Remove All Tax Holidays – IMF

MANILA, Philippines - The International Monetary Fund (IMF) has suggested that the Philippine government removes all tax holidays and the tax on gross income earned (GIE) by investors to make the tax incentives system simpler and easier to understand, thus, enhancing the country's attractiveness to investors.

This was contained in the IMF Country Report No. 12/60 dated March 2012 entitled "Philippines: Technical Assistance Report on Road Map for a Pro-Growth and Equitable Tax System," which assessed the country's tax and tax incentives regime.

The report also recommended with a reduction in the CIT (corporate income tax) rate to at least 25 percent.

"It is likely to make the system simpler and easier to understand for investors, while also making it more transparent, equitable and efficient than the current regime. This regime, together with a reduction in the CIT rate, should enhance make the Philippines' attractiveness to investors," the report stressed.

If the preferred option is not considered feasible, IMF has proposed to rationalize tax incentives using the Department of Finance (DOF) bill as a base with the following amendments: limit the total period for all incentives to no more than 10 years; provide only two rate options: an income tax holiday followed by a 7.5 percent tax on GIE; or simply a 7.5 percent tax on GIE.

In recommending this option, the IMF noted that the period for providing incentives is still too long and should be reduced.

Most countries in the region, the IMF said, do not provide incentives beyond 10 years.

"The main reason for time-limiting incentives is that they are usually offered to attract firms to undertake a particular activity and/or to assist in their establishment. Once that objective is achieved - or at least enough opportunity given to do so - the incentive should cease," the report added.

The ITH being offered by the government total a maximum of eight years, but the 5 percent GIE offered by the Philippine Economic Zone Authority to its locators after they exhausted their ITH has no time limit.

The IMF has also recommended the abolition of the value-added tax zero-rating for suppliers outside the zones to exporters within the zones.

Both the Board of Investments and the DOF bills have pushed for the contiinued VAT zero-rating for suppliers outside the zones to exporters within the zones.

"The zero-rating in these cases is too prone to abuse and difficult to monitor, with leakage to the domestic market," the IMF said.

This measure was introduced partly due to the inadequacies of the VAT refund regime. These concerns are being addressed with the reform of the VAT refunds, so that there is less need for the zero-rating, the IMF noted.

Also recommended is to implement the grandfather rule to existing recipients of incentives, by allowing those incentives that are time-bound to expire, and phasing out those incentives that are not time-bound within a reasonable time frame.

In addition, the IMF would like the reduction of the list of IPP (Investment Priorities Plan) activities eligible for incentives.

Likewise, the IMF report has recommended the inclusion of a sunset clause for all incentive laws of no more than 5 years. (BCM)