The Duterte administration’s plan to cut corporate taxes— while closing tax loopholes that some companies currently enjoy—received a boost from the International Monetary Fund whose regional head said the proposal would increase business confidence in the country.
The so-called “TRAIN 2” tax package calls for Congress to reduce the corporate income tax rate to 25 percent from the current 30 percent, while simultaneously “rationalizing” tax incentives that cost the government as much as P301 billion annually, according to a Department of Finance estimate.
“The government’s proposed second phase of the tax reform is critical to the modernization of the corporate tax system in the Philippines, in support of the country’s development,” IMF Asia-Pacific director Rhee Changyong said in his paper “Tax Reform for a Brighter Future.”
“Once implemented, this reform will improve the overall business environment and further establish the Philippines as a strong reformer in the region,” he said.
While the proposed reduction in corporate income tax rates have widespread support in the business community, the long-running drive to reduce the number of tax breaks— now covered by over 220 laws that provide incentives and 14 government agencies that have the authority to grant them with discretion—has been a constant sore point between the Department of Finance on one hand and the Department of Trade and Industry on the other.
The DOF insists that the tax breaks unnecessary reduce the amount of revenues it collects for the government’s spending needs, while the DTI says the tax breaks are critical for attracting foreign investors who then create jobs for Filipinos.
At 30 percent of gross income, the Philippines has the highest corporate tax rate in the region. Vietnam, Malaysia and Laos all have rates below 25 percent.
Thailand’s is at 20 percent, while Brunei’s and Singapore’s are below 20 percent, with Singapore having the lowest corporate taxes in the region.
The paper published by the Washington, DC-based multilateral funding agency, however, came down squarely on the side of the Finance Department.
“In our view, the decision to grant tax incentives needs to be considered against the need for providing more and better public services,” the IMF paper said, “With 22 million people estimated to be living in poverty in 2015, a careful balance needs to be achieved between tax incentives and meeting critical spending needs on education, health care, and basic necessities.”
The IMF official pointed out that the current high corporate tax rate acts as a disincentive to businesses not receiving tax incentives, who are effectively subsidizing the current recipients of incentives.
“A more equitable corporate tax system would help strengthen competition among businesses and encourage overall investment in the Philippines more broadly,” he said.