IMF supports DOF’s second tax reform proposal

The Intentional Monetary Fund (IMF) has thrown its support behind the Duterte administration’s second proposed tax reform package, citing it is a critical measure to modernize the country’s corporate tax system.

In a statement, Changyong Rhee, IMF Asia and Pacific director, said late Monday that once the second tax package is passed into law, it will improve the country’s overall business environment and further establish it as a strong reformer in the region.

“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 percent, from 30 percent,” Rhee said.

“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,” he added.

The government is currently embarking on a process to modernize the country’s tax system and raise more revenue to pay for much needed public investment in infrastructure, education and health.

Currently, the Philippines offers a wide range of tax incentives at a significant cost of government revenue, the IMF official noted.

These fiscal 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 (DOF) estimated the revenue lost from these incentives at about 2.0 percent of gross domestic product (GDP), equivalent to R301 billion or nearly R2,900 per person.

“It is not surprising that while having the highest CIT rate (30 percent) among ASEAN countries, the Philippines’s collects only around 3.8 percent of GDP from this tax — well below the average of 6.5 percent of GDP in other ASEAN countries,” Rhee explained.

Amid huge tax losses, Rhee believes 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,” Rhee said,

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, the IMF director said.

“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, who are effectively subsidizing the current recipients of incentives,” Rhee said.

He also said 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,” Rhee said.

“This tends to create competition among the agencies in granting incentives. Moreover, monitoring the impact of incentives can be challenging,” he added.