By Elijah Joseph C. Tubayan
THE DEPARTMENT of Finance (DoF) will ensure that state coffers will not suffer unduly as it seeks to give the Philippines a better chance of bagging foreign investments by cutting the corporate income tax rate to the level of many of its competitors.
Reducing the corporate income tax rate to 25% from 30% currently can be done by either cutting it automatically by a percentage point annually over the next five years, or by cutting it by the same magnitude the year after it collects an additional P26 billion — about 0.15% of gross domestic product — after removing fiscal incentives from sectors that do not need them, the department said in a statement on Sunday, quoting Finance Undersecretary Karl Kendrick T. Chua.
The second tax reform package the department submitted to the House of Representatives on Jan. 15 focuses on cutting the corporate income tax rate while covering revenues expected to be foregone by streamlining fiscal incentives. The DoF estimates that the government has been losing about P300 billion annually from superfluous tax incentives.
A national association of tax experts cautioned, however, that making the graduated cut in corporate income tax rate conditional on revenues to be collected from a wider tax base could turn off investors, hence, defeat the very purpose of that reform.
“We will propose the second method to ensure that this tax reform, which is Package Two of the CTRP, will be revenue neutral,” Mr. Chua said, referring to the comprehensive tax reform program that will consist of up to five packages.
“Every one-percent reduction requires P26 billion in counterpart revenues to keep revenue neutrality.”
The same statement quoted Finance Secretary Carlos G. Dominguez III as saying: “Our plan is to lower the tax rate for corporations from 30% to 25%. But our proposal to the Congress is to allow us to do that only if there’s a reduction in the amount that we provide for incentives.”
Sought for comment, Tax Management Association of the Philippines President Raymund S. Gallardo, however, cautioned that such a condition for cutting the corporate income tax rate as planned could defeat the purpose of this reform.
“Baka mahirapan sila sa pag-attain ng conditions. So, we want sana ‘yung straight 25%. Makakaapekto ‘yan sa foreign investments (It might be difficult to fulfill that condition, so we want an unconditional cut to 25%. That condition could affect foreign investments),” Mr. Gallardo said in a telephone interview yesterday.
“Tayo na nga ang pinakamataas (We already have the highest corporate income tax rate) so why do you have to have conditions?” he added.
“And it would be easier to implement if it would be the 25% and then look at other measures to compensate for the loss (in revenues).”
The DoF is taking this tack after the first tax reform package — submitted to both chambers of Congress in September 2016 and enacted as Republic Act No. 10963 on Dec. 19, 2017, consisting of a cut in personal income tax rate and compensating for estimated foregone revenues by either hiking or imposing consumption taxes on several items — yielded a revenue estimate of about P90 billion for the first year of implementation after provisions were toned down, from P133.8-157.2 billion originally.
Mr. Chua added that the Finance department’s proposed bill includes the repeal 150 laws granting fiscal perks to businesses and replacing them with an omnibus law covering all 14 investment promotion agencies (IPAs) in the country.
In order to improve compliance, Mr. Chua said the department is proposing simplification of tax rules for firms by, among others, cutting the number of tax forms and procedures; reviewing the National Internal Revenue Code to improve general anti-avoidance regulations and transfer pricing and costs; and reducing the optional standard deduction to 20% from 40% of gross income.
He said there should be clear measures of actual investment, job creation, countryside development, exports, as well as research and development to ensure that incentives are performance-based.
Moreover, Mr. Chua said, “[a]ll tax incentives should not be perpetual because the government cannot go on subsidizing business forever.”
“If a firm continues to be a losing firm, it has no business being in business.”
Hence, DoF has proposed that companies enjoying incentives of more than 10 years will continue to enjoy such perks for two more years once the second tax reform package is enacted.
Businesses availing of incentives for five to 10 years will continue to do so for three more years after enactment, while those with incentives for less than five years will avail of them for five more years.
In order to make sure the effect of incentives is better monitored, the DoF’s proposal also seeks to give the Finance chief the power to administer the tax perks shelled out by IPAs — which are now attached to various Executive offices including the Department of Trade and Industry (DTI), making it difficult to monitor total revenue impact — as chairman of DoF’s Fiscal Incentives Review Board (FIRB).
“The Secretary of Finance can cancel or suspend the grant of incentives upon the review and recommendation of the FIRB,” Mr. Chua said.
“So rather than creating a new body, we will just expand the existing body that is chaired by the Secretary of Finance who currently grants incentives only to government-owned and -controlled corporations.”
Past administrations had sought to address foregone revenues from tax incentives, but DoF and DTI — which has warned that cutting such perks would make the Philippines lose out to its competitors — have never agreed on a formula to do so.
Mr. Chua cited the practice in several Southeast Asian economies, as well as in Japan and South Korea, where their respective Finance ministries approve the grant of tax incentives.
The DoF has noted that the Philippines’ smaller corporate tax base has resulted in a corporate tax efficiency rate of just 12.3%, even with its high 30% corporate income tax (CIT) rate.
Thailand’s CIT rate is 20% but it collects almost three times the Philippines — a 30.5 percent efficiency rate — equivalent to 6.1% of gross domestic product (GDP); Vietnam’s CIT rate is 25% but it has a 29.2% tax efficiency rate, with collections equivalent to 7.3% of GDP; while Malaysia’s 24% CIT rate generates a 27.1% efficiency rate in terms of collecting such taxes that are equivalent to 6.5% of GDP.
Moreover, DoF’s statement quoted Mr. Chua as saying, “There is discrimination among different types of businesses that create distortion and inequity.”
“For instance, companies with same profit levels pay different tax rates because of the incentives enjoyed by some but not by others, and taxpayers with more profitability may be paying less than those with lower profits, also because of overly generous incentives.”