The first tranche of the Tax Reform for Acceleration and Inclusion (TRAIN) Act, or TRAIN Law, went through the tunnel of scrutiny without too many hitches, despite protests here and there from select sectors. Package 1, after all, targeted individual income tax restructuring, and it helped raise the take-home pay of some workers. While its implementation took a toll on everyday conveniences, such as cars, sweetened beverages, and cigarettes, it still had a relatively smoother ride than expected.
The same can’t be said of TRAIN 2, though. Battered by protests from the very beginning, from no less than the Philippine Economic Zone Authority (PEZA) and the Board of Investments (BOI), the second installment of the tax reform program is expected to take a beating once the House passes it. When it becomes law, however, any debate will be unnecessary.
Hence, it would be best for small and midsized enterprises (SMEs) to know what to expect from TRAIN 2. In a nutshell, the second tranche targets the lowering of the corporate income tax (CIT) rate, removal of the VAT and redundant incentives, and the promotion of domestic investment outside of Mega Manila.
Below are some things existing and upcoming SMEs need to know:
Streamline Fiscal Incentives
“Expansions are signs of profitability and need not be given incentives,” stated Finance Undersecretary Karl Kendrick Chua early this year, in a statement to media. These expansions would result in about 123 investment incentives from 14 investment promotion agencies to be revoked or streamlined. The move aims to improve tax revenue collection, widen the tax base, and make charges equal across the board.
Chua said a few incentives might remain, but they’re not final as of this writing. What is certain is that companies will retain incentives in customs duties for capital equipment.
Value Added Tax (VAT) exemptions will be removed and can no longer be used as a customs incentive, especially for building investments.
Investments Outside Mega Manila Encouraged
He mentioned that local businesses under the Strategic Investments Priority Plan (SIPP) could still gain perks. The government is open to bringing in as many new investments under the SIPP wing if these investments can create numerous jobs or raise revenue from exports.
For instance, companies that are relocating outside of Metro Manila or to conflict-stricken or calamity-stricken regions will be granted investment incentives to encourage development in the rural areas. The same is true for exporting companies, but the definition of “export” will slightly change. Only companies that ship 90 percent of their products or services outside of the country will be tagged as exporters.
Lower CIT Tax on Net Income to Replace GIE Tax Incentive
A corporate income tax rate of 15 percent on net taxable income will also replace the current unlimited 5 percent tax rate on gross income earned (GIE). It follows that the current income tax holiday of four years will remain, but the eight-year extension will no longer be allowed.
To help with the transition, the Department of Finance will allow businesses under the current GIE tax incentive to continue for two to five more years from the implementation of TRAIN 2.
Income-Based IncentivesThe Finance department outlined other incentives, including:
1. 50 percent deduction for labor.
2. Double deduction for training and R&D investments.
3. Deduction for infrastructure development and reinvestment of profit.
4. Investment tax allowance
Finally, Chua said businesses qualified to receive tax incentives must meet the following conditions:
Performance-Based – The incentives will depend on actual jobs, technology, exports, etc.
Time-bound – The investment must have an end date and will not exceed.
Targeted – It must be based on SIPP targets covering domestic, foreign, export and local firms.
Transparent – Names of beneficiaries must be included, and tax incentive estimates must be reported.