When the country’s economic managers first announced plans for the Tax Reform for Acceleration and Inclusion Act (TRAIN), they underscored its provision to lower income tax rates for individuals – from 30 percent to 21 percent for most employees. To offset the expected loss in government revenue, they said, the law would raise new funds, one of which was a P2 tariff per liter of diesel and other fuel imports where there was none before.
The lower income tax rate indeed made it a tax reform law and it was duly welcomed by small wage earners. But the new P2 tariff on diesel imports started pushing up market prices all over the country. For it raised the price of diesel, raising in turn the prices of market goods brought to markets from farms on diesel trucks. Government blamed other factors for the high prices, such as high world oil prices and price manipulation by local traders, but there is no doubt the new tariff on diesel was a key factor.
There was to be a TRAIN 2 — hopefully renamed TRABAHO bill for Tax Reform for Attracting Better and Higher-Quality Opportunities — providing for a lower corporate tax rate. But also included many provisions removing the incentives with which the government had attracted many foreign enterprises to come to the Philippines’ export zones.
TRAIN 2 was never enacted into law because of TRAIN 1’s impact. But it continues to hang over the head of foreign investors already in the Philippines. Many have decided to defer expansion plans.
Last week, ten aerospace companies announced they had abandoned their plans to invest in the Philippines. Aerospace Industry Association of the Philippines President Dennis Chan said the ten foreign companies had earlier made known their intention to move from China and set up manufacturing and assembly operations in the Philippines. They will now go to Vietnam instead.
It has been one year since TRAIN 2 was suspended because of the ill effects of TRAIN 1. It may be time to review it and perhaps retain the lower corporate tax but scuttle plans to remove so many of the incentives to foreign investments as they are evidently still needed.