about
informati half of
on (e.g., the Inefficien
bank economy
cy
secrecy) is taxed)

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Tax reform packages

Package Tax coverage
Package 1A – TRAIN PIT, VAT, excise, others

Package 1B and C General and estate tax amnesty, bank

secrecy relaxation, automatic exchange of
information, MVUC
Package 2 – TRABAHO Corporate income tax and fiscal incentives
Package 2+ Tobacco, alcohol (Universal Health Care);
mining taxes
Package 3 Property valuation and tax

Package 4 Capital income tax and financial tax

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Package 1:

TRAIN -
Tax Reform for Acceleration
and Inclusion

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TRAIN and inflation

Tuesday, November 02, 2021 DEPARTMENT OF FINANCE 13

 Inflation has been rising in 2018,
reaching 6.7 percent in September…
Year-on-year inflation rates in 2018
8

7 6.7
6.4

6 5.7
5.2
5.0
5 4.6
4.5
4.3
Percent

3.9
4
3.4

0
Jan Feb Mar Apr May Jun Jul Aug Sep YTD
(Jan to Sep average)
Source: PSA

DEPARTMENT OF FINANCE 14
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Inflation update

2018 Jan Feb Mar Apr May Jun Jul Aug Sep

Year-on-year 3.4 3.9 4.3 4.5 4.6 5.2 5.7 6.4 6.7

Month-on-
0.9 0.8 0.5 0.5 0.0 0.6 0.5 0.9 0.8
month

Year-to-date 3.4 3.7 3.8 4.1 4.1 4.3 4.5 4.8 5.0

Source: PSA

DEPARTMENT OF FINANCE 15
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Top 10 drivers of September 2018 inflation

ranked by contribution to inflation
Contribution to
Rank Top contributors to inflation year-on-year
inflation (ppt)
1 Rice 1.0
2 Fish 0.8
3 Electricity, gas, and other fuels 0.7
4 Operation of personal transport equipment 0.6
5 Vegetables 0.5
6 Meat 0.5
7 Catering services (inc. restaurants) 0.4
8 Actual rentals for housing 0.4
9 Non-alcoholic beverages 0.3
10 Tobacco 0.3

DEPARTMENT OF FINANCE 16
Food items have overtaken non-food items as the
main driver of inflation in 2018.
Contribution to inflation of food and non-food items
4.5
Food Non-food
4.0

3.5

3.0
Percentage points

2.5

2.0

1.5

1.0

0.5

0.0
Jun
Jul

Jun
Jul
Aug

Aug
Jan

Apr

Nov

Jan

Apr
Dec
Feb

May

Sep

May
Mar

Feb
Mar

Sep
Oct

2017 2018
Source: PSA

DEPARTMENT OF FINANCE 17
 …With rice contribution to
inflation growing by 10 times.
Contribution to inflation of rice
1.2

1.0

0.8
Percentage points

0.6

0.4

0.2

0.0
Jan

Jan
Mar

Mar
May

May
Oct
Feb

Sep

Feb

Sep
Apr

Aug

Apr

Aug
Jun

Nov

Jun
Jul

Dec

Jul
2017 2018
Source: PSA
DEPARTMENT OF FINANCE 18
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Filipinos pay twice as much for

rice compared to other countries.
45
40
36.81
35
30
in Php per kg

25
19.00
20
17.61
15
16.80
10
5
0
2000

2001

2002

2003

2004

2005

2006

2007

2009

2010

2011

2012

2013

2014

2015

2016
2008

2017 (June)
Pakistan (25% brokens) Thailand (25% brokens)

Vietnam (25% brokens) Philippines (RMR)

Note: RMR – regular milled rice

Sources: FAO, PSA and BSP
DEPARTMENT OF FINANCE 19
Fish contribution to inflation
has been growing since 2017.
Contribution to inflation of fish

1.2

1.0

0.8
Percentage points

0.6

0.4

0.2

0.0

-0.2
May

May
Jan

Mar
Mar

Jan
Oct
Feb

Sep

Sep
Apr

Feb

Apr
Nov
Aug

Aug
Dec

Jul
Jun

Jun
Jul

2017 2018
Source: PSA

DEPARTMENT OF FINANCE 20
 High vegetable contribution to
inflation is largely due to weather.
Contribution to inflation of vegetable
1.2

1.0

0.8
Percentage points

0.6

0.4

0.2

0.0

-0.2
May

May
Mar

Mar
Jan

Jan
Feb

Sep

Feb

Sep
Oct
Nov
Aug

Aug
Jun
Apr

Apr
Jun

Dec
Jul

Jul
2017 2018
Source: PSA
DEPARTMENT OF FINANCE 21
 High meat contribution to
inflation reflects pricing mismatch.
Contribution to inflation of meat
1.2

