The Philippines this month could take a step closer to lowering its 30% corporate tax rate—the highest in Southeast Asia.
Lawmakers are set to consider a government proposal to phase in a corporate rate cut to 20% by 2027 when they return from recess July 27.
The tax cut is part of a broader stimulus package lawmakers are pursuing to boost foreign investment and economic recovery as the country tries to rebound from the pandemic. The idea of such a cut has been percolating for years. The current proposal, made in 2019, would put the Philippines closer to the tax rates of its neighbors—Singapore at 17% and Cambodia, Thailand, and Vietnam at 20%.
There is an “urgent need to make Philippines a more attractive investment place for local and foreign companies,” Jeffrey Ng, vice-president of the Federation of Filipino-Chinese Chambers of Commerce and Industry, said in an email.
The package is supported by a host of business groups representing retailers, bankers, hotel operators, and others. They asked lawmakers in May to move quickly to help businesses trying to recover from the pandemic’s economic hit.
Summer Debate
The government’s proposal is pending before a Senate committee. It would reduce corporate taxes from 30% to 25% this year, and by 1 percentage point annually beginning in 2023 until it reaches 20% by 2027. The House approved a bill last year that would take longer to reach the 20% tax rate—reducing it gradually by 1 percentage point each year over a decade to 20% by 2029.
The two houses could reconcile their differences and produce a final version of the bill in line with the Finance Ministry’s proposal, called the Corporate Recovery and Tax Incentives for Enterprises Act, or CREATE.
“You have our word that we will take up the bill upon resumption of the session in July and work to pass it by the month of August,” Senate lawmakers said in a June 5 statement.
The cut would cost the Philippines 42 billion pesos ($848 million) in revenue in the second half of this year if enacted, according to the Finance Department’s proposal.
The effect of the cut “would be spread over a period longer than this year and should be seen as helping to support the economy over the medium term,” said Thatchinamoorthy Krshnan, an economist at Oxford Economics in Singapore.
“The impact in 2020 would be comparatively smaller since corporate profits would already have shrunk as a result of the economic slowdown causing corporate tax revenue collection to fall regardless,” he said.
Faster Cuts?
Ng’s group and others like the American Chamber of Commerce of the Philippines are also hoping lawmakers can speed up the tax cut.
The rate cut would free up money for expansion and hiring and “should also influence new investors who were deterred by the 30% rate to take another look at investing in the Philippines,” said John Forbes, senior adviser to the chamber. Since the tax cut was first proposed in 2019, the group has called for phasing in the rate cut over a shorter period—reaching 20% in 2025, he said in an email.
But a corporate rate cut isn’t the only tool that could attract foreign direct investment.
“It is crucial for the Philippine government to make extensive use of both tax and non-tax incentives to enhance Philippines’ overall attractiveness to FDI, and to take advantage of opportunities that companies may seek to diversify their supply chains post-pandemic,” Jessie Lu, who covers the country for Continuum Economics, said in an email.
There are other steps lawmakers can take to encourage investment, like cutting labor costs and investing in infrastructure, said Christian de Guzman, senior vice president at Moody’s Sovereign Risk Group in Singapore.
But “things have to go right in the global economy,” he said, citing the continuing impact of coronavirus.
Tax Incentives
The government also wants to cut some of the special tax perks business get. The Philippines in 2017 gave 441 billion pesos in tax incentives to 3,150 companies. The list included some of the country’s top 1,000 companies. And though the top tax rate is 30%, those companies were paying an effective corporate tax of just 6%-13%, according to the Finance Department.
Companies with no incentives, which include almost all of the country’s 90,000 small and medium-sized businesses, pay the regular corporate rate of 30% of their net taxable income, the Finance Department said.
The bill didn’t pass the Senate before the June recess because there was a debate over removing special tax incentives, said Maria Lourdes P. Lim, tax managing partner at PwC in Manila. “It is reducing corporate taxes while at the same time rationalizing incentives,” she said.
For example, the proposal calls for phasing out over nine years a special 5% gross income tax in lieu of national and local taxes for companies operating in economic zones administered by the Philippine Economic Zone Agency. Under the House bill, the tax sunsets after seven years.
The proposed sunset has caused “great concern over higher costs of doing business in the country and uncertainty over the future fiscal regime,” Forbes said.
“With the COVID-19 crisis, the foreign chambers with industry associations are recommending a five year pause to allow recovery before the transition to a new system begins.“ he said.
Not everyone agrees. The nine-year period is enough time for companies to adjust, Ng said.