Right incentive system should be balanced with revenue mobilization — IMF

Right incentive system should be balanced with revenue mobilization — IMF

By Keisha B. Ta-asan, Reporter

THE PHILIPPINES should create the right tax incentive system and properly mobilize tax revenues to achieve a more sustainable growth, the International Monetary Fund (IMF) said.

“Creating an environment that is conducive to attract more investments would be good eventually for growth prospects in the medium to the long run, but at the same time, we need to ensure that the Philippines and the government has adequate resources to finance its other priority expenditures,” IMF Representative to the Philippines Ragnar Gudmundsson told BusinessWorld on Nov. 22.

Last week, a House of Representatives committee approved the amendments to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which seeks to address conflicting provisions on tax incentives.

The CREATE MORE (CREATE to Maximize Opportunities for Reinvigorating the Economy) bill would allow companies inside economic zones and freeports to enjoy duty-free privileges and value-added tax (VAT) exemptions on imports and local purchases.

The bill would also empower the President to modify, craft and grant incentive packages, without the recommendation of the Fiscal Incentives Review Board (FIRB).

Jonathan L. Ravelas, senior adviser at Reyes Tacandong & Co., said the amendments to the CREATE law and improving the overall business environment could help attract more foreign investments into the Philippines.

“Providing the right tax incentives for companies in the specific sectors we want in economic zones and freeports is crucial to encourage their growth and contribute to the country’s economic development,” Mr. Ravelas said. 

The CREATE MORE bill seeks to introduce a “simplified and streamlined” tax refund system for registered business enterprises.

Under the bill, domestic and export companies, even those inside ecozones and freeports, would continue to enjoy duty exemptions, VAT exemption on importation, and the VAT zero-rating of local purchases as provided in their respective investment promotion agency registrations.

The measure also seeks to reduce the corporate income tax to 20% for those under the enhanced deduction regime from 20-25%.

Mr. Ravelas said President Ferdinand R. Marcos, Jr. should be careful in modifying incentive packages without the recommendation from the FIRB.

“While it may expedite decision making, careful oversight is necessary to prevent potential misuse of power. Striking the right balance is key for effective and transparent governance,” he said.

He also said the government should focus on sectors such as manufacturing, which can employ a lot of people and improve their skills.

Latest data from the Department of Finance showed revenue losses from the CREATE law reached P80.4 billion in 2022, higher than P68 billion in losses in 2021. This included P59.2 billion in losses arising from the reduction in corporate income tax rates.

The CREATE law was implemented as a pandemic relief measure for businesses through income tax reductions.

Meanwhile, IMF’s Mr. Gudmundsson said it is important for the government to have tax revenues that can support programs for education, health, and social protection. 

“Especially as the Philippines moves to an upper middle-income country status, mobilizing revenues and resources domestically becomes more and more important because there will be reduced access to concessional financing,” he said.

National Economic and Development Authority Secretary Arsenio M. Balisacan earlier said the Philippine government is preparing to be less reliant on official development assistance once the country achieves upper middle-income status.

The World Bank classifies the Philippines as a lower middle-income economy, with gross national income (GNI) per capita of $3,950 in 2022.

The World Bank norm for lower middle-income countries is a GNI per capita of $1,136 to $4,465. The bracket for upper middle-income economies is set at $4,466 to $13,845. — Keisha B. Ta-asan