Improving Phl competitiveness

President Aquino has recently signed into law the amendment to Section 32 of the National Internal Revenue Code that will in effect increase the tax exemption cap for bonuses from P30,000 to P82,000.

Under the new law, employees receiving 13th-month pay, Christmas bonuses and other benefits not exceeding P82,000 will now be exempted from tax. 

Senate President Franklin Drilon earlier said that the tax exemption for bonuses is needed “to provide relief to state and private workers whose purchasing power has been shrinking for years due to inflation, but still have had to deal with the consequences of an outdated law.”

For his part, Sen. Sonny Angara, one of the authors of the new law, explained that the P30,000 tax ceiling had not been adjusted for 20 years.

Bureau of Internal Revenue chief Kim Henares is, of course, probably one of the very few who are not so happy with this development. According to her, any reduction in tax collections has to be compensated by an increase in collections from something else.

Henares’ woes are just starting.

After raising the tax exemption ceiling for bonuses, Marikina City Rep. Miro Quimbo, who heads the House Ways and Means Committees said Congress is now preparing for deliberations on income tax reforms, which would reduce tax rates.

 At least three bills seeking to lower individual tax rates by as much as 15 percent have been filed at the House.

The Philippines has the highest income tax rate among Southeast Asian countries at 32 percent. Under the existing system of progressive taxation in the country, individuals with a taxable income of at least P500,000 annually are considered to be in the top tax bracket and are taxed 32 percent.

Henares has warned that the government stands to lose as much as P43 billion in tax revenues by 2017 if income tax rates are lowered.

In the Senate, Angara has filed a bill seeking to adjust individual income tax bracket and to reduce the country’s individual income tax rate from the current 32-to 25-percent by 2017.

By 2017, Angara’s bill seeks to lower tax rates to 10-from 15-percent for those earning between P20,000 to P70,000 and to 25 percent from the current 32 percent for those earning over P1 million.

To address the projected loss of government revenues from lower income tax rates, Quimbo said his panel is also working on legislating revenue-generating measures such as excise taxes on carbonated drinks, and additional impositions on the mining industry.

The Tax Managers Association of the Philippines (TMAP) has thrown its support for cutting income tax rates, saying both businesses and workers stand to benefit if these are reduced. 

The group has said in a position paper released last week that lowering income tax rates would provide individuals with more disposable income. This, it noted, would result in economic growth and better living standards for Filipinos.

TMAP has also recommended that workers in the lowest tax bracket, or those defined as “marginal income earners” should no longer be taxed. At present, even those who earn P10,000 are taxed five percent.

For his part, Quimbo has filed a bill seeking to adjust the levels of taxable income brackets and the corresponding base amount of tax for compensation income based on updated consumer price index (CPI).

Under his proposal, a flat rate of 25 percent income tax will be imposed on self-employed individuals and professionals.

His bill likewise seeks to reduce the corporate income tax rate from 30-to 25-percent and to increase the minimum corporate income tax rate from two to five percent.

Our government should realize that higher taxes is partly to blame for our country’s failure to take off and realize its full potential. And that as the younger Angara has pointed out, the tax system should not only be a means to raise revenue, but should be a way to promote an end.

Why do other countries like Singapore and Hongkong impose low individual and corporate income tax rates?

The Inland Revenue Authority of Singapore (IRAS) explains that “the fundamental tenet of Singapore’s tax policy is to keep tax rates competitive both for corporations as well as individuals. Keeping our corporate rate competitive will help us to continue to attract a good share of foreign investment. Keeping our individual rates low will encourage our people to work hard. It will also make risk-taking worthwhile and encourage entrepreneurship.”

Lower corporate taxes may mean lower collections for the BIR and therefore, less money to spend for our government, but that doesn’t mean that it is the end of the road for us. If only lower corporate and individual incomes taxes can be matched with creating a more attractive investment climate and a program that will encourage Filipinos to invest their savings in productive endeavors, then the short-term loss can easily be wiped out.

Indeed, lower taxes can be a step towards the Philippines achieving global competitiveness.

Chiara Feliz Gutierrez of Isla Lipana & Co. in an article notes that  “if we intend to effectively achieve the Asean framework of a single market and production base, it is imperative that we create a conducive environment that would catapult the Philippines into a place among investors’ choices. This would require scaling down to benchmark our corporate income tax rates with the average corporate income tax of other Asean member states.”

At present, the average corporate income tax rate among the 10 Asean member countries is 23 percent, with Singapore imposing the lowest rate of 17 percent on net taxable income. Thailand and Cambodia levy up to 20 percent as corporate income tax, while Lao PDR has a 24 percent profits tax. Malaysia and Indonesia both impose a 25 percent corporate income tax. Myanmar also generally imposes 25 percent, except in the case of a foreign entity’s branch operating in Myanmar, which is subject to a higher 35 percent rate. Vietnam previously pegged its corporate income tax at 25 percent, but has now reduced the rate to 22 percent. (www.pwc.com)

Aside from having the highest corporate tax rate at 30 percent, the Philippines also subjects its taxpayers to 12 percent VAT. It is the highest rate among VAT or Gross Sales Tax relative to other Asean states, with rates ranging from zero to 10 percent. From these two components alone, it would be easy to understand why costs of doing business in the Philippines remain high and less attractive to investors, Gutierrez notes.

As of 2013, the WEF, in its Global Competitiveness Report, ranks the Philippines 65th out of 144 economies. Other fellow Asean states have outranked it by far (e.g., Singapore, 2nd; Malaysia, 25th; Brunei Darussalam, 28th; Thailand, 38th; and Indonesia, 50th).

“While, arguably, tax rates by themselves do not shape our economy’s competitiveness, the implications, however, cannot be ignored. Keeping rates at par with those of immediate neighboring economies will allow the Philippines to stride without the risk of being surpassed and, ultimately, getting left behind. Any move to be globally competitive in terms of taxation in the Asean region should, of course, be coupled with other bona fide reforms in the government to address deterrents to FDI such as bureaucratic inefficiencies, inadequate infrastructure, corruption and even its mere perception,” Gutierrez added.

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