The government’s tax reform Package 2 — focused on corporate profits and fiscal incentives — could end up being detrimental to investments, a Fitch Group unit said.
“While the proposed tax reforms in the second package would streamline the complex tax system, we believe it will likely weigh on the country’s competitiveness and create uncertainty for investors in the near-term,” BMI Research said in a report released on Tuesday.
The second of five packages under the Duterte administration’s Comprehensive Tax Reform Program (CTRP) was submitted to the House of Representatives in January, quickly following the December approval of the Tax Reform for Acceleration and Inclusion (Train) law that took effect at the start of 2018.
Package 2 proposes to gradually lower the corporate income tax rate to 25 percent from 30 percent while modifying tax incentives for companies to make these “performance-based, targeted, time-bound and transparent.”
BMI, however, said: “Despite the proposed corporate income tax cut, we note that tax rates in the Philippines will still be one of the highest and least competitive in the region, and the repealing of tax incentives to investors will likely make it worse.”
The rationalization of perks also comes at a time when neighboring countries are trying to offer more incentives to attract foreign direct investments, it added.
“Not only that, the tax reduction is conditional and dependent upon the government’s ability to reduce the cost of tax incentives — for every reduction in the cost of the tax incentives by 0.15 percent of GDP (gross domestic product), there will be a 1 percent reduction in corporate tax rate,” BMI noted.
As part of the proposal, the government is asking for a limit on Philippine Economic Zone Authority (PEZA) incentives to a maximum of 10 years and changing the 5 percent tax on gross income earned (GIE) to a 15 percent tax on net income, it pointed out.
The bill also calls for the repeal of more than 30 special laws that grant incentives to investors and for PEZA-registered enterprises to export 90 percent of total sales, up from the current 70 percent.
BMI noted that the PEZA currently grants an attractive incentives package that includes income tax holidays for a maximum of eight years, a perpetual 5 percent tax on GIE and zero value-added tax on local purchases and up to 30 percent of local sales, among others.
There are also 14 investment promotion agencies, more than 200 laws that grant various types of investment and non-investment tax incentives and tax benefits are also provided under the Tax Code, it added.
“Although the quid pro quo approach may be fiscally prudent, it creates more uncertainty for businesses. We believe that this could weigh on investment over the near-term as investors adopt a wait-and-see approach,” BMI concluded.
The Train law, also known as Train 1A, cut personal income taxes in exchange for excise tax hikes on fuel, car sales and sugar-sweetened beverages, among others.
CTRP Package 2 is separate from the stilll-to-be approved Train 1B proposal, which includes complementary measures such as motor vehicle users’ charges and an estate tax amnesty that the Finance department wants Congress to pass within the first quarter of this year.
The government has said that revenues from its tax reform program would help it deliver on its ambitious “Build Build Build” infrastructure program.