Starting this week, this column will produce a series of Market-Oriented Reforms for Efficiency (MORE) articles related to recently enacted laws and proposed legislations in the Philippines on various sectors. Thus, recent Republic Acts (RA) and some pending bills for bicameral committee meetings after the May 2019 elections will be discussed.
First on the list is the need to simplify and reduce tax rates for business that create sustained jobs for Filipinos. Currently in East Asia, the Philippines has (a) the highest corporate income tax (CIT), (b) among the highest in withholding tax for dividends and interest income, (c) the highest withholding tax for royalties, and (d) among the highest VAT or gross sales tax (GST).
These non-attractive fiscal policies plus the Constitution restrictions on foreign investments, among others, contribute to the Philippines having the lowest foreign direct investments (FDI) stock among more mature economies in the region (see table 1).
The main bill under deliberation is HB 8083, the “Tax Reform for Attracting Better and High-Quality Opportunities” or TRABAHO bill. Originally it was called the “TRAIN 2” bill but with the generally adverse impact of the TRAIN law of 2017, the DOF changed its moniker to TRABAHO.
Among the important provisions is the reduction of CIT from the current 30% to 28% in 2021, 26% in 2023, 24% in 2025, 22% in 2027, and 20% in 2029. In exchange it intends to remove certain fiscal incentives that supposedly “lower” DOF tax collections, especially the 5% gross income earned (GIE).
The Senate version intends to cut CIT from 30% to 25% in year 1 of implementation and not staggered to 10 years.
TRABAHO bill has been passed on third reading in the House last September 2018, awaiting action from the Senate for a possible bicameral meeting in late May this year.
If the government is sincere in really attracting more local and foreign investments, it should either (a) cut CIT to low, flat 15-16% within year 1 of implementation and abolish the GIE, or (b) cut CIT to 21-25% and raise the GIE to 7%.
There is real, not fictional, CIT competition in the region. For instance, Singapore’s 17% is positioned near Hong Kong’s 16.5%. Socialist Vietnam until 2013 has 25%, became 20% in 2016 (see table 2).
Let us hope that when Senators and Congressmen/women meet for a bicameral meeting after the May elections, or when they refile the bill in the next Congress in July, they will be more aware that capital and people are more mobile these days. Both the national and local governments should not be too tax-hungry and reducing the tax rates, lowering the number of permits and payments, will greatly help in attracting both local and foreign investments, and retaining them for the long-haul.
Bienvenido S. Oplas, Jr. is the president of Minimal Government Thinkers