Philippines has room to gradually cut income tax on businesses — IMF paper

MANILA, Philippines — The Philippines can afford to gradually cut corporate income tax (CIT) rates to stimulate investments, as the country also seeks to reduce fiscal incentives from businesses that do not need them.

“Some ASEAN countries, like the Philippines, have scope to cut the statutory CIT rate in a gradual manner, which could encourage domestic investment and attract foreign direct investment,” a working paper published by the International Monetary Fund said.

“But the extensive use of tax concessions and exemptions—estimated to amount 1.5 percent of gross domestic product in 2014—results in distortions, and keeps CIT productivity at almost half the level of better performing peers, as is the case in the Philippines,” it added.

The Department of Finance wants to gradually trim the income tax imposed on companies from the current 30 percent to 25 percent to match those of the Philippines’ regional peers.

Last month, lawmakers filed House Bill 7458, which provides for a one-percentage point reduction in the CIT every year starting 2019, provided that the cut would not reach lower than 20 percent.

The bill also seeks to “modernize” investment incentives to ensure that only industries that provide positive spillover to the economy are given incentives.

Early this month, BMI research warned that investments could slow over the near-term amid “uncertainties” over the government’s proposed conditional corporate tax reduction and repealing of fiscal incentives.

The unit of Fitch Group added that while the proposed tax reforms may be fiscally prudent, it will likely make the Philippines less competitive versus its regional peers.

But the DOF said incentives can still be granted, but “more judiciously this time.”

“A simpler CIT code with lower tax burden can create a level playing field and reduce compliance costs for firms, which, in turn, promote fixed investment by existing and new firms, and attract foreign direct investment,” the IMF paper said.

“It is critical to develop a comprehensive approach to corporate tax reform aiming to reduce the tax burden while simultaneously strengthening tax compliance and introducing base-broadening measures, like phasing out tax incentives and preferential treatment, which complicate the system and erode the revenue base,” it added.