Business Monitor International, a unit of Fitch Group, said the government’s tax reform program will make the Philippines less competitive in attracting foreign investments.
BMI said in a report Tuesday foreign investments could slow over the near term as the proposed conditional corporate tax reduction and repealing of fiscal incentives could create uncertainties for businesses.
The Finance Department already submitted the second package of the government’s Comprehensive Tax Reform Program to Congress and the proposal is now being deliberated at the House of Representatives.
“While the proposed tax reforms in the second package would streamline the complex tax system, we believe it will likely weigh on the country’s competitiveness, and create uncertainty for investors in the near-term,” BMI said.
The second package came after the first package was signed into law by President Rodrigo Duterte in December 2017. It aims to lower corporate income taxes and reduce fiscal incentives to investors to achieve the government’s objective of making the tax system more efficient and fairer.
Package two of the Tax Reform for Acceleration and Inclusion proposes to gradually reduce the corporate income tax rate from 30 percent to no less than 25 percent, while modifying tax incentives for companies to make these “performance-based, targeted, time-bound and transparent”.
The Philippine Economic Zone Authority currently grants an attractive package of incentives including income tax holiday for a maximum of eight years, followed by a perpetual 5-percent tax on gross income earned and zero value added tax on local purchases and up to 30 percent of local sales.
The country has 14 investment promotion agencies, more than 200 laws granting various types of investment and non-investment tax incentives and the Tax Code that also provides several tax benefits.
The latest draft of the Train’s second package called for an overhaul and streamlining of the tax incentives to make these business perks more equitable and effective in creating jobs, developing industries, attracting more foreign direct investments and generating more revenues to fund the government’s P8.4-trillion ‘Build, Build, Build’ infrastructure program.
The government is asking for a limit on Philippine Economic Zone Authority’s incentives to a maximum of 10 years and to change the 5-percent tax on gross income earned to 15 percent tax on net income.
The bill also calls for the repeal of more than 30 special laws that grant incentives to investors and for Peza-registered enterprises to export 90 percent of total sales, up from the current requirement of 70 percent.
“Despite the proposed corporate income tax cut, we note that tax rates in the Philippines will still be one of the highest and least competitive in the region, and the repealing of tax incentives to investors will likely make it worse,” BMI said.
“This comes at a time when other countries in the region are trying to offer more tax incentives in order to attract foreign direct investments. Not only that, the tax reduction is conditional and dependent upon the government’s ability to reduce the cost of tax incentives – for every reduction in the cost of the tax incentives by 0.15 percent of GDP, there will be a 1.0-percent reduction in corporate tax rate,” it said.