The government collects income taxes from large corporations and other private firms representing only 3.7 percent of the country’s Gross Domestic Product (GDP), or a collection rate of a low 12 percent because of 360 laws that grant businesses tax breaks and other perks, according to the Department of Finance (DOF).
Finance Undersecretary Karl Kendrick Chua said that compared to other economies in the Association of Southeast Asian Nations (ASEAN), the Philippines imposes the highest corporate income tax (CIT) rate but is among those at the bottom in terms of collection efficiency.
The Philippines, he said, currently imposes a CIT rate of 30 percent but with a tax collection efficiency of only 12.3 percent, while Thailand’s CIT rate is only 20 percent but it collects almost triple–a 30.5 percent efficiency rate–that represents 6.1 percent of its GDP.
Vietnam’s CIT rate is 25 percent but it collects even more with a 29.2 percent tax efficiency rate representing 7.3 percent of GDP. Malaysia’s 24 percent CIT generates a 27.1 percent efficiency rate in terms of collecting taxes, which is 6.5 percent of GDP.
“So clearly, we have the classic problem of a high rate but narrow base. That is why the efficiency is problematic,” Chua said in his discussion of the proposed second package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP) at a recent meeting of the Development Budget Coordination Committee (DBCC).
Following the enactment of the Tax Reform for Acceleration and Inclusion Act (TRAIN), which slashes personal income tax rates while raising additional revenues for infrastructure and social services, the DOF is now preparing to introduce to the Congress the Duterte administration’s Package Two of the CTRP, which focuses on reducing CIT rates while rationalizing fiscal incentives.
Under Package Two, the DOF aims to lower the CIT rate to 25 percent, while rationalizing incentives for companies to make these “performance-based, targeted, time-bound, and transparent,” Chua said.
Through this proposal, the government would be able to ensure that incentives granted to businesses generate jobs, stimulate the economy in the countryside and promote research and development; contain sunset provisions so that tax perks do not last forever; and are reported so that the government can determine the magnitude of their costs and benefits to the economy.
The DOF is targeting to submit this revenue-neutral proposal to the House of Representatives this January.
Chua said, “a flawed and outdated system that provides tax incentives to companies under 150 investment laws and 210 non-investment laws is the reason for the country’s low CIT collection efficiency.”
Under the Philippine tax code, all corporations, unless receiving fiscal incentives, have to pay a regular CIT rate of 30 percent or a minimum CIT rate of 2 percent of gross income beginning the fourth taxable year immediately following the year in which a corporation commenced its business operations, when the minimum income tax is greater than the regular tax. The optional standard deduction for corporations is 40 percent of gross income under the tax code.
Chua said that in terms of revenue, the country’s CIT has been increasing over time as a share of GDP and will continue to go higher because of the strong growth of the economy.
“However, I think this is deceiving because, despite a 30 percent rate, we are at the bottom in terms of revenue efficiency,” Chua said.
The Tax Incentives Management and Transparency Act (TIMTA) has allowed the government to identify the companies receiving the biggest incentives and their impact in terms of benefits to the economy.
A TIMTA study shows that among the IPAs, the PEZA accounts for the bulk of the incentives, followed by the BOI.
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