RP tax system fails to lure long-term plans

09/09/2008

An International Monetary Fund (IMF) paper said businesses in the country are now among the region’s most heavily taxed after the the corporate income tax was raised last year to 35 percent from the previous 30 percent, along with the expanded value added tax.

The IMF paper “Investment Incentives and Effective Tax Rates in the Philippines: A Comparison With Neighboring Countries” also noted that income tax holidays or the waiving of income tax payment for a certain period on new business projects was not an effective incentive in bringing in long term projects.

Among the authors of the paper is Reza Baqir who is now the IMF resident representative in the Philippines.

The paper said the country’s general tax provisions and investment incentives were compared with six other east-Asian economies, Malaysia, Indonesia, Laos, Vietnam, Cambodia, and Thailand to provide an input into an ongoing debate in the Philippines about reforming tax holidays.

The study concluded that for companies that do not receive tax incentives, effective tax rates in the Philippines are higher than in neighboring countries.

It added tax incentives were broadly comparable in the Philippines and neighboring countries and reduce effective tax rates significantly.

“The wedge between taxation of companies with and without tax incentives in the Philippines is one of the largest (in the region),” according to the paper.

It said tax holidays were most effective in providing incentives for foreign direct investments and new investments, rather than incremental investment.

Thus it said tax holidays were most attractive for investing in short-live assets.

Focusing on equity financed projects, effective tax rates under the maximum tax holiday increase as economic depreciation declines.

“Effective tax rates increase rapidly as the holiday expires, especially for profitable firms. As such, footloose companies benefit more from income tax holidays,” the paper noted.

These industries are likely to bring the smallest benefit to the overall economy. Instead, firms investing in long-lived assets whose revenues may not fully recover costs during the period of the holiday, benefit least from tax holidays, it added.

The IMF paper added tax holidays were open to abuse and provide many opportunities for tax avoidance such as the use of transfer pricing or other devices to shift earnings into holiday companies.

“This is especially true for countries with weak revenue administrations and insofar leakage occurs from special economic zones. Thus, tax incentives present a risk to government revenue as their mere existence allows for potential abuse by investors not intended to receive them,” the paper noted.

To mitigate these risks, as is the practice in the Philippines, it is important that firms receiving holidays still complete tax returns, it stated.

It is often argued that, just like its neighbors, the Philippines could attract investment more cost effectively if the corporate tax rate were set at a level in line with current international norms and a generalized system of moderate investment incentives were provided.

As a general principle, incentives that are directly conditioned on the undertaking of investments in targeted activities or locations are always more cost effective than those that allow benefits on the outcome of such investments, such as holidays, it said.

Back to top

For comments about this website:Webmaster@tribune.net.ph
The Daily Tribune © 2006