1.0

0.8
Percentage points

0.6

0.4

0.2

0.0

-0.2

May
Mar

Mar
Jan

Jan
May

Oct
Feb

Sep

Feb

Sep
Aug
Apr

Nov

Apr
Jun

Aug

Dec

Jun
Jul

Jul
2017 2018
Source: PSA
DEPARTMENT OF FINANCE 22
 Non-food contributing to
inflation is slowing down.
Contribution to inflation of non-food items
4.5

4.0

3.5

3.0
Percentage points

2.5

2.0

1.5

1.0

0.5

0.0
Mar

Mar
Jan

Jan
May

May
Sep

Feb

Sep
Oct
Aug

Aug
Feb

Nov
Apr

Dec

Apr
Jun
Jul

Jun
Jul
2017 2018
Source: PSA

DEPARTMENT OF FINANCE 23
 Short-term solutions
• In summary, food is the main driver of inflation
in 2018, especially in recent months.
• The Department of Agriculture (DA) is key in
bringing down food prices.
• Administrative Order 13 and Memorandum
Circulars 26, 27, and 28 give DA the power to
increase food supply and bring down food
prices.
• DSWD and DOTR need to fast-track distribution
of cash transfers and fuel cash cards.

DEPARTMENT OF FINANCE 24
Medium- to long-term solutions
• Rice tariffication – reduce the price of rice by
P2 to 7 / kilo; reduce inflation; support farmers
with tariff revenues

• Improving efficiency by reallocating the budget

from favoring certain crops (e.g., rice) and
production inputs into more broad-based farm
infrastructure, R&D, and support service.

DEPARTMENT OF FINANCE 25
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Package 2
COMPREHENSIVE TAX REFORM PROGRAM

TRABAHO Bill:
Corporate income tax
and fiscal incentives reform
As of September 13, 2018 11:00 am
 The Philippines has the highest corporate
income tax rate in the ASEAN region.

Source: Asian Development Bank and PWC.

We have a complex
We grant the most
tax incentives system. generous fiscal
incentives since they are
in lieu of all taxes and
given forever.

- 14 IPAs
136 investment laws
200 non-investment
laws
946 ‘ecozones’ and
freeports

Source: Individual country finance agencies and

investment promotion offices.
Huge inequity under the
current system:
Firms with no incentives pay the
regular rate of 30% of net
taxable income
Firms with incentives pay
between 6% and 13%

For example, almost all of the

90,000 SMEs pay the regular 30% Source: DTI and TIMTA.
rate.
 Tax incentives in billion pesos

Type of tax 2015 2016

Income tax 86 121
Customs duties 18 57
Estimated forgone Subtotal 104 179
revenue due to tax Import VAT (gross) 160 TBD
incentives Local VAT (gross) 37 TBD
Local business tax TBD TBD
Subtotal for incentives 301 TBD
Leakage 43 TBD
Total 344 TBD
No. of recipients 2,844 3,102
Source: TIMTA, DOF estimates.
 Package 2
Fair and accountable tax incentives system
Every peso granted as tax incentive is a peso off the budget that could have
been spent for infrastructure, health, education, and social protection that
benefit all, and not only a few.
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Cost-benefit analysis of fiscal

incentives
“Ex-post” cost-benefit analysis

This is done so that we can

determine if the tax incentives
given to recipients benefit our
economy more than they cost.
Note: Evaluation of the past performance does not
necessarily indicate future priority or preference over
some industries.
 2. Performing a
1. Estimating implicit labor counterfactual analysis
Do firms with registered activities for
subsidy incentives perform better in terms of
What is the cost for each job created?
job creation, R&D investments,
productivity, etc. when compared to
Cost-benefit non-registered firms?

analysis:
Methods
3. Estimating net 4. Accounting of direct and
government revenue indirect cost and benefit
Do we generate more revenue from Do total benefits from incentives,
the tax we forego? both private and social, outweigh
total costs?
Result #1
(Implicit labor subsidy)

In 2015, to create 1 job, it costs taxpayers at least P252,706.

Note: In 2012 to 2015, 402,000 jobs created, and in 2015, P104 billion in
income and customs duties incentives were given to 14 IPAs.

Source: IPA submissions, TIMTA, DOF estimates.

Result #2
(Counterfactual analysis using propensity score matching)

In general, registered firms, when compared to non-registered firms…

Have the same employment relative to size

Have similar average wages, but pay top management higher
Spend more on fixed assets, but do not spend higher on R&D
Have the same level of exports relative to sales
No difference in productivity
Source: PSA ASPBI, TIMTA, DOF estimates.
Result #3
(Net government revenue effect)
Tax incentives on:
Income
Duties (30%)
VAT (net of refund)
Local taxes

On average, for every peso

we grant as incentive, we
collect 32 centavos in
taxes, even after
accounting for taxes from Taxes collected from:
indirect employment and Firms
Employees
domestic inputs. Dividends

Indirect employees
If taxes from unnecessary Domestic inputs

incentives are accounted Source: IPA submissions, SEC, TIMTA, DOF estimates.

for, we collect 86 centavos.

