Philippines should broaden tax base to cut rates – IMF

CEBU, Philippines - The government can cut tax rates without risking its revenue stream by broadening the tax base, an official from the International Monetary Fund said.

Shanaka Jayanath Peiris, IMF resident representative to the Philippines, stressed that the government must address the loopholes in the tax system such as the many tax holidays and exemptions.

"If you'll have an income tax reform, you need to have compensation measures for it because the country's revenue ratio and public investment ratio are low," Peiris told reporters in an interview after his economic briefing at the Bangko Sentral ng Pilipinas office in Cebu City on Monday.

Peiris pointed out the Philippines has relatively high tax rates compared to its neighbors in Southeast Asia but its collections are quite low mainly because of the many exemptions.

"The big issue in corporate tax is the rate is high but we only collect a little because we have lots of tax holidays and exemptions," he said.  

"Exemptions have to be reduced. Rates look high but only few pay. Let more people pay across the board. [The Philippines] should not just cut the rates but should have a holistic [tax] measure," the IMF official explained.

"If you broaden the [tax] base and collect more and then you can cut rates," he further said.

Peiris said reducing tax exemptions would also make a more level playing field for small and medium enterprises, noting that big companies are usually the ones enjoying the exemptions.

Presently, the highest tax rate for corporations is 30 percent while for individuals is 32 percent.

From January to November 2015, the Department of Finance reported a tax-effort ratio of only 13.72 percent. The Southeast Asian tax effort average is 15 percent.

Tax effort represents the share of tax collections to gross domestic product (GDP).

Peiris noted that the country's tax-to-GDP ratio is relatively low so the government must prioritize a tax reform that would raise revenue while making the tax system more efficient.

An income tax reform are among the top agenda of the presidential candidates for the coming election. 

There have been calls from different sectors for a comprehensive tax reform to make the Philippines more competitive. (FREEMAN)