THE PHILIPPINES has enough room to introduce a “gradual” reduction in corporate tax rates in order to attract greater investments, while noting that tax breaks granted to some firms have proven to be inefficient.
A working paper published by the International Monetary Fund (IMF) said that the Philippines can afford to cut the income tax imposed on businesses, as currently planned by the Duterte administration.
“Some ASEAN countries, like the Philippines, have scope to cut the statutory CIT (corporate income tax) rate in a gradual manner, which could encourage domestic investment and attract foreign direct investment (FDI),” IMF economists Serhan Cevik and Fedor Miryugin said in a paper, titled: “Does Taxation Stifle Corporate Investment? Firm-Level Evidence from ASEAN Countries.”
“But the extensive use of tax concessions and exemptions — estimated to amount 1.5% of GDP (gross domestic product) in 2014 — results in distortions and keeps CIT productivity at almost half the level of better performing peers, as is the case in the Philippines.”
Pending before the House of Representatives is Package Two of the tax reform program being pushed by the Department of Finance (DoF), which seeks to gradually cut corporate income taxes to 25% from 30%.
One version of the proposal makes the tax cuts conditional: providing for a one-percentage point reduction in CIT rate provided that the government collects 0.15% of GDP — or about P26 billion — from streamlining tax incentives given to firms.
However, House Bill No. 7458 simply proposes an annual reduction in corporate taxes starting January 2019 without this condition, provided that the rate does not go below 20%.
The government wants to cut corporate tax rates that are among the steepest in Southeast Asia.
The paper assessed the impact of taxation on fixed investments by 799,328 firms in the Philippines, Indonesia, Malaysia, Thailand and Vietnam in 1990-2014.
“The empirical results show that an excessive level of taxation reduces incentive for private investment by raising the user cost of capital and distorting resource allocations,” the IMF paper read.
“[A] simpler CIT code with lower tax burden can create a level playing field and reduce compliance costs for firms, which, in turn, promote fixed investment by existing and new firms and attract foreign direct investment,” the economists explained.
“[I]t is critical to develop a comprehensive approach to corporate tax reform aiming to reduce the tax burden while simultaneously strengthening tax compliance and introducing base-broadening measures, like phasing out tax incentives and preferential treatment, which complicate the system and erode the revenue base,” the IMF paper added, citing relatively low revenue-to-GDP ratios across Southeast Asia.
The Finance department wants to remove redundant tax holidays and other perks granted by 14 investment promotion agencies, saying that all incentives need to be time-bound and “performance-based”.
The department estimates that the government gave out a total of P301 billion worth of tax breaks in 2015.
BMI Research, a unit of Fitch Ratings, has flagged that investments could slow over the coming months amid uncertainties on corporate taxes, warning that the DoF’s proposal could do more harm than good for the country’s business climate.
FDIs to the Philippines surged to $10.05 billion last year, hitting a fresh all-time high to beat the central bank’s $8-billion forecast, but still paled in comparison to foreign capital received by neighboring economies. — Melissa Luz T. Lopez