Identifying necessary & unnecessary incentives
We have been
supporting many firms Number of firms enjoying incentives
for at least 15 years
unnecessarily.

Source: TIMTA.

645 firms receiving incentives for

at least 15 years.
Dividends declared at 164% of income tax
incentives received

Source: SEC, TIMTA.

Result #4
(Accounting of total direct and indirect cost and benefit)

On average, for every peso spent on incentive, between P0.60

and P1.15 comes back in benefits, even after accounting for
employment generated and spillovers, both direct and indirect.
Source: IPA submission, PSA ASPBI, SEC, TIMTA, DOF estimates.
 In general, registered firms do not
Summary

To create 1 job, it costs perform better on employment,

Result #1

Result #2
taxpayers at least exports, and productivity compared
to non-registered firms.
P252,706.

For every peso spent on

For every peso we incentive, between P0.60

Result #4
Result #3

grant as incentive, and P1.15 comes back in

we collect 32 cents benefits.
in taxes.
Source: TIMTA, DOF estimates.
 TRABAHO Bill
Tax Reform for Attracting Better and High-
quality Opportunities bill
(HB 8083)
 Lower corporate
income tax

Scheduled reduction may be

advanced when adequate
savings are realized from the
rationalization of fiscal
incentives
 Incentives menu
Income tax holiday
Upto 3 years plus 1 year extension if investing in agribusiness, or in less developed areas, or if
relocating outside Metro Manila and adjacent urban areas

Special rate (2019)

18% on net taxable income
after ITH for upto 5 years
including the ITH
- 1.5% to province
- 1.5% to municipality
 Rationalize investment tax incentives

One menu of Only new investment/ Expansions can avail only of

No double registration
incentives applicable activities shall be granted exemption from customs duty
of activities
to IPAs income tax incentives of capital equipment

Special VAT incentives for Two years additional

Domestic firms allowed Two-year additional Two years additional
exporters: 90% of export incentives for agribusiness
if included in the incentives for firms incentives for lagging
sales are actually shipped projects of registered
strategic investment moving out of Manila regions, conflict, and
out of the country enterprises located outside
priority plan and adjacent areas calamity-stricken regions
Metro Manila
 An indicative list from DTI, subject to change:

Top 12 Priorities for Both Domestic & Export Markets

Electrical & Electronics IT BPM, E-Commerce Agri-business Tourism

Auto & Auto Parts Tool & Die, Iron & Steel Transport & Logistics
Shipbuilding, RORO

Aerospace Parts Chemicals Furniture, Garments, Creative Construction

The Future of Philippine Industries
 Incentives menu
• Depreciation allowance of qualified capital • Enhanced net operating loss carry-
expenditure: over (NOLCO) (5 years)
• 10% for buildings • Exemption from customs duty on
• 20% for machineries imported capital equipment and raw
materials
• Additional deduction of up to:
• 100% deduction for research and
development (R&D) and training
• 50% of the wages for labor expense
• 100% on country-wide infrastructure
development
• 50% for reinvestment allowance to
manufacturing industry
• 50% on the domestic input expense used in
registered export activity
 Incentives menu
• VAT incentives to registered enterprises whose export meet the 90% of sales
threshold, and are within an ecozone or free port:
• VAT exemption on importation
• VAT zero rating on domestic purchases

• Additional 2 years of incentives for:

• registered activities relocating outside
Metro Manila and selected urbanized areas
adjacent to Metro Manila
• agribusiness projects of registered
enterprises located outside Metro Manila
• projects located in less developed areas or
those recovering from armed conflict or a
major disaster
 Sunset provision for existing incentives

For RBEs which availed of ITH: For RBEs enjoying existing 5% GIE:
Continue until remaining period
ends or for a period of 5 years,
whichever comes first
 There are other and may be better ways to
support firms
The government can use The real solution in the
Granting tax incentives is more efficient and medium-term is to address
not the only way to targeted subsidies infrastructure gaps,
directly help firms corruption, inefficiency in
government, and complex
business regulations

Ex. lifeline subsidies, power subsidies,

housing vouchers, skills training, etc.
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Tax reform as bridging the future

Source: https://www.pinterest.com/explore/social-stratification/

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Source: https://scottdeutschtalks.files.wordpress.com/2016/05/who-wants-change.jpg
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Let’s be partners for change!

• For more information, please visit:
www.dof.gov.ph/taxreform/ facebook.com/DOFph

• For questions: DOFtaxreform@dof.gov.ph

Tuesday, November 02, 2021 DEPARTMENT OF FINANCE 56