Big business and other private firms pay the equivalent of only 3.7 percent of local output or the GDP as income tax as a result of a plethora of legislation showering these otherwise very profitable companies with tax breaks and other perks, the Department of Finance said on Tuesday.
Finance Undersecretary Karl Kendrick T. Chua said this translates to a very low collection rate, or only 12 percent, of potential and the result of 360 pieces of legislation extending an umbrella of protection over these firms.
This, despite the Philippines imposing the highest income-tax rate on corporations in the Asean and a clear illustration of the inefficiency of the current business-tax regime in the country, according to Chua.
The Philippines, he said, imposes a corporate income tax (CIT) of 30 percent but reports a tax-collection efficiency of only 12.3 percent. Thailand’s CIT is only 20 percent but collects nearly three times more as Bangkok reports a 30.5 percent efficiency rate equal to 6.1 percent of GDP.
Vietnam’s CIT is 25 percent but 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, which is 6.5 percent of GDP.
“So clearly, we have the classic problem of a high rate but narrow base. That is why the efficiency is problematic,” Chua said in his discussion of the proposed second package of the Comprehensive Tax Reform Program (CTRP) at a recent meeting of the Development Budget Coordination Committee (DBCC).
Following the enactment of the Tax Reform for Acceleration and Inclusion Act, which slashed the personal-income tax rates to generate additional revenues for infrastructure and social services, the DOF is preparing to introduce to legislators Package Two of the CTRP, which is focused on reducing the CIT while rationalizing fiscal incentives.
Under Package Two, the CIT is reduced to 25 percent while reworking the incentives and make these “performance-based, targeted, time-bound and transparent,” Chua said.
The government proposal would ensure the incentives generate jobs, stimulate the economy in the countryside and promote research and development. These also contain sunset provisions so that tax perks do not last forever and regularly reported so that anyone can see their cost and benefits to the economy.
The DOF aims to submit this revenue-neutral measure to the House of Representatives within the month.
Chua said: “A flawed and outdated system that provides tax incentives to companies under 150 investment laws and 210 non-investment laws is the reason for the country’s low CIT collection efficiency.”
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 started 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.
Chua said that in terms of revenue, the CIT has increased over time as a share of GDP and should continue to rise because of the strong and continued expansion of the economy.
“However, I think this is deceiving because, despite a 30 percent rate, we are at the bottom in terms of revenue efficiency,” Chua said.
The Tax Incentives Management and Transparency Act (Timta) has allowed the government to identify the companies receiving the biggest incentives and their impact in terms of benefits to the economy.
A Timta study shows that among the investment promotion agencies, the Philippine Economic Zone Authority accounts for the bulk of the incentives, followed by the Board of Investment.