Last of three parts
TO FINANCE urgent spending to deal with the coronavirus outbreak, most countries were expected to spend "enormous amounts" to smoothen the transition into what advocates hope would become a "better normal."
Singapore, the richest country in Asia, was expected to spend 13 percent of its gross domestic product (GDP) on Covid-19 measures. For Thailand, the figure was 9 percent.
Vietnam, Indonesia and the Philippines were expected to mobilize resources estimated to be at just 3 percent of GDP, an Oxfam study said, citing a report from RaboResearch.
This surge in financial outlays was expected to outpace revenue collection, which would lead to deficit spending, the study said.
But this is nothing new for the Philippines, which ran a deficit for 17 of the last 21 years from 2000 to 2020, the Oxfam study said.
For this year, economic managers set the budget deficit target at 9.6 percent of GDP. The country has reached more than half of that ceiling, hitting 6.5 percent of GDP from January to June, based on latest available data.
This turnout was already above the average 4.2 percent deficit-to-GDP ratio for all Asean nations as forecast by the study.
This is where foregone revenues from tax perks would have made a difference.
Citing a 2019 OECD report, the Oxfam-funded study said that both the Philippines and Vietnam could decrease Covid-19 budget burdens by one third by "stopping offering corporate income tax incentives to both multinational and domestic companies."
The estimate doesn't include the one-time P640 billion worth of revenues to be foregone once the proposed Corporate Recovery and Tax Incentives for Enterprises (Create) Act is passed.
"It doesn't seem logical for the country to borrow funds left and right and, at the same time, allow revenues to be foregone," said Mae Buenaventura, senior policy officer of the Asian Peoples' Movement for Debt and Development (APMDD). "That proposal defies common sense."
As of 2018, way before coronavirus became a household word, the Philippines — just like Myanmar, Laos and Cambodia — still had "to tackle high poverty rates measured by income," the Oxfam study said, citing the World Bank's World Development Report.
Hundreds of billions of pesos of foregone revenue could have been spent on poverty reduction, social protection and efforts to address Covid-19, instead of helping reduce taxes of the country's top corporations while in the middle of a pandemic, critics said.
Kenneth Abante, coordinator of Covidbudget.PH, a website that tracks public funds allotted for and spent on the coronavirus response, agreed that fiscal reform should be undertaken.
But Abante, who had worked for the Department of Finance, pointed out that other urgent matters needed to be addressed.
"The reform needs to happen because the incentive structure currently benefits the incumbents," he said. "Is this the right time to push for it? Are there more important priorities? To which the answer is yes."
Abante added: "There are more important things that we should manage like our health. If the Philippines [becomes] a Covid-19 hotspot, will investors invest?"
But BSP's Tolentino emphasized the importance of enacting Create as soon as possible.
"Create must be passed now, since the issues that Create targets have been long-standing, and further delay in reform will mean continuing to hobble the economy," he said. "Moreover, passing Create now will end the wait-and-see attitude of many investors who seek more clarity in the tax regime so that they can make their financial projections. It will also provide immediate relief to struggling businesses. Delaying the passage of this measure has caused too much investor uncertainty. Passing this now will allow the business community to resume operations and start creating new jobs with new investments."
Tax competition, a race to the bottom?
A noted tax lawyer, who belongs to one of the country's top auditing firms, wants the corporate tax cut to be deeper.
Instead of only 5 percentage points as envisioned under the corporate recovery bill, the income tax rate reduction should go as deep as 7 or even 10 percentage points from the get-go to finally allow the country to be competitive with its peers, the lawyer said.
In short, from 30 percent, the corporate income tax rate should be immediately reduced to 20 percent upon Create's enactment, the lawyer said.
"My frustration with some government proposals is that it's as if we're existing in a vacuum," the lawyer said. "It's as if we don't have competitors and we're not fighting for the same foreign direct investments."
The Philippines, in its bid to attract job-creating investments, should brace itself for tax competition in the region, the lawyer said.
Based on the 2019 Asean Investment Report, the Philippines placed fifth among 10 regional economies, attracting $9.8 billion in foreign direct investments in 2018. It trailed Singapore, which at $77.6 billion, took the top spot and received half of the region's total of $155 billion. It was followed by Indonesia, Vietnam and Thailand.
"We should look at what these countries are offering and see whether we can outdo them," the tax lawyer said.
Data from the Oxfam study showed that average corporate income tax (CIT) rates across the region had fallen for the past 10 years, from 25.1 percent in 2010 to 21.7 percent in 2020.
However, these rate reductions and increases in tax incentives did very little to affect investment decisions, according to the study. Investors have enjoyed the special 5 percent tax and other perks for almost half a century, but the Philippines did not become a top destination of foreign direct investments.
"There is no evidence that tax incentives increase FDI—indeed, quite the contrary. The majority of the corporate tax incentives currently offered by Asean countries are not aimed at attracting long-term investments but rather are an attempt to compensate for weak governance and poor infrastructure, and they feed the short-term desire of shareholders to cut corporate tax payments to the bare minimum," the Oxfam study said.
The way forward is tax cooperation, and not competition, in the region, the tax study said.
"Asean countries need to make sure that tax policies in the region serve the common good and provide for a stable fiscal environment," the study said.
The first of its three recommendations is for the region to draw up a whitelist and a blacklist of tax incentives: the former should include perks that are acceptable, investment-based tax incentives. The latter should involve putting up a plan to phase out profit-based tax incentives at a certain date.
The second recommendation is to establish rules for good governance of tax incentives.
Finally, the study called on countries to agree to a tax standard across the region.
"...[C]orporate income tax incentives offered should not be set below the level of a minimum effective corporate tax rate," the Oxfam study said. "The appropriate rate is subject to discussion, with a possible range of 12.5 percent to 20 percent."
Although it falls at the highest end of the range, the recommended figure still falls within what is envisioned under Create.
However, Filomeno Sta. Ana III, coordinator of policy and advocacy group Action for Economic Reforms (AER), is not convinced of the study's proposal for tax cooperation.
"The reality that we're in an Asean that is engaged in tax competition," Sta. Ana said. "In other words, we also have to make our tax rates competitive in order to get a share of those investments."
He added: "Reforming the fiscal incentive system is critical to address investment promotion, industrial policy, tax revenue and tax administration. While we also have to put other reforms in place, fiscal incentive rationalization is one key reform that has to be done."
Robert JA Basilio Jr. is a freelance writer based in Quezon City. He can be reached via email at rjabasiliojr@gmail.com.
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Editor's note: The first two parts of the series, entitled "Tax cuts" and "Is a VAT exemption a tax incentive?," were published on November 1 and 2, respectively, and can be read on voxpop.com.ph/davao while the whole story can be read on pcij.org.
