TAX REFORM FOR A BRIGHTER FUTURE The second phase of tax reform will help spread tax burdens more evenly.

THE government’s proposed second phase of the tax reform is critical to the modernization of the corporate tax system in the Philippines, in support of the country’s development. Once implemented, this reform will improve the overall business environment and further establish the Philippines as a strong reformer in the region.

The government has embarked on a process to modernize the country’s tax system and raise more revenues to pay for much needed public investment in infrastructure, education, and health. The first phase of this process, known as TRAIN, reduced the number of people paying income tax by increasing the income threshold, raised excises on fuel, tobacco, and automobiles, and introduced taxes on sweetened beverages. These reforms are expected to generate additional revenue equivalent to 0.5% of GDP starting in 2018. Some of the additional revenue will be transferred to poor households to compensate for lower purchasing power due to higher taxes.

Building on TRAIN, the second phase of tax reform will create a more efficient, transparent and fairer corporate income tax ( CIT) by rationalizing tax incentives and, at the same time, reducing the CIT rate to 25%, from 30%. The lower CIT rate will help attract more investment to the economy and in turn support growth and job creation. A modern tax incentive regime will also help put businesses on a more equal footing in terms of tax payment with greater transparency and accountability.

Today, the Philippines offers a wide range of tax incentives at a significant cost of government revenue. Incentives include

income tax holidays, reduced income taxes, increased tax deductions, tax credits, and exemptions from the value-added tax and import duties. The Department of Finance estimates the revenue lost at about 2 percent of GDP, that is P301 billion or nearly P2,900 per person. It is not surprising that while having the highest CIT rate (30%) among ASEAN countries, the Philippines’s collects only around 3.8% of GDP from this tax — well below the average of 6.5% of GDP in other ASEAN countries.

In our view, the decision to grant tax incentives needs to be considered against the need for providing more and better public services. With 22 million people estimated to be living in poverty in 2015, a careful balance needs to be achieved between tax incentives and meeting critical spending needs on education, health care, and basic necessities. For example, according to the World Bank, one in three Filipino children under age of five is stunted because of malnutrition. More resources are needed to help these children and meet the government’s commitment to significantly reduce poverty rate by 2022.

In seeking a more equitable tax system, the second phase of tax reform will help spread tax burdens more evenly.

The current high CIT rate acts as a disincentive to businesses not receiving tax incentives, which are effectively subsidizing the current recipients of incentives. A more equitable corporate tax system would help strengthen competition among businesses and encourage overall investment in the Philippines more broadly.

This reform would simplify tax incentives and make them more transparent. There are now over 220 laws that provide tax incentives and 14 government agencies that have the authority to grant incentives with discretion. This tends to create competition among the agencies in granting incentives. Moreover, monitoring the impact of incentives can be challenging. The planned reform would centralize the system and set clearer and uniform criteria for granting tax incentives to help achieve more inclusive growth and faster poverty reduction.

Ongoing reforms to streamline government regulations should help address some of the concerns over the rationalization of tax incentives. It is often cited that the incentive schemes also provide more streamlined regulatory requirements. In addition to improving infrastructure, it is encouraging to note that the government is undertaking reforms to ease burdens on businesses, including reducing red tape and liberalizing foreign direct investment by reducing the negative list.

In summary, the second package of tax reform represents a major step forward in modernizing corporate taxes in the Philippines. It will help build a more equitable, efficient, and transparent corporate tax system with a lower CIT rate for everyone and a clearer focus on the country’s development priorities.

Early approval of this reform will help the Philippines compete in the global economy. It will again show the country’s determination to modernize its institutions; give confidence that the Philippines is committed to keep its public debt manageable, while it scales up spending on infrastructure and social programs; and show the world that the Philippines will continue to undertake important reforms to support more inclusive growth.