THE government can secure an “A” investment grade credit rating for the Philippines once two crucial tax reform measures are passed, according to a Philippine National Bank (PNB) economist.
“In our view, Fitch stands ready to hike the country’s investment credit rating upgrade to the next level if we see [the] passage of key fiscal and macro reform measures, closing in on the coveted ‘A’ ratings,” Jun Trinidad, an economist at the Tan-led lender, said in a report released earlier this week.
He is referring to Fitch Ratings, which on February 12 raised its outlook for the Philippines from stable to positive, indicating that the country’s current “BBB” investment-grade credit rating is one step closer to being upgraded.
“We believe the new reform measures whose passage are critical to notching a credit ratings upgrade are”Citira and Pifita, Trinidad said.
Formally known as the Corporate Income Tax and Incentives Rationalization Act, Citira aims to cut the corporate income tax (CIT) rate from 30 percent to 20 percent and modernize the country’s incentive system to make tax perks performance-based, time-bound, targeted and transparent.
Under this measure, firms enjoying the existing 5-percent tax on gross income earned would be allowed a transition period in which they can continue to benefit from this incentive for two to five years.
The “[k]ey macro effect of Citira, in our view, is to create that ‘supply response’ from the beneficiary firms as the CIT is cut,” the economist said.
He also said the tax cut’s effect could be used to upgrade production efficiency or boost labor productivity, and support better dividend policy of companies.
For small and medium enterprises, the PNB economist added, it is hoped that the lower CIT rate would improve the likelihood of tax compliance and, thus, improve the collection efficiency of such taxes.
“We believe benefits of the CIT cuts would offset the employment costs in the rationalization of fiscal incentives,” he said.
Trinidad also said that, with less than 40 percent of households accessing bank services, Pifita is expected to strengthen the savings culture and broaden household preference to invest in financial assets and not just in real assets.
Officially known as the Passive Income and Financial Intermediary Taxation Act, Pifita targets to complement Republic Act 10963, or the Tax Reform for Acceleration and Inclusion Act, by making fairer intermediary taxes. This would pave the way for the simpler taxation of passive income, financial services and transactions.
The economist said having these measures passed within the year and another investment credit rating upgrade from Fitch next year would burnish the appeal of local and foreign currency-denominated Philippine financial assets to offshore investment flows.
“These key fiscal and macro reforms that strengthen public finances translate into a stronger government capacity to spend and alleviate short-term losses in employment and incomes as well as infrastructure damage arising from natural disasters and other negative macro surprises while sustaining the low risk of debt default,” he added.