Trabaho bill ‘to yield little results’ – Fitch unit
Corporate income tax (CIT) cuts under the House-approved Tax Reform for Attracting Better and Higher Quality Opportunities (Trabaho) bill are unlikely to generate higher investments given the Philippines’ poor business environment, a Fitch Group unit said on Thursday.
Trabaho, the second tax reform package under the Duterte administration’s Comprehensive Tax Reform Program (CTRP), calls for a gradual CIT lowering and the streamlining of tax incentives for investors. It was approved on third and final reading by the House of Representatives on September 10 and will now be considered by the Senate.
“The proposal to lower corporate income tax rates is unlikely to result in a tangible boost to investment without an improvement to the business environment,” Fitch Solutions Macro Research said in a September 20 report.
On a positive note, it said the bill’s impact on revenue collections would likely be “negligible” in the short term, with effects further down the road to be addressed by other pending CTRP packages.
“We are therefore maintaining our forecast for the Philippines’ budget deficit as a share of GDP to come in at 2.9 percent in 2018 and average 2.6 percent from 2019-2027,” Fitch Solutions added.
While taxes are among the considerations of investors looking to relocate, the Fitch unit said “we believe that more of them are deterred by the poor business environment caused by red tape and corruption, as well as poor infrastructure conditions.”
It cited the World Economic Forum’s 2017-2018 Global Competitiveness report as stating that “inefficient government bureaucracy,” “inadequate supply of infrastructure” and “corruption” as the top three concerns with regard to doing business in the Philippines.
Tax rates, in comparison, only rank fifth.
The government has said the CIT cuts will make the country’s rates at par with Asian neighbors, but Fitch Solutions said the reductions, to take effect starting 2021, will be “so gradual that it will take until at least 2025 before they fall in line with regional levels.”
In particular, it said the Philippines would only catch up to Indonesia and Malaysia after 2025.
Under the Trabaho bill, the current 30 percent CIT will be cut by 2 percentage points every two years until it hits 20 percent in 2029. While CIT accounts for almost one-fourth of government revenues, the expected P62-billion loss in 2021 will represent just 1.5 percent of government revenues that year.
As the measure will also limit available tax incentives, this could offset some of the revenue loss. Succeeding CTRP packages that contain revenue-enhancing measures, including higher taxes on “sin” products, property taxation reforms and a bigger government share of mining revenues, are expected to make up for the CIT losses.
FROM A REPORT BY ED VELASCO
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