Tax package 2 to serve as catalyst for equities
The package 2 of the government’s Comprehensive Tax Reform Program (CTRP) is seen as a catalyst for the equities market this year.
Minda Olonan, head of research at Maybank ATR Kim Eng Securities, said the possible passage of the package 2 will give boost to the market this 2018.
She said the stock market had rallied recently mainly because of the passage of the Tax Reform for Acceleration and Inclusion (TRAIN) Act, the first package.
The second package, which seeks to reduce corporate income tax (CIT) rates and modernize fiscal incentives to investors, will even boost market sentiment if passed by the government, she said.
"The reform on corporate income tax cuts will be a key market catalyst for 2018," the economist said.
The Department of Finance had formally submitted to the House of Representatives this week the second package of the tax reform.
The Constitution provides that all revenue measures should emanate from the House of Representatives.
Package 1 of the CTRP or the TRAIN was signed into law by President Duterte last December 19. It slashed personal income tax rates–the first time that the government did so by law–while raising additional revenues for infrastructure and social services through the repeal of several non-essential exemptions to the valueadded tax (VAT); adjustments in the excise tax rates for fuel, coal and automobiles; and a tax on sugarsweetened beverages among other measures.
"The TRAIN is a boon to discretionary spending. Tax cuts could encourage discretionary spending to the advantage of retailers, F&B companies, QSRs, airlines and manufacturers of consumer goods," Olonan said.
The CTRP’s Package 2, which the DOF designed to be revenue-neutral, proposes to gradually lower the CIT rate from 30 to 25 percent while modernizing incentives for companies to make these “performance-based, targeted, time-bound, and transparent,” Finance Undersecretary Karl Kendrick Chua earlier said in a statement.
Chua said that through this tax reform package, 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 the government can determine the magnitude of their costs and benefits to the economy.
The incentives enjoyed mostly by big businesses such as income tax holidays and other perks with no time limits need to be corrected as it is costing the government over P300 billion annually in foregone revenues, he said.
Citing 2015 data, Chua said income tax holidays and special rates account for P86.25 billion of the revenue losses, while custom duty exemptions account for P18.4 billion.
The finance official said exemptions from paying the VAT on imports led to P 159.82 billion in foregone revenues; and local VAT, P36.96 billion, although part of this tax will eventually have to be refunded because these are imposed on exporters.
He said these incentives totaling P301.22 billion do not yet include exemptions from the payment of local business taxes and the estimates on tax leakages.
In terms of income tax incentives, the government, in effect, gave away P61.33 billion to companies in 2011, which went up to P88.17 billion in 2014.
Customs duty exemptions, however, have gone down from P82.97 billion in 2011 to P38.04 billion in 2014 owing to the various free trade agreements signed by the Philippines with other countries.
“So on average, we gave away up to 2 percent of our GDP in income tax and custom duties exemptions,” Chua said.
The DOF said 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 315 laws or provisions that grant businesses tax breaks and other perks.
Compared to other economies in the Association of Southeast Asian Nations (ASEAN), the Philippines imposes the highest CIT rate but is among those at the bottom in terms of collection efficiency, resulting in a high rate but narrow tax base.
The Philippines, he said, currently imposes a CIT rate of 30 percent but with a tax collection efficiency rate of only 12.3 percent, while Thailand’s CIT rate is only 20 percent but it collects almost triple–a 30.5 percent efficiency– 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.
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.