The reduction in the corporate income tax (CIT) rate complemented by an overhaul in the tax incentives system for companies will propel economic growth, create more jobs, and lower poverty incidence, according to a study commissioned by the Department of Labor and Employment (DOLE).
The study, supported by the Asian Development Bank (ADB) and the Department of Finance (DOF), also shows that the proposed reforms in corporate taxation will level the playing field for businesses across the country, boost the flow of foreign direct investments (FDIs) into the country, and lead to a reduction in the prices of consumer goods.
A copy of the study titled “The Potential Economic Effects of Reducing Philippine Corporate Income Tax and Reforming Sectoral Incentives” was sent to Finance Secretary Carlos Dominguez III by Labor Secretary Silvestre Bello III.
“With these positive findings, the DOLE is confident that CITIRA [now renamed CREATE] will facilitate the creation of more and better employment opportunities for our workers through a regionally competitive corporate tax rate and a level playing field for firms and industries across regions, especially for (MSMEs) and in lagging and underdeveloped regions,” Bello said in a letter to Dominguez.
The study focused on six key simulations in which the CIT is reduced in all exercises, but with different assumptions on how the reduction of the tax rate is balanced out, whether through higher borrowings or lower spending by the government.
Conducted by Dr. Caesar Cororaton of the Virginia Polytechnic Institute and State University or Virginia Tech and Dr. Marites Tiongco of the De La Salle University (DLSU) School of Economics, the study was based on the original proposal called the Corporate Income Tax and Incentives Rationalization Act (CITIRA), which seeks to gradually lower the CIT from 30 percent to 1 percentage point each year until the rate reaches 20 percent in 2029. This was a slower tax rate reduction than the one more currently proposed under CREATE.
The research was conducted before the outbreak of the Covid-19.
In the simulation scenario, which considered the original CITIRA as envisioned by the government, with the deficit kept at 3.2 percent and the “Build, Build, Build” program in full swing, the services and agriculture sectors stand to benefit the most from the corporate tax reform in terms of employment, with the increase in jobs significantly larger in the skilled, than in the unskilled sector, the study showed.
In most of the simulations, including the one described above, in which the CIT reduction is offset by reforms in the grant of fiscal incentives, the employment rate increases in all sectors and poverty incidence drops by at least 4.9 percentage points.
But in the simulation in which the CIT reduction is not accompanied by a modernization of fiscal incentives, the deficit steadily increases to 4.3 percent in 2029 as the government suffers a shortfall in revenues. Prices generally rise and GDP growth decreases under this deficit-financing scenario.
Moreover, employment and real wages “also generally decline” and “poverty incidence increases and income inequality deteriorates” under this environment, the study shows.
“The study said such results indicate “that any reduction in corporate income tax needs to be accompanied by a compensatory sector tax (referring to the reforms in fiscal incentives) for the reduction to be growth-enhancing, employment generating and poverty reducing.”
“Corporate income tax is a major source of government revenue. Reducing this source could put a lot of pressure on government finances. Increasing taxes on select sectors to reform the fiscal incentives reduces the pressure on government finances,” the study said.
Under a scenario where the CIT reduction is fully reinvested in the country, the study shows around P58 billion will be infused into the economy in the first year of this proposal’s implementation in 2020 (1 percent CIT reduction), which will increase to P1.08 trillion by 2029 (10 percent CIT reduction).
In terms of net FDI inflows, the study estimates increasing amounts flowing into the country, rising to P1.75 trillion by 2029.
“The reduction in prices is higher under this scenario as the inflows of FDI expand the aggregate supply in the economy,” the study said.
It also noted higher GDP growth of 8.2 percent in 2029 with additional FDI inflows and more jobs created at 212,000 in 2020 to 2.3 million in 2029 if the CIT reduction is reinvested in the economy.
“During hearings in the 17th Congress, the Senate requested a job impact study by the DOLE on this reform. We welcome this study, which validates our own studies’ conclusion that this reform will create jobs and reduce poverty,” Finance Assistant Secretary Antonio Joselito Lambino II said.
“The case for the reform becomes more compelling when the labor department itself sees this package as a job-creating measure,” Lambino added.
In response to the pandemic and its effects on the economy, the Executive proposed recalibrations to allow the outright CIT cut from 30 percent to 25 percent this year, along with a targeted, transparent, tailor-fit incentives system to attract investments that will benefit the public.
On top of the outright 5-percent tax cut in 2020, the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill also provides for a 1-percentage point CIT reduction each year from 25 percent in 2023 to 20 percent by 2027. Both CITIRA and CREATE seek to make the Philippines’ CIT, which is now the highest in the region, closer to the 23-percent regional average of the CIT rates of Association of Southeast Asian Nations (ASEAN) member-economies.
This rebalancing is part of a set of priority actions the government seeks from Congress to help businesses overcome the economic impact of the Covid-19 pandemic.
Dominguez has described CREATE, which was mentioned by President Duterte as one of his priorities in the recent State of the Nation Address (SONA), as the first-ever revenue-eroding proposal from the DOF. He added that it will provide “one of the largest economic stimulus measures in the country’s history.”
The Senate failed to pass CREATE, or the recalibrated version of CITIRA, before the sine die adjournment of the Congress last June 5, but Senate President Vicente Sotto III had earlier committed to prioritizing the bill upon the resumption of the congressional session. This bill was certified by President Duterte as urgent.
The House has likewise committed to adopt the Senate’s “fiscally responsible” version of CREATE to speed up submission to President Duterte for his signature.
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