2018 opened with a bang as the effects of the first package of the government’s comprehensive tax reform program (also known as the TRAIN) begin to be felt by the general public. Those with incomes below P250,000, who are supposed to benefit from the exemption under the new tax law, now have to face the surge in prices of basic goods and services. But as the expression goes, the law may be harsh, but it is the law (dura lex, sed lex). The impact of the increased/new tax on petroleum, coal/mineral products, sweetened beverages, to mention a few, has definitely affected the purchasing power of the general public. And this is just the beginning of the TRAIN.
ENTER TRAIN 2
On Jan. 15, the Department of Finance (DoF) submitted to the House of Representatives the second tax reform package which focuses on reducing the corporate income tax rate from 30% to 25% while streamlining fiscal incentives. The DoF estimated that the government has been losing about P300 billion annually from superfluous tax incentives.
As the deliberations on Package 2 start to heat up, let us take a look at the supposed foregone revenues of the government that triggered the streamlining of fiscal incentives. The position is grounded on the perception that the current income tax perks represent an “income tax holiday forever” since there is no sunset provision on the lifespan of these incentives.
Where did DoF get this “superfluous tax incentives” figure? I surmise that the amount may have been derived from the estimated tax relief incentive figure that is generated from the annual corporate income tax return, particularly, BIR Form 1702-MX on Schedule 2 — Tax Relief Availment. This tax return is prepared annually by entities registered with Investment Promotion Agencies (IPA) such as the Board of Investments (BoI) or Philippine Export Zone Authority (PEZA), and other corporate entities subject to multiple income tax rates.
DECONSTRUCTING TAX RELIEF AVAILMENT
During the road show of the Bureau of Internal Revenue (BIR) introducing BIR Form 1702-MX in February 2013, one question raised during the open forum was the significance of Schedule 2 — Tax Relief Availment. The BIR resource speaker explained then that Schedule 2 was designed to account for the tax relief incentives that an IPA-registered entity exempt from income tax or subject to the 5% gross income tax should have paid to the BIR if the said taxpayer were under the 30% corporate income tax regime.
However, the form as it is may not accurately capture the correct tax base for the 30% regular tax rate.
For purposes of illustrating the potential miscalculation of the tax relief availment (both Total Exempt and Total Special) of a PEZA-registered company with multiple tax regimes, below is a reproduction of pertinent portions of BIR Form 1702-MX particularly line items covering Schedule 1- COMPUTATION Of Tax Per Tax Regime and Schedule 2 — Tax Relief Availment with sample computations.
If the PEZA-registered entity is enjoying Income Tax Holiday (ITH), the amount reported under “Regular Income Tax Otherwise Due” would be the same amount reported under line item #7, “Total Tax Relief/Availment.” In my illustration, the foregone tax revenue of the government is P18.
However, an overstatement may arise if the taxpayer opts not to provide the amount of “Ordinary Allowable Itemized Deductions” and NOLCO under line items #6 and #7 of Schedule 1 since these are not mandatory fields. And considering that the PEZA entity will subsequently be subject to 5% gross income tax (GIT) upon expiration of its ITH, the PEZA entity would generally not deem it necessary to show these deductions. This would generally result in line item #7 of Schedule 2 being overstated by 100% of the tax effect of the total amount of allowable deductible expenses (and any NOLCO) that were not reflected. This is without considering the temporary and permanent non-deductible/non-taxable items.
In my illustration, if the PEZA entity did not reflect the “Ordinary Allowable Itemized Deductions” of P40, the foregone tax revenue would come out as P30 (which is overstated by P12).
The other scenario would be if the PEZA registered entity is enjoying the 5% GIT incentive; in which case, the amount reported under “Regular Income Tax Otherwise Due” would also be overstated as follows:
1. In Schedule 1, line item #10, Net Taxable Income/Net Income, the amount reported is properly reported, i.e., without the benefit of deducting “Ordinary/Allowable Itemized Deductions.” Thus, similar to the ITH scenario, the tax base of the 30% regular tax is presumably overstated to the extent of the tax effect of any allowable deductible expenses that were not reflected.
2. Since the amount of Income Tax Due under line #16B of Schedule 1 pertains only to tax paid to the BIR, there is yet another overstatement due to the exclusion of the local government’s share in the 5% GIT when computing the foregone tax revenue in line item #7.
If the DoF and the BIR have no other source of reference for the tax relief incentives other than BIR Form 1702-MX, it would be prudent to provide at least a reasonable reduction in the gathered tax relief incentive figures to make the streamlining of tax incentives more realistic.
The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Revelino R. Rabaja is a senior manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.