Corporate tax reform to level playing field – DOF

March 18, 2018

The Duterte administration is pushing income tax reforms in the corporate sector to level the playing field of business and make our system equitable, transparent and more accountable by, among others, removing perpetual tax holidays enjoyed by only a select group of investors, which is unfair especially to smaller enterprises that pay regular tax rates, according to the Department of Finance (DOF).

Finance Undersecretary Karl Kendrick Chua made it clear that far from removing all fiscal incentives for businesses, the Duterte administration merely wants to harmonize and modernize such perks under Package 2 of the Comprehensive Tax Reform Program (CTRP) to ensure that these are “targeted, time bound, transparent and performance-based.”

Dismissing claims by certain quarters that such corporate income tax (CIT) reforms would drive away businesses that are in the country already or are thinking of setting up shop here, Chua said investors themselves have cited  four more important and pressing concerns than tax perks that they want the Philippines  to address for them to bring in more investments, which  are the infrastructure gap, inefficiency in government, corruption, and the high cost of doing business  here, as shown by the results of the 2017 World Economic Forum survey.

Tax rates and incentives only ranked 5th among the concerns raised by investors in this survey, Chua said.

Chua noted that, in fact, the paramount objective of the Tax Reform for Acceleration and Inclusion (TRAIN) plus the other CTRP reform packages--alongside making taxation simpler and more equitable--is to raise sufficient revenues for the Duterte administration's ambitious "Build Build Build" infra buildup and other priority programs for inclusive growth.

Both chambers of the Congress are also working right now on a major bill meant to improve the ease of doing business in the country, he said.

“That the government will put ‘a stop to current incentives’ is a misconception of the proposed modernization of fiscal incentives. This is simply not true. Incentives will remain to be granted, but more judiciously this time so that there is a better balance between the investment and fiscal sustainability goals,” Chua said. “The DOF recognizes the role of incentives to encourage investments.”

On top of modernizing tax incentives, he said the government must tackle the “real issues” raised by investors in the World Economic Forum survey, along with improving human capital, investing in infrastructure and relaxing foreign ownership restrictions to attract more investments.

Chua said a proper cost benefit analysis is now being done to determine the fiscal incentives that should be given to certain businesses.

"Rather than provide incentives in perpetuity to only a select set of industries without any accountability," Chua said "the government must  address the more urgent concerns of modernizing  infrastructure and investing in education and health to give all businesses, whether local or foreign, and whether large or small, a level playing field.”

“Incentives should not be used as a band-aid solution. This is what the country has been doing for 50 years so it is high time to change this misguided policy,” Chua said.

Chua said that given the consultative approach of the DOF in pushing for tax reform, it looks forward to the inputs of the various sectors on its proposal to reduce the CIT complemented by the modernization of fiscal incentives, which comprises Package 2 of the CTRP.

“Package 2 is all about fair and accountable tax incentives,” Chua said. “The government is pro-investment to attain higher growth, and lower poverty and inequality.”

Chua said incentives will still be provided to business activities so long as they qualify in the three-year Strategic Investment Priorities Plan (SIPP) and adhere to the key principles of being performance-based, time-bound, targeted, and transparent.

“This is to ensure that every peso spent from the national budget generates the desired outcome—investments must create jobs, meet export targets, or achieve countryside development, among others. The SIPP, not the law, will re-evaluate priority industries every three years so that these priorities are aligned with changes in the economy,” Chua said.

In comparison to other countries, Chua said the Philippines has an elaborate and complex incentives system that is already one of the most generous in the region, with 123 laws that grant investment incentives outside of the tax code and 14 investment promotion agencies authorized to give such perks.

The Philippines is the only country that gives incentives in lieu of all taxes (the 5 percent gross income-earned tax) that last forever, he noted. “We have been granting incentives for 50 years, and it is time we reevaluate whether the benefits are worth the cost.”

Chua said that compared to other economies in the Association of Southeast Asian Nations (ASEAN), the Philippines imposes the CIT rate but is among those at the bottom in terms of collection efficiency.

The Philippines, he said, currently imposes a CIT rate of 30 percent but with a tax collection efficiency of only 12.3 percent, while Thailand’s CIT rate is only 20 percent but it collects almost triple--a 30.5 percent efficiency rate--that represents 6.1 percent of its GDP.

Vietnam’s CIT rate is 25 percent but it collects even more with a 29.2 percent tax efficiency rate representing 7.3 percent of GDP. Malaysia’s 24 percent CIT generates a 27.1 percent efficiency rate in terms of collecting taxes, which is 6.5 percent of GDP.  DMS