BMI flags corporate tax reform risk

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Proposed corporate tax reforms may not be enough to make the Philippines compellingly more competitive than its Southeast Asian peers. -- AFP

INVESTMENTS could slow amid uncertainty over planned corporate tax changes, BMI Research said in a March 13 note, noting that the second tax reform package the Finance department submitted to Congress on Jan. 16 could do business more harm than good.

The second package — which follows implementation on Jan. 1 of Republic Act No. 10963 that had slashed personal income tax rates and made up for foregone revenues by removing some value exemptions besides adding taxes on cars, fuel, tobacco products, coal, some minerals and other items — seeks to cut the corporate income tax rate to 25% from 30% currently which is the highest in Southeast Asia as well as eliminate redundant tax perks that the DoF estimates has been depriving government of some P300 billion annually.

Despite the steep rate, corporate income tax collections now account for just 3.7% of gross domestic product (GDP).

“While the proposed tax reforms may be fiscally prudent, it will likely make the Philippines less competitive versus its regional peers. Investment could slow over the near term as the proposed conditional corporate tax reduction and repealing of fiscal incentives create uncertainties for businesses,” the unit of Fitch Group said in a research note published yesterday.

DoF Undersecretary Karl Kendrick T. Chua disputed BMI’s assessment, saying in a mobile phone message when sought for comment that the first package under RA 10963 was positive for investor sentiment. “Despite uncertainty last year due to tax reform, our FDI reached $10 billion,” Mr. Chua said of foreign direct investments, which amounted to a record-high net $10.05 billion last year and beat the central bank’s $8-billion forecast.

BMI said, however, that “despite the proposed corporate income tax cut, we note that tax rates in the Philippines will still be one of the highest and least competitive in the region, and the repealing of tax incentives to investors will likely make it worse.”

“This comes at a time when other countries in the region are trying to offer more tax incentives in order to attract foreign direct investments.”

The note was e-mailed to journalists a day after the Organization for Economic Cooperation and Development (OECD), in a March 7 report posted on its Web site last Monday, said the Philippines’ 25% reduced corporate income tax would still be higher than Southeast Asia’s 23% average and that Vietnam, Cambodia, Laos and Myanmar “have generally been active legislative reformers over time,” with “[e]ach iteration of the investment law… designed to address the weaknesses in the existing one.”

The DoF also wants to repeal some 150 laws granting tax perks to businesses and instead prescribe a “single menu” of incentives that will be given by 14 investment promotion agencies.

The OECD had noted in its report that “Vietnam, the Philippines and Cambodia are the least generous” in providing income tax holidays.

The Philippines has languished in the bottom half of the World Bank Group’s annual report measuring ease of doing business at 113th out of 190 economies, and seventh among 11 Southeast Asian countries for 2018.

In contrast, the US News & World Report last week named the Philippines the best country to invest in, beating 79 other economies, citing a young population that provides a reliable labor pool.

BMI added that the “conditional” nature of the proposed corporate income tax cut — with every reduction in cost of tax incentives by 0.15% of GDP to be matched by a one percentage-point reduction in corporate income tax rate per year — while “fiscally prudent… creates more uncertainty for businesses.”

“We believe that this could weigh on investment over the near term as investors adopt a wait-and-see approach,” BMI said. — Melissa Luz T. Lopez