FOREIGN investors on Wednesday asked the government to speed up plans to reduce corporate income tax (CIT) rate to 25 percent, as the Philippines has to catch up with its Asian neighbors that implemented tax cuts lately to attract investors.
Leaders of the American and European business chambers said that it is the best time to rush the reduction of CIT rate to 25 percent, from 30 percent at present—the highest among Southeast Asian states. They argued that tax cuts would help firms manage the economic toll of the coronavirus pandemic and its consequential lockdown.
They also reminded the government that the country’s rivals for foreign direct investments are making moves to attract capital, especially at a time that many multinationals are moving out of China to transfer operations elsewhere in Asia.
Government economists are now proposing the legislation of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill. The measure will serve as the repackaged version of the Corporate Income Tax and Incentives Rationalization Act (Citira), which got stuck in the Senate after its passage in the House of Representatives last year.
Now deemed the second package of the comprehensive tax reform program, the CREATE bill seeks to lower the CIT rate at a faster pace to lure investors to the Philippines.
CREATE lowers CIT to 25 percent on the first year of implementation, a radical change compared to the Citira’s provision of gradual reduction by 1 percent annually until the corporate tax rate hits 20 percent by 2029.
John D. Forbes, senior advisor of the American Chamber of Commerce of the Philippines, told the BusinessMirror that “this is a very welcome proposal,” especially at a time of the pandemic that forced Asian rivals to roll out tax cuts in order to keep their investors.
He cited the case of Indonesia. In April Jakarta announced that it is accelerating its tax reforms by reducing CIT to 22 percent for this year and next year, and to 20 percent by 2022, as part of its financial playbook against Covid-19.
In exchange, it is imposing an electronic transaction tax on digital firms now having a field day generating sales, as individuals around the world are ordered to stay at home and are left with no choice but to buy things online.
Forbes also cited the case of India, which is offering 15 percent corporate tax rate to 1,000 foreign firms that are willing to relocate their plants to available industrial lands of more than 400,000 hectares.
European Chamber of Commerce of the Philippines Executive Director Florian Gottein said his group also favors the proposed tax cut under the CREATE bill, saying such fiscal move will benefit mostly micro, small and medium enterprises (MSMEs).
Further, reducing the CIT rate to 25 percent immediately will ease cash flow pressures on firms and allow them to reallocate financial resources for their rebuilding, Gottein argued. Most business operations, particularly in Metro Manila, are bleeding for revenue after lockdowns halted two months of operations.
“ECCP believes that reducing the corporate income tax from the present rate of 30 percent to 25 percent will provide immediate relief to businesses—especially MSMEs—as they recuperate from the economic toll from Covid-19,” Gottein told the BusinessMirror.
The Duterte administration has been pushing for the passage of a fiscal measure slashing CIT rate to make the Philippines competitive with those of its Asian rivals. However, it is facing difficulty getting such reform past Congress, as lawmakers are wary of the tradeoffs that may come with it.
The Citira bill hurdled the House last year but failed to slip past the Senate, as senators worried that the measure’s component on rationalization of fiscal incentives will lead to capital flight and job losses.
Besides trimming CIT rate to 20 percent by 2029, the Citira bill overhauls incentives granted to firms in economic zones. The rationalization will remove even the 5 percent tax on gross income earned paid in lieu of all local and national taxes, a tax perk that many investors say is crucial to their operations here.
Last year, the JFC warned that the lifting of incentives as laid out under Citira bill could displace more than 700,000 workers, as economic zone locators, mostly multinationals, will be compelled to move to another Southeast Asian country.
Industry groups have been telling the government that incentives are what keep the Philippines competitive with its counterparts in the region. They said this is the best tradeoff that they can get for investing here in spite of the country’s having the highest logistics cost in Southeast Asia and one of the highest energy costs in Asia.