Credit rating a factor in corporate tax cuts — DoF
PRESERVING the Philippines’ credit rating will be a consideration when cutting corporate tax rates in the second round of tax reform, with the elimination of incentives to help offset foregone revenue, the Department of Finance (DoF) said.
“We are going to reduce the corporate income tax (CIT) rate from 30% to 25% over time. But we will do this responsibly, meaning we will only do this once we find savings from incentives that are redundant, or not contributing to the economy,” Finance Undersecretary Karl Kendrick T. Chua said at a the Davao City Chamber of Commerce and Industry conference on Friday.
“We’re doing our best to keep our investment-grade credit rating very competitive,” he added.
“We have to maintain fiscal sustainability. Once investors see that a country’s finances are unsustainable, interest rates go up. Government would pay P30 billion more in interest and principal debt payments,” Mr. Chua said, adding that payments on household loans could increase by P100 billion overall.
The DoF submitted to Congress Package 2 of the Tax Reform for Acceleration and Inclusion (TRAIN) program on Jan. 16 that featured a 1% reduction in the corporate tax rate provided that the government collects 0.15% of gross domestic product (GDP), or about P26 billion, from streamlining tax incentives given to firms.
However, these conditions were not present in House Bill No. 7458 as filed by Reps. Dakila Carlo E. Cua, Aurelio D. Gonzales, Jr., and Raneo E. Abu on Wednesday.
HB 7458, a copy of which was given to BusinessWorld by the office of Mr. Cua, cuts the 30% corporate income tax annually starting January 2019 without any conditions, provided that the rate does not go below 20%.
Key features of the bill that do mirror the Finance department’s proposal were the repeal of tax holidays given by Investment Promotion Agencies that do not fall under the Strategic Investments Priority Plan; the designation of the Fiscal Incentives Review Board — chaired by the DoF — to be the overall administrator of tax perks, a five-year cap on incentives, and the disallowance of transfer pricing, among others.
The Philippines currently holds a “BBB” rating from Fitch and S&P, and a “Baa2” from Moody’s, which all are a notch above investment-grade.
Mr. Chua said that the government gave out a total of P300 billion worth of tax breaks, including the involving VAT, in 2015.
“If we collect P130 billion, we would cut (tax rates) by 5%. I’m just asking for P130 billion out of P300 billion. So I’m not removing incentives totally,” he said.
Mr. Chua did not respond to requests for specific comment on the House bill.
The bill follows the enactment of TRAIN, or Republic Act No. 10963 — consisting of cuts to personal income, estate and donor taxes, removal of some VAT tax exemptions, increase in taxes for automobiles, fuel, tobacco, minerals, and a new tax on sugar-sweetened beverages and cosmetic procedures — which was approved by President Rodrigo R. Duterte on Dec. 19.
Sought for comment, Tax Management Association of the Philippines President Raymund S. Gallardo meanwhile opposed the conditional cut of the corporate income tax rate as the government may not implement it promptly.
“This might bring apprehension that if the condition is not met, the condition might not be effected. The 1997 Tax Code provided for a transition to taxing income at 15% of the gross income if certain conditions are met. This was never implemented as the conditions were never met or simply not pursued,” Mr. Gallardo said in a mobile phone message yesterday.
“A reduction in CIT rate dependent on a condition is not a tax policy or rule that is certain, which is one of the factors considered important by foreign investors most especially. Policy changes affecting existing tax incentive structure should be evaluated independently from the issue of reducing the CIT Rate. The reduction should not inexorably tied to a condition which in effect is tantamount to a zero-sum game,” he added.
Senate ways and means committee chairperson Juan Edgardo M. Angara said that the panel has yet to set a date for the filing of the bill, as it is currently focused on the estate and general tax amnesty bill — a measure to shore up complementary revenues for TRAIN.
“We’re still talking (with DoF). The lines are always open. But they know we’re busy with the amnesty. We’re in touch with them on the amnesty now. We’re polishing it off,” Mr. Angara said in an interview last week.
Asked what Senate’s main concerns are about the second round of tax reform, he said: “It’s not just the revenue implications but also the issue of jobs, jobs produced, what kind of jobs, do they generate high incomes, was there an improvement in the local economy, was there technology transfer, did it help develop in other development areas, did the roads improve? All those metrics of development we’ll be looking at.” — Elijah Joseph C. Tubayan, Camille A. Aguinaldo