More than 99 percent of registered businesses in the country are considered micro, small and medium sized enterprises (MSMEs) that employ more than 60 percent of today’s working population.
Yet this significant force in economic activity, growth, job creation, community resilience and innovation is also among those saddled with the highest corporate income tax rate in the ASEAN region. Based on government estimates, 99 percent of corporate taxpayers, including most SMEs, pay the regular rate of 30 percent, apart from a host of other duties due to various government agencies and entities.
For SMEs, a high corporate income tax rate can be a big blow for their businesses as it shrinks their profit margins, portions of which could have been reinvested back to their firms. This thus puts most local businesses at a disadvantage compared to foreign firms and other companies that currently enjoy perpetual fiscal and nonfiscal perks.
Level the playing field
Such an uncompetitive landscape for SMEs is what the Duterte administration seeks to correct under Package 2 or the Corporate Income Tax and Incentives Rationalization Act (CITIRA) of its comprehensive tax reform program.
CITIRA is envisioned to level the playing field for businesses by reducing the corporate income tax (CIT) rate to 20 percent from the current 30 percent—said to be the highest among ASEAN economies. To offset this reduction, CITIRA will also rationalize the country’s outdated fiscal incentive system by targeting strategic priority industries and areas.
Eventually, all these will help create an enabling environment for businesses, make the country more competitive in the region, generate as many as 1.5 million jobs over ten years, and spur growth across less urbanized areas. “The gradual lowering of the corporate income tax rate from 30 to 20 percent will be the best incentive we can give almost a million MSMEs, which are working hard and contributing a lot to the country by employing a majority of our workers. At the same time, Package 2 also seeks to modernize the fiscal incentive system to make it performance-based, time-bound, targeted, and transparent,” Finance Secretary Carlos G. Dominguez said.
For most SMEs saddled by such hefty taxes, a reduction in the CIT rate will redound to significant savings which can be used to invest in additional equipment, open new branches, and, most importantly, hire more people. On a larger scale, lowering the CIT will further make the Philippine business landscape even more competitive and attractive for foreign companies to set up shop and/or expand in the country.
Consequently, the expansion of local businesses and entry of foreign firms will mean more jobs that can further improve the lives of Filipinos—a development that dovetails with the Duterte administration’s goal of slashing poverty incidence to 14 percent by 2022.
The Philippines was deemed “too generous” in granting incentives to a few investors in perpetuity, among them would be the 5 percent tax on gross income earned (GIE) in lieu of all taxes, both local and national, and with no time limit. In contrast, firms with no incentives, which include almost all of the country’s 90,000 SMEs, pay the regular CIT rate of 30 percent.
A study by the Department of Finance showed that the Philippines granted a hefty P441.1 billion in tax breaks to 3,150 companies in 2017, up 15.9 percent from the P380.7 billion recorded in 2016. Based on its estimates, the 2017 amount is around four fifths the annual budget of the Department of Education (DepEd) and roughly four times bigger than that of the Department of Health (DOH)—an amount could have been used to build around 33,000 public markets, 46,000 kilometers of road, 130,000 daycare centers, or 450,000 classrooms.
Thus, in modernizing the existing system, the government will be able to ensure that the incentives will continue to be given to deserving companies and activities while those that are redundant are gradually phased out.
“To clarify, we are not removing incentives. We want to make sure that the incentives we give produce results. Under the new incentive regime, superior incentives and additional deductions will be given to companies that create better jobs, invest in R&D, train their employees, and buy local products,” Dominguez explained.
“Package 2 is pro-investment and pro-incentives. It will level the playing field and make sure that, when the Philippines grants incentives, it does so for the right reasons and the right investments,” the finance chief further stressed.
This article was published in the Philippine Daily Inquirer on December 15, 2019.
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