The
Duterte administration has successfully taken office and promises exciting
changes for the Philippine economic landscape. Proposed adjustments start with
commitments to lowering corporate and individual tax rates while supplementing government’s tax revenue through increases in
value-added tax (VAT) rates to between 12% and 14%. Alongside these tax
changes, the Duterte administration also claims it will begin the process of
‘rationalizing’ numerous tax incentives currently available to investors ,
including many VAT exemptions.
Income Tax Reform
Traditionally,
the Philippines’ income tax rates have been among the highest in the ASEAN
bloc. At 32% for personal income and 30% for corporate taxation, the
Philippines is losing its competitive edge to its peers – Vietnam, Thailand and
Indonesia. These economies have comparable personal income taxes, but lower
rates for corporate income at 20%, 22% and 25% respectively. Such high tax
rates, act to increasingly deter investors from engaging in the Philippines and
instead dive interest towards other ASEAN economies with comparable production
costs.
As such,
Duterte’s decrease in income tax seems to be a step toward a downward trend in
taxation throughout ASEAN aimed at attracting inflows of foreign
investment. In the event that tax
reductions are in fact implemented, it will put the Philippines on a more equal
footing with regional rivals and allow the island nation to capitalize on key
assets such as its English speaking workforce.
Importantly,
taxation proposals reflect more than a drive for increased competitiveness.
Both leading up to and following the election, Rodrigo Duterte’s campaign has
made promises of poverty reduction and a more inclusive economic growth.
Helping to implement these policies is incoming Department of Finance
Secretary, Sonny Dominguez who articulated plans to cut the poverty rate from
25% to 16% in the next six years.
In
keeping with these objectives, much of tax current income tax proposals focus
on cuts for the lower income brackets.
For investors involved in the provision of consumer goods, cuts are
projected to boost disposable income for lower income Filippinos and in turn
increase aggregate demand from Philippine based consumers
In the
months ahead, it will be important to monitor where corporate income tax
settles as well as the manner in which the Personal income taxes will be
lowered. Understanding these policies will be of utmost importance from a
strategic planning and investment standpoint.
For
policy makers in the Philippines, a key struggle will be to ensure the
continuity of state revenue streams during the period of tax reform. To assist
in this process during the upcoming quarters, the Duterte administration has
expressed plans to bolster government coffers with supplementary Value Added
Tax revenue. Following the reduction in corporate and individual income tax
rates, current proposals plan to increase VAT to 14%. However, this might not
be the best strategy, considering the large proportion of the economy involved
in the informal sector. Ultimately, the
collection of VAT revenue will be equally, if not more difficult, than the
collection of income taxes raising the possibility that increased revenue
streams would leave leave a shortfall in profits and catalyze deficit spending.
To
compensate for this possibility, Duterte’s current tax plan also promises to
tighten perks for foreign investors, with the important inclusion of VAT
exemptions on the list of potential cuts. Although specific perks have yet to
be slashed, it is important for all current and prospective investors to keep a
close eye on the sentiment of tax officials and to review existing incentives
packages as well as any bilateral investment agreements that may be in place between
their home country and the Philippines.
Anh Ta
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