On Tax Reform Package 4 (Pifita)

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The Tax Reform Package 4 is one of five tax packages that are intended to serve as the funding pillar to support the “Build, Build, Build” program, which is the economic centerpiece of the Duterte administration. This package originally referred to as the Capital Income and Financial Intermediary Taxation Act of 2019 under House Bill 8252, now renamed as the Passive Income and Financial Intermediary Taxation Act (Pifita), was introduced on 17 September 2018 by Representatives Estrellita Suansing and Horacio Suansing. The Committee on Ways and Means submitted a revised proposal, House Bill 8645, incorporating some minor revisions by Rep. Luis Raymund Villafuerte on 26 November. The consolidated amended bill was recently passed in Congress on its third and final reading on 3 December. This was subsequently transmitted to the Senate on 5 December where it now awaits a reconciliation with the still-to-be-introduced Senate version.

Although I already previously wrote about this particular tax package proposal a few months ago, given what seems to be the faster pace by which this proposed legislative bill has been recently moving as compared to the relatively slower pace of the more controversial Package 2 or the TRABAHO Bill that seeks the rationalization of fiscal incentives, thus possibly indicating a good chance that Pifita will be approved shortly, even ahead of the Package 2, I believe it is appropriate to now review what Pifita is all about.

The Package 4, or Pifita, actually is not meant to bolster the revenue base of the country as compared to Package 1 and Package 2 which were originally intended to improve the tax base. It is expected to be revenue neutral.

Package 1, popularly and now derisively known as the TRAIN, has had mixed reviews, unfortunately mainly negative. We now know, on hindsight, that shortly after the approval of the TRAIN, various unforeseen circumstances, such as the oil price increases and the self-inflicted rice shortage, triggered a corresponding surge in the inflation rate causing an outcry from the public. As a consequence, TRABAHO, which aims to reduce corporate taxes but at the same time rationalizing corporate fiscal incentives, has also encountered some stiff resistance from a very strong and influential corporate anti-TRABAHO lobby group echoed ironically by investment government agencies — particularly the Philippine Export Zone Authority and the Board of Investments — and a few oppositionist legislators who label the TRABAHO bill as pro-rich and anti-poor.

In addition, the specter of a politician “tainted” with taxes come election time in 2019 will be too hot an issue for any reelectionist. The question now is whether there will be a similar anti-Pifita lobby group coming from an equally formidable and well-funded banking sector that will likely have the most to lose because of the removal of certain unique incentives that the industry currently enjoys.

It would be a shame if indeed an anti-Pifita lobby does occur.

Why? The key goal of Pifita in simple terms is to transform the currently complex capital market taxation into a simpler and fairer and more regionally competitive environment, but at the same time, achieving revenue neutrality for the government in the short term. It is difficult to argue against such lofty goals.

In the furtherance of these goals, the preamble of the bill expounds on the policies of the State as follows:

The State shall promote and develop a tax system that provides neutrality in the tax treatment across financial institutions and financial instruments.

The State shall endeavor to simplify an otherwise complex tax system for easy compliance.

The State shall ensure that the taxation of passive income and financial transactions is equitable across all stakeholders and discourage arbitrage opportunities.

The State shall promote capital market development and tax competitiveness within the context of globalization, increased capital mobility and financial inclusion.

These policies are undoubtedly positive and should augur well for the financial markets if taken in their entirety. However, given the bill’s underlying principle of revenue neutrality, inevitably, there will be some sectors within the industry that will experience pain in order to provide some with a good measure of relief. As a consequence, the realistic scenario that will likely arise as the Senate puts together its own version is a spirited debate among the many stakeholders in the financial markets during the technical working group meetings.
As the popular saying goes… abangan!

Until next week … one big fight!

Email: bing_matoto@yahoo.com

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