The Tax Management Association of the Philippines (TMAP) has expressed its support for Package 2 of the government’s Comprehensive Tax Reform Program (CTRP), as the lowering of corporate income-tax (CIT) rates will enable the Philippines to become more competitive.
According to TMAP Ex Officio Director Malou P. Lim, the organization is backing the proposal of the Department of Finance (DOF) to lower CIT rates as it will allow the Philippines to go head to head with its neighbors in Southeast Asia.
“We expressed our support to the DOF regarding the move to reduce corporate income tax to 25 percent to be more competitive with our Asean neighbors as, currently, the Philippines is the highest,” Lim told the BusinessMirror through electronic mail.
Earlier, Finance Undersecretary Karl Kendrick T. Chua pointed out that, compared to other economies in the Asean, the Philippines is at the bottom in terms of collection efficiency at 12 percent, despite having a CIT rate of 30 percent. This is higher than Thailand’s 20 percent, Vietnam’s 25 percent, Malaysia’s 24 percent, Indonesia’s 25 percent and Singapore’s 17 percent, according to the DOF.
Under the Philippine National Internal Revenue Code, all corporations 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 its operations, unless they are receiving fiscal incentives.
The government is currently reforming the country’s outdated tax system to further boost Philippine growth and encourage more investments via competitive corporate taxes. According to the DOF, there are 360 laws that grant businesses tax breaks and other perks under the current setting.
Lim added that the TMAP also supports the proposal to revisit tax exemptions given to certain entities to allow for a more targeted system, as well as a proposal for the DOF to revisit the 10-percent improperly accumulated earnings tax (IAET).
“There is presumption of improperly accumulated income when retained earnings [RE] exceeds capital of the company. Instead of allowing investors to accumulate income, which can be reinvested in the Philippines that would generate economic activity, they need to dividend out the RE lest be assessed of the 10-percent IAET,” she said.
The IAET is a penalty tax, which aims to compel corporations to distribute its earnings so that the earnings of its shareholders could be taxed. The tax applies to corporations formed for the purpose of avoiding the imposition of income tax on the income received by its shareholders, by permitting its profits to accumulate, instead of being distributed.
According to an article from PricewaterhouseCoopers (PwC) Network, surplus profits or retained earnings are expected to be declared as dividends and distributed to a company’s shareholders.
The DOF disclosed that it will to submit to Congress the second package of the CTRP on Monday when the House of Representatives resume session.
“Yeah, we should be ready by that [January] 15, because that’s when they open,” Finance Secretary Carlos G. Dominguez III told reporters. Under Package 2 of the CTRP, the DOF aims to lower the CIT rate to 25 percent and rationalize incentives for companies to make it performance-based, targeted, time-bound and transparent. The package is seen to be revenue neutral.
According to Chua, the government will 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. “We officially transmit to the Speaker of the House because it’s a tax bill. Usually, the committee will review it first and then endorse it to the chair[man]. The chair[man] will file it, then it will have a house number, and then it will be read again in the plenary and referred to the committee. There’s a process,” Chua told reporters.