The Philippines must end unnecessary perks for industries so it can cut among the highest income taxes in the region without eroding the fiscal gains the economy has achieved, the International Monetary Fund’s (IMF) representative said.
Removing incentives for property developers, power-plant operators and miners will help plug a revenue shortfall that’s hampering the government’s ability to improve collection, IMF Philippine Representative Jay Peiris said in an August 20 interview in Manila. The country must limit benefits only to industries that really need it, like manufacturing, he said.
“The big boys aren’t paying, and then you squeeze everything from workers,” Peiris said. While the personal income-tax rate of as much as 32 percent is among the highest in Southeast Asia, tax revenue is still below 14 percent of the country’s gross domestic product (GDP).
Peiris said the tax holidays and duty-free importation of equipment offered by the Philippines are among the most generous incentives in the region. Still, the country has lagged its neighbors in attracting foreign direct
investment (FDI).
FDI rose 66 percent to a record $6.2 billion last year, still the least among major Southeast Asian countries, according to the United Nations Conference on Trade and Development.
“The most important deterrent to FDI here is weakness in infrastructure,” Peiris said. Investing more in infrastructure will “attract more FDI,” he said.
Cash handouts
Exemptions for industries led to P144 billion ($3.1 billion) in foregone revenue, equivalent to at least 1.5 percent of the country’s GDP in 2011, according to the Department of Finance. Proposals to reduce these incentives have languished in Congress for more than two decades.
The need to improve collection is acute, as President Aquino targets expansion of 7 percent to 8 percent this year. Philippine economic growth slid to a three-year low of 5.2 percent in the first quarter as government spending faltered.
Mr. Aquino, whose term ends in June 2016, is seeking to increase spending in next year’s budget by 15 percent from this year. While his administration has cracked down on tax evaders and streamlined government spending and collection, “it’s definitely not enough” to sustain fiscal gains, Peiris said. “The risk is on the revenue side.”
The government’s failure to boost spending has distracted attention from revenue collection, Peiris said. The country also needs to do away with secrecy laws protecting bank accounts from government scrutiny, he said.
“Tax reform should be on top of the agenda for the next administration,” Peiris said. “I’m all for reducing personal income tax. You can also recoup it from excise tax on fuel as oil prices are down.”
Bloomberg News