THE economy could recover faster from the pandemic if the government reconsiders the tax rate for Philippine Economic Zone Authority (Peza) locators under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill, according to a former dean of the University of the Philippines School of Economics (UPSE).
In a presentation at the virtual Pilipinas Conference 2020 on Monday, National Scientist and former UPSE Dean Raul V. Fabella said under the CREATE bill, Peza locators will see their corporate income tax (CIT) rates increase to 25 percent from the current Gross Income Tax (GIT) of 5 percent.
Fabella said that since the CIT equivalent of the 5 percent GIT paid by Peza firms is around 17 percent, based on the Department of Finance (DOF) calculations, it would be a better option to peg CIT rates of Peza firms at 17 percent instead of 25 percent.
“Why not mandate that for Peza locators, instead of a move from 30 percent to 25 percent, it should be a move from 30 to 17 percent. By the way, 17 percent is the current CIT tax applying to new DFIs [Direct Foreign Investments] in Vietnam and as I’ve already mentioned, 20 percent is the CIT for everyone else,” Fabella said.
Vietnam, Fabella said, is an important template now for the Philippines. The country now enjoys an average investment rate of 30 percent of GDP in the past 20 years and its trade surplus continues to post rapid growth.
Fabella said part of the reason is that Vietnam has had a CIT of 17 percent for 10 years. DFIs in that country also enjoy two years where they do not pay any CIT.
He added that investors in Vietnam also enjoy an 8-percent CIT for four years before it reverts to 17 percent for the next four years.
On the domestic front, Vietnam also offers a CIT of 20 percent for all local corporations operating in the country.
Investments for planet
Apart from looking at Vietnam and reducing the CIT for Peza locators, Fabella added that it is important to also think of the planet.
Fabella said the government should incentivize rooftop solar Photovoltaic (PV) investments made by corporations. This can be a condition to accessing a 25-percent CIT under CREATE.
Another option, he said, is for the government to consider passing an idle rooftop tax for the top 1,500 corporations. The tax, Fabella said, would automatically be lifted when the rooftop investment is made by the large companies.
“Solar rooftop PV investment is a very quick turnaround. There are now enough solar installers in the country to make it a competitive market. By the way, solar panels are now produced in Laguna so we don’t have to import those,” Fabella said.
Services sector
In the same forum, University of the Philippines economist Ernesto M. Pernia said the growth of the services sector has always been faster than manufacturing except in 2014 and 2017.
Based on the data Pernia presented, Manufacturing grew 7.6 percent in 2014 and 8 percent in 2017. These are both higher than the growth of Services which grew 6.7 percent in 2014 and 7.4 percent in 2017.
Poverty targets
When the country recovers from the pandemic, Fabella said the government should target a reduction of poverty incidence to around 10 percent and rural poverty incidence of around 15 percent from the current 36 percent.
Fabella said the Philippines should also target to grow per capita incomes to around $10,000 in 10 years and enjoy the benefits of a resilient economy.
This can be made possible through rapid economic growth of around 6 to 7 percent annually. This growth should be fueled by an investment rate of 25 to 30 percent of GDP.
Sustaining rapid economic growth for 10 years may be possible if the country can hit an export growth of 10 to 15 percent a year and for manufacturing growth to be faster than services growth.