Friday, July 8, 2016
Philippines - Philippines Set to Lower Corporate Income Tax under Duterte
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.