Reduced perks to offset corporate tax cut impact

Lower corporate income taxes should come with a reduction in business incentives to limit the impact on government revenues, the Finance department said.

Finance Undersecretary Karl Kendrick Chua said that least P26 billion had to be raised for every percentage point cut to the corporate income tax rate, which the government is planning to reduce to 25 percent from 30 percent under Package Two of its Comprehensive Tax Reform Program.

Package Two, which was forwarded to Congress earlier this month by the Finance department, also calls for the modernization of the incentives system via measures such as the designation of the Fiscal Incentives Review Board as overall administrator of all investment promotion agencies (IPAs).

Chua said the government also wants legislators to repeal 150 special laws that complicate the grant of fiscal incentives, replacing these with an omnibus law that would provide for a single menu of perks applicable to all IPAs.

The Finance department is in favor of setting a revenue trigger — equivalent to 0.15 of gross domestic product — for a staggered reduction in corporate income taxes.

“Every one percent reduction requires P26 billion in counterpart revenues to keep revenue neutrality,” Chua said.

Finance Secretary Carlos Dominguez 3rd stressed that the corporate income tax could only be lowered if there was a corresponding drop in terms of incentives granted.

“Our plan is to lower the tax rate for corporations from 30 percent to 25 percent. But our proposal to the Congress is to allow us to do that only if there’s a reduction in the amount that we provide for incentives,” he said.

To improve compliance, Chua said the Finance department was proposing a simplification of tax rules for corporations, fewer tax forms and procedures, a review of the National Internal Revenue Code to improve general anti-avoidance regulations and transfer pricing and costs, and a cut in the optional standard deduction from 40 percent to 20 percent of gross income.

As for incentives, these should be performance-based with clear measures of actual investment, job creation, countryside development, exports, and research and development.

Incentives should also be targeted to minimize leakages and distortions and, more importantly, time-bound so that the perks are not granted forever to businesses, Chua added.

For companies currently enjoying incentives of more than 10 years, the Finance department is proposing a grandfathering provision where the perks will continue to be enjoyed for two more years after Package Two becomes a law.