PHL expected to benefit from profit-shifting rules

THE PHILIPPINES is expected to benefit modestly from international tax rules to deter profit shifting by multinationals, the ASEAN+3 Macroeconomic Research Office (AMRO) said.

In an analysis published Tuesday, AMRO said the proposed two-pillar solution under the proposed inclusive framework on base erosion and profit shifting (BEPS) can reallocate at least $100 billion worth of tax rights and generate $150 billion in additional global tax revenue each year.

The first pillar hopes to shift the right to tax a multinational company where the revenue is generated, instead of the current practice of collecting taxes where the business is incorporated. The second part of the framework aims to establish a proposed 15% global minimum tax rate for the sector.

In reallocating a portion of taxable profit to economies where the revenue is generated, AMRO said populous countries with high income and large digital economies will benefit the most.

“China and Japan will likely receive a significant portion of the reallocated residual profit. Populous middle-income economies, such as Indonesia, the Philippines, Thailand and Vietnam, are expected to gain moderately,” it said.

In an e-mail Tuesday, AMRO said the estimates were arrived at based on the potential number of consumers within a given population and income per capita. These inputs helped determine the new tax base once the framework has been rolled out.

To increase potential revenue of the country, AMRO said the Philippines needs to launch reforms that will scale down the use of tax incentives to attract investment from multinational companies.

Aside from population, AMRO said the concentration of multinational regional headquarters in certain countries will also affect government tax collection.

Foregoing revenue-based digital service taxes, as proposed under pillar one to avoid double taxation, however, would result in lower collections. The Philippines is yet to adopt taxes for digital services.

AMRO said the second pillar of the framework, which would set a floor on tax rates for multinational companies, will likely hurt regional economies with low corporate tax rates such as Cambodia, Hong Kong, South Korea and Singapore, whose rates are currently below 15%.

“These economies will be less attractive to existing multinational enterprises and potential investors as the attractiveness of their tax incentives diminishes,” it said.

The Philippines reduced its corporate income tax to 25% this year from 30% previously, and will further cut the rate by one percentage point annually until it reaches 20% in 2027. It also removed the 10% preferential tax rate for regional operating headquarters.

The framework aims to create a more “stable and fairer” global tax structure to address BEPS practices that transnational companies undertake to arbitrage tax regimes and shift profits to locations with low or zero tax rates.

Citing estimates from the Organisation for Economic Co-operation and Development, AMRO said governments are losing $100-400 billion annually in tax revenue due to these profit-shifting schemes.

“Achieving global consensus on such global tax reform is a complicated process. It would require economies with competing interests to find common ground and redefine the ways of doing cross-border business,” it said.

The Department of Finance has said that the Philippines is making progress in joining the inclusive framework, which was first established in 2015 and has 134 signatories which pledge to implement 15 action plans to address tax avoidance. — Beatrice M. Laforga