DOF to pitch reduced corporate income tax in next revenue package

The Department of Finance (DOF) will submit to Congress in October a revenue-neutral second tax reform package aimed at slashing corporate income taxes while putting a cap on the fiscal incentives being enjoyed by investors.

A DOF document showed that the second of five tax reform packages would cover corporate income taxation. The draft bill will be submitted to Finance Secretary Carlos G. Dominguez III in September, following next month’s results of the cost-benefit analysis of investors’ tax perks under the Tax Incentives Management and Transparency Act (Timta).

A comprehensive review of the country’s tax incentives regime had been mandated under the Timta Law to assess the benefits as well as the costs of giving away fiscal perks to investors.

The second tax reform package will bring down the corporate income tax rate from 30 percent at present to 28 percent in 2019, and further down to 25 percent in 2021, the same level currently being enjoyed by neighboring countries.

Based on DOF estimates, the P34.8 billion in foregone revenues from the reduced corporate income tax rates will be offset by a similar P34.8-billion gain from the rationalization of fiscal incentives during the first year of implementation.

“The lower income tax rate must be offset by enough claw back of incentives,” the DOF said.

Fiscal incentives will be rationalized under the second package such that only the performance-based, time-bound, targeted and transparent will be granted to investors. For existing tax incentives, a sunset provision of a maximum of five years will be put in place.

The government will also replace the 5-percent gross income earned tax to a reduced corporate income tax rate of 15 percent under the second package.

The package would also “expand the coverage of the Fiscal Incentives Review Board to include all incentive recipients beyond government-owned and/or -controlled corporations” while also reviewing the tax incentives being given away by investment promotion agencies such as the Board of Investments, the Philippine Economic Zone Authority as well as other economic zones, the DOF document showed.

The three other tax reform packages will involve property taxation, capital income taxation, as well as health, environment and luxury taxation. All of these would be submitted to Congress by October, according to the DOF.

In a report Wednesday, debt watcher Fitch Ratings said the first tax reform package approved by the House of Representatives last week “should widen the tax base and boost revenue.”

“It also demonstrates the administration’s commitment to broader tax reforms that have the potential to improve fiscal stability and support an ambitious public investment program,” Fitch said.

Fitch noted that “low government revenue is currently a key weakness in the Philippines’ fiscal profile—general government revenue was equivalent to just 22 percent of GDP [gross domestic product] at end-2016, compared with a median 30 percent for ‘BBB’-rated countries.”

“The speed with which this first bill passed through the House—and President Duterte’s intervention to give it a push over the line—suggests that tax reform is a priority for government. Indeed, tax reform is crucial to the rest of the administration’s 10-point socioeconomic agenda, which includes plans to ramp up investment in infrastructure, health, education and social protection,” it said.

Infrastructure spending is expected to rise to 7.4 percent of the GDP by 2022, or by the end of President Duterte’s term.