June 23, 2018, 10:38 am
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More tax cuts, retain perks

Fitch Group’s BMI Research said despite the proposed corporate income tax cut, the tax rates in the Philippines will still be one of the highest and least competitive in the region

BMI said  repealing the  tax incentives given to investors will likely make the situation worse. 

“This comes at a time when other countries in the region are trying to offer more tax incentives in order to attract  foreign direct investments,” BMI Research said.

 In a report, BMI Research said while the proposed tax reforms may be fiscally prudent, it will likely make the Philippines less competitive versus its regional peers. 

The Department of Finance has submitted the second tax reform package to the House of Representatives, and the bill is now in deliberation. 

“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,” the report said.

The second package aims to lower corporate income taxes and reduce fiscal incentives to investors to achieve the government’s objective of making the tax system more efficient and fairer.

Specifically, it proposes to gradually lower the corporate income tax rate from 30 percent to no less than 25 percent, while modifying tax incentives for companies to make these performance-based, targeted, time-bound, and transparent.

The report said  at present, the Philippine Economic Zone Authority (PEZA) grants an attractive package of incentives including income tax holiday for a maximum of eight years, followed by a perpetual five percent tax on gross income earned (GIE), and zero VAT on local purchases and up to 30 percent of local sales, among others. 

There are also 14 investment promotion agencies, more than 200 laws granting various types of investment and non-investment tax incentives, and the Tax Code also provides several tax benefits, it added.

“As part of the proposal, the government is asking for a limit on PEZA incentives to a maximum of 10 years and to change the five percent tax on GIE to 15 percent tax on net income. 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 requirement of 70 percent,” the report said. 

The report also said 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, there will be a one percent reduction in corporate tax rate. 

“Although the quid pro quo approach may be fiscally prudent, it creates more uncertainty for businesses,” BMI Research said.

“We believe that this could weigh on investment over the near-term as investors adopt a wait-and-see approach,” it added.
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