DOF tweaks proposed cut in corporate taxes

By Chino S. Leyco | Published January 15, 2018, 10:01 PM

Local and foreign companies will not immediately enjoy lower corporate income taxes anytime soon as the Department of Finance (DOF) wanted to index first the new rate to the cost of the government’s tax incentives given to business enterprises.

Based on the DOF’s second tax reform bill transmitted to the House of Representatives yesterday, the reduction in corporate income tax (CIT), which is currently at 30 percent, will take effect only in January, 2020.

But the rate of reduction in CIT will depend on the annual losses the government incurs from its tax incentives program, the DOF proposed.

The DOF wants that CIT rate be reduced by one percentage point on January 1, 2020, but that will only happen once the cost of granting tax incentives to business investments dropped by at least 0.15 percentage point of gross domestic product (GDP).

“Provided, that the President, upon the recommendation of the Secretary of Finance, shall reduce the CIT rate by one percentage point effective January 1, 2020 for every 0.15% of GDP reduction in the cost of granting tax incentives to business investments, two years prior to the effectivity of the new rate,” the proposed bill read.

The DOF is also proposing that the reduction in CIT rate, covering both domestic and foreign corporations, shall not fall below 25 percent.

“The Philippines’ corporate income tax system is characterized by a high rate and a narrow base,” the DOF explained. “Despite having the highest corporate income tax rate in the ASEAN region at 30 percent, its collection efficiency is one of the lowest.”

The inefficient collection of corporates taxes, DOF said is owing to “very generous tax incentives” that are given in perpetuity and in lieu of other taxes, including local taxes, and “thus seriously erode the tax base.”

In 2015, the DOF estimated that investment tax incentive system costs the government around R301 billion in foregone income tax, value-added tax, and customs duty.

“This estimate does not yet include foregone local taxes and leakages that arise from tax avoidance and tax evasion due to the complicated system,” DOF said.

While the country benefits from incentives in terms of investment, jobs, exports, and country-side development, DOF said the staggering cost of it was at more than two percent of GDP, which warrants a review of the incentives system.

The DOF wants to the incentives system to be time-bound, performance-based, transparent, and targeted to ensure that redundant incentives are removed, the benefits fully outweigh the cost, and fiscal prudence is maintained at all times.

“With tax incentives modernized and the tax base expanded, the corporate income tax rate can be reduced to correct the current inequitable and unjust system that benefits a few industries while negatively impacting the rest of the business community,” DOF said.

“The reduction of the corporate income tax rate would be a very much welcome relief that will benefit all corporate taxpayers, whether large or small, and whether domestic or foreign, and will enhance the competitiveness of our investment climate,” it added.

“In the end, this bill aims to benefit not just the government, but more importantly, the Filipino taxpayers who have been diligently complying with their tax obligations by making the tax system more progressive, efficient, and simpler,” the DOF ended.

Source: https://business.mb.com.ph/2018/01/15/dof-tweaks-proposed-cut-in-corporate-taxes/