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‘Faster CIT reduction to expand budget gap’

October 09, 2019

Finance Secretary Carlos Dominguez 3rd (Photo by DJ Diosina)

A shorter time frame for the proposed reduction in the corporate income tax (CIT) rate could widen the Philippines’ budget deficit, Finance Secretary Carlos Dominguez 3rd warned on Tuesday.

During the 14th Philippine Forum of The Asset publication in Taguig City, Dominguez called the time frame a “long period,” and said “[i]f we drop the [CIT rate] too quickly, we are going to balloon our deficit, and ballooning our deficit is going to probably mean a credit downgrade.”

“If a credit downgrade happens, everybody’s interest rate goes up, so what’s the use of it?” he added.

The reduction is proposed in House Bill 4157, or the “Corporate Income Tax and Incentives Rationalization Act” (Citira). The second package of the government’s Comprehensive Tax Reform Program (CTRP) and formerly known as Tax Reform for Attracting Better and High-quality Opportunity measure, the bill aims to cut the CIT rate from 30 percent to 20 percent by 2025.

The government has set a 3.2-percent budget deficit-to-gross domestic product ceiling for this year until 2022 — same as last year’s 3.2 percent, surpassing its ceiling of 3 percent.

Meanwhile, the Finance chief told critics of the proposed rationalization of tax incentives under Citira to read the measure first before making “ignorant” statements.

Approved by the House of Representatives last month and now discussed at the committee level in the Senate, Citira aims to modernize the country’s incentive system to make tax perks performance-based, time-bound, targeted and transparent.

“We have a lot of speculation from goddamn ignorant people. So let’s read it and see what it says,” Dominguez said.

“What’s going to happen is if you read the law, there will be a review. There will be a body that’s going to review all of the fiscal incentives granted by all the different agencies. That’s all,” he explained.

Dominguez also said the government was not anti-incentives and would not remove incentives under Citira.

“We simply want to make sure that the incentives we give yield a corresponding positive impact on our society,” he said.

Under the new incentives regime, superior incentives and additional deductions would be given to companies that create high-quality jobs, invest in infrastructure, train their employees and other positive activities.

The Department of Finance (DoF) earlier reported the government posted an estimated P1.12 trillion of foregone revenues in tax perks awarded to select companies from 2015 to 2017.

Clarification needed

Also on Tuesday, an economist urged the government to disclose the implications of CTRP, particularly Citira, and put in place the safety nets needed for its implementation.

At the Investments Insights roundtable organized by the Philippine Economic Zone Authority (PEZA) in Bonifacio Global City, Taguig City, Ronald Mendoza, dean of the Ateneo School of Government, said “there are clear issues for clarification” with regard to Citira.

“The [second tax] reform package is expected to be revenue-neutral, so that the reduction of CIT [is likely to] be compensated by the rationalization of fiscal incentives,” he explained.

“This suggests that some sectors will definitely face reduced incentives — and it is an empirical question as to the possible investment and job impacts of this adjustment. Another set of empirical questions relate to the projected investment and job-creation impact, if at all, of the CIT cut,” Mendoza said.

“At present, our system of corporate income taxation is characterized by a narrow base and a one of the highest tax rates in [Southeast Asia]. On top of this is a complicated system of fiscal incentives for investors, which include a few incentives [that] are not time-bound,” he added.

“The net impact of all these adjustments could better inform us of the full implications, hence the necessary safety nets and policy roll-out protocols supporting this reform. Yet a cursory review of the evidence so far suggests that we do not yet have this evidence and information” Mendoza said.

He said the government must lay out a concrete plan and safeguards for the rollout of these reforms, particularly those that may affect key economic sectors.

For her part, PEZA Director General Charito Plaza said industries’ contributions outweigh the foregone taxes, adding that incentives her agency grants “have been attracting investments that contribute to much-needed revenues and taxes.”

“Aside from the payment of taxes from gross income earned to the national government and local governments, enterprises and locators also pay other taxes, such as real property tax to local governments,” she said.

The PEZA chief reiterated that her agency’s tax perks were time-bound and performance-based, adding that “PEZA registered-companies are required to strictly adhere to deadlines on fiscal and performance reports in order to avail [themselves] and enjoy the PEZA incentives,” she said. WITH ANNA LEAH E. GONZALES

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