By Chino S. Leyco
The Department of Finance (DOF) is confident that the country would remain attractive to investors even after the Duterte administration’s proposed rationalization of fiscal incentives is passed into law.
Finance Secretary Carlos G. Dominguez III said the main concern of many investors is the government’s high corporate income tax rate, which, currently at 30 percent, is among the highest in Southeast Asia.
While the DOF has introduced a trigger mechanism before the government can actually cut the corporate tax rate to not lower than 25 percent, Dominguez believes this safeguard will not discourage potential investors.
Dominguez explained the 0.15 percent “trigger” is necessary to protect government revenues.
Under the DOF’s second Comprehensive Tax Reform Program (CTRP) bill submitted to the House of Representatives last week, foregone revenues due to tax incentives should decline by at least 0.15 percent of gross domestic product (GDP) before the reduction in corporate income tax.
Based on the DOF estimates, a 0.15 percent decline in tax incentives is equivalent to R26 billion in revenue gain. At this rate of reduction, the government will be willing to lower CIT by one percentage point to 29 percent.
“That’s easy to achieve,” Dominguez told reporters when asked if the 0.15 percent threshold is realistic. “You know ours is a responsible reform, we will balance the approach always. The first package is like that — balanced approach — second will be like that also.”
The Tax Reform for Acceleration and Inclusion two (TRAIN-2) is revenue-neutral, meaning the lower income tax rate must be offset by enough claw back of incentives.
“It focuses the issue, what do you want, lower income tax or less, no incentives that are targeted, time-bound and measured, so it focuses the mind. If you are a company, you really have to balance, do I really need this incentive or am I better off with lower income tax,” Dominguez said.
Based on the DOF’s second tax reform bill, the reduction in corporate income tax will take effect only in January 2020, and the reduction will depend on the annual losses the government incurs from its tax incentives program.