Fitch Solutions downplays corporate tax cut’s lure

By Melissa Luz T. Lopez
Senior Reporter
LOWER CORPORATE INCOME TAX RATES are unlikely to provide a big boost to inbound investments, Fitch Solutions said, noting that a weak business environment hounded by red tape still deters investors from making big bets in the Philippines.
Fitch Solutions, a unit of Fitch Group, said the second tax reform package now awaiting legislative approval will not be a source of additional state revenues and is unlikely to lead to a deluge of foreign direct investments (FDIs).
Earlier this month, the House of Representatives approved House Bill No. 8083, or the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) Act, which gradually reduces the corporate income tax (CIT) rate to 20% from the current 30% by two percentage points every other year starting 2021.
This will come alongside a new one-size-fits-all scheme for tax incentives, which will replace various types granted by investment promotion agencies and likewise put a cap on the number of years in which a company can enjoy such perks.
Under the bill, incentives will consist of a three-year income tax holiday (ITH) as well as allowable deductions up to five years for “labor, training, infrastructure building, and research and development expenditures.” This is a far cry from the current regime which grants ITH for up to nine years, with a five percent tax on gross income.
The House approval puts the ball in the Senate’s court, although lawmakers there are studying a different version that would immediately cut the CIT rate to 25% in the first year of implementation.
However, the Fitch unit said the country is unlikely to see much fiscal gain from the TRABAHO bill. “We believe that the impact on the government’s fiscal position is negligible…” Fitch Solutions said in an analysis issued yesterday. “The government expects a loss of P62 billion in revenue upon the lowering of CIT in 2021 and, according to our forecast, this will represent just 1.5% of the expected revenue collection that year. Moreover, the TRABAHO also seeks to trim tax incentives that are offered to investors, making them more selective and less encompassing, and this will likely offset some of the loss in revenue from lower corporate taxes.”
The Department of Finance had originally designed the second tax package to be revenue-neutral, meaning it was not to yield additional tax collections unlike Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act, that took effect this year. But since CIT cuts are no longer pegged to annual revenue increments from removal of redundant fiscal perks under the bills in Congress, this measure is now expected to yield more foregone revenues.
Fitch Solutions is also unsure that the lower tax rates will improve the Philippines’ attractiveness as an investment destination.
“On the investment front, we are unconvinced that the lowering of CIT rates will provide a significant boost, in the absence of accompanying improvements to the business environment,” the report read.
“While CIT rates are one of the considerations of potential investors when they look to relocate their businesses, we believe that more of them are deterred by the poor business environment caused by red tape and corruption, as well as poor infrastructure conditions.”
“Moreover, the lowering of CIT rate is so gradual that it will take until at least 2025 before they fall in line with regional levels,” the think tank added, noting that it will take years before the tax rate actually becomes competitive.
Not all tax reforms proposed by the Executive can be approved by yearend, a House leader has said, contrary to President Rodrigo R. Duterte’s request in his State of the Nation Address last July in hopes of securing legislative approval before lawmakers shift attention to preparations for the May 2019 mid-term elections.