The Asian Development Bank has expressed support for the proposed second tax reform package that will reduce corporate income tax rates while rationalizing investors’ fiscal perks.
The Manila-based multilateral lender claimed that doing so would ultimately allow the government to slash the poverty incidence rate and sustain robust economic growth.
In a statement Monday, ADB chief economist Yasuyuki Sawada said the second tax package, which is still pending in Congress, and the Duterte administration’s broader comprehensive tax reform program “are critical to strengthening the Philippines’ tax system.”
“Passage of this important legislation will demonstrate the commitment of Congress, and the country more broadly, to the reforms that are needed to spur growth, reduce poverty and inequality, and achieve upper middle-income status. It will also set the foundations for stronger and more inclusive growth for the next generation of Filipinos,” Sawada said.
According to Sawada, a “good” tax system goes beyond revenue generation and has seven other features, including equity, efficiency, competitiveness, stability and predictability, ease of administration and compliance.
“Oftentimes when people think of equity in taxation, they focus on ‘vertical equity,’ or how the tax system treats people with different incomes. Most tax systems aim for progressivity, where the rich pay a higher share of their income in taxes than the poor,” he said.
“The first phase of the tax reforms addressed this issue and succeeded in reducing personal income taxes for the bottom 99 percent of the population,” Sawada added, referring to the Tax Reform for Acceleration and Inclusion (TRAIN) Act signed by President Duterte last December.
The TRAIN Law or Republic Act No. 10963 since Jan. 1 this year jacked up or imposed new excise taxes on cigarettes, sugary drinks, oil products and vehicles, among other goods, to compensate for the restructured personal income tax regime that raised the tax-exempt cap to an annual salary of P250,000.
“But another important element is ‘horizontal equity,’ or how the tax system treats similar entities. The guiding principle is fairness—the playing field must be level, so that similar entities face similar tax rates. If we look at the current system, the incentives that some firms get but others don’t works against horizontal equity. Firms that manage to get tax incentives face much lower effective tax rates of 6-14 percent, whereas firms that don’t face a 30-percent rate. [The second tax reform package] aims to improve horizontal equity by rationalizing fiscal incentives for businesses,” Sawada said.
“By rationalizing existing fiscal incentives, [the second tax package] will allow for a reduction in the 30-percent corporate income tax rate, and this will help with the third and fourth features of a good tax system—efficiency and competitiveness. One of the principles in public finance is that distortions, or the decline in society’s well-being due to a tax, rise disproportionately with the tax rate. For this reason, it is more efficient to have a broader tax base and a lower rate, and that is what [the second package] is trying to do for corporate taxation,” Sawada said.
“A lower corporate tax rate will make the Philippines’ tax system more competitive, as it currently has the highest corporate tax rates in Asean,” Sawada added.
“One argument often leveled against [the second tax reform package] and the tax reform program more broadly is that by changing things, the government is reducing the stability and predictability of the tax system—the fifth feature of a good tax system. But one cannot and should not keep a tax system fixed—especially a flawed one—simply for the sake of ‘stability.’ The Philippines’ tax system is in dire need of fixing, and this is the first major tax reform in the Philippines in two decades. If we allow it to be done right, and done quickly, the Philippines will not need another tax reform for another two decades,” according to Sawada.