Broader corporate tax base needed to boost gov’t revenue, NTRC says

State-run National Tax Research Center (NTRC) sees a bigger taxable base for corporations as necessary to help jack up the country’s tax revenue.In a report titled “Buoyancy and Elasticity of Taxes on Net Incomes and Profits: Calendar Years 1998-2018,” the tax think tank noted that taxes slapped on net income and profits “remain as top revenue source of the government, contributing on the average almost half (45 percent) of the total government tax revenue over the past two decades.”

The NTRC’s computations showed a buoyancy coefficient of taxes on net income and profits at an estimated 1.1 during the 21-year period, and a higher elasticity estimate of 1.38 when effects of discretionary changes were removed.

“The commonly used tools in measuring the responsiveness of tax revenue to changes in GDP (gross domestic product) are buoyancy and elasticity estimates. Elasticity measures the responsiveness of tax revenue to changes in income also referred to as automatic growth of the tax yield. Buoyancy, on the other hand, measures the responsiveness of tax revenue to the combined effects of changes in income and of discretionary changes which include, among others, changes in tax rate and base, imposition of new taxes, and major changes in tax administration,” the NTRC explained.

The elasticity estimate for the period 1998-2018 meant that “for every 1 percent increase in GDP, the automatic growth in net income and profits is 1.38 percent … [reflecting] an elastic structure when net income and profits grew higher relative to GDP,” the NTRC said.“Comparing the two coefficients revealed that growth in total taxes on net income and profits responds well to growth in national income rather than that of discretionary changes done during the two-decade period. The tax measures implemented during the period had actually caused a decline in the overall growth of the income tax collection—25.5 percent of the reduction in collection on net income and profits can be attributed to the revenue-losing measures adopted during the period,” the NTRC added.For instance, Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Act, which took effect last year, restructured personal income tax rates and exempted an annual taxable income of P250,000 and below.

In 2015, RA 10653 raised the tax-exempt cap on 13th-month pay and other benefits to P82,000 from P30,000 previously.

At least three other laws on personal and corporate income taxation implemented between 2008 and 2018 also had revenue-eroding provisions, NTRC data showed.

But the TRAIN Law and other tax laws during the last 21 years jacked up excise taxes slapped on consumption, such as “sin” products, oil, motor vehicles, sugary drinks and cosmetic procedures, among others.

While taxes from corporations were found to be both buoyant and elastic, the NTRC said collections from personal income taxes were found to be inelastic “due to failure to index the income-tax schedule to inflation” in the past, which had been corrected by the TRAIN Law in 2018.

“The foregoing buoyancy and elasticity results, which were generally close to each other suggest that legislative tax measures done during the period under review had a minimal effect on increasing income-tax revenue; instead, significant percentage in the growth of tax revenue came from growth in national income,” the NTRC said.

“The present income-tax structure responds automatically to increases in the national income, except for income tax on compensation and business/professional, which were found to be inelastic,” the NTRC added.

As such, “to increase tax revenue, it is suggested that the taxable base for corporate income tax be broadened given its high elasticity,” according to the NTRC.

Data showed that corporate income taxes jumped to P302.9 billion in 2018 from P40.1 billion in 2008—growing by an average of 11.6 percent yearly during the past 21 years despite a rate reduction in 2009 from 35 percent to the current 30 percent.

In comparison, the take from personal income tax on compensation, on average, grew by a slower 8.8 percent yearly from P48.3 billion in 1998 to P231 billion in 2018—with a 27-percent decline registered last year due to the implementation of both the TRAIN Law and RA 10653.The Duterte administration’s pending Corporate Income Tax and Incentives Reform Act was aimed at rationalizing the tax and other fiscal perks currently being enjoyed by investors while gradually reducing the region’s highest corporate income tax rate—from 30 percent at present, to 20 percent.