Government urged to come up with CITIRA safety nets

MANILA, Philippines — The proposed Comprehensive Income Tax and Incentives Reform Act (CITIRA) should come with safeguards to better prepare for unintended consequences of the measure, the Ateneo School of Government said.

Ateneo School of Government dean Ronald Mendoza said during the roundtable discussion organized by the Philippine Economic Zone Authority (PEZA) that while the rationale behind the push for CITIRA is clear, there are also issues that need to be clarified in the proposed measure.

CITIRA seeks to gradually reduce the corporate income tax (CIT) rate, considered to be among the highest in Southeast Asia, to 20 percent from 30 percent, as well as rationalize incentives given to investors.

Part of the proposed changes in the incentives system is the shift from payment of five percent tax on gross income earned by PEZA locators to CIT.

“The reform package is expected to be revenue-neutral, so that the reduction of CIT will likely be compensated by the rationalization of fiscal incentives. This suggests that some sectors will definitely face reduced incentives—and it is an empirical question as to the possible investment and job impacts of this adjustment. Another set of empirical questions relate to the projected investment and job-creation impact (if at all) of the CIT tax cut. The net impact of all these adjustments could better inform us of the full implications — hence the necessary safety nets and policy roll out protocols — supporting this reform,” Mendoza said.

In general, he said the government must provide a concrete plan and safeguards for the introduction of reforms.

“The clear challenge presently is to better understand the consequences of reform rollout so that government and the private sector are better prepared for any potential unintended consequences and in order to offer adequate safety nets for the groups most affected by dramatic structural adjustments,” he said.

He said recent reforms put in place such as the Tax Reform for Acceleration and Inclusion Act which reduced personal income tax rates and slapped higher taxes on fuel, cars, tobacco and sugar beverages, and the Rice Tariffication Law which liberalized rice imports for food security, should be recalled and pondered upon when introducing reforms as their rollout issues have not yet been fully sorted out.

With agencies for and against the CITIRA not in agreement on evidence and data being presented, he said there is also a need to review empirical evidence related to the proposed measure.

“We should be careful in interpreting the present set of mixed results on the effectiveness of incentives to attract FDI (foreign direct investments). Studies suggest that investors are influenced more by strong economic fundamentals of the host economy. The evidence suggests that the effectiveness of incentives is highly context (e.g. time and geography) dependent. In other words, in addition to the prevailing tax policy and regime in a country, investment decisions are also driven by market and political factors such as market size and income level, labor productivity, type and availability of infrastructure, and political and macroeconomic stability,” he said.