IMF study supports abolition of income tax holiday in RP

MANILA, Philippines - An International Monetary Fund (IMF) study supports the proposal seeking the abolition of income tax holidays, saying the move would help sustain and improve the country's fiscal position. The study comes after Antique Rep. Exequiel Javier filed a bill sponsored by the Department of Finance (DoF), which seeks to replace existing income tax holidays with a lower corporate income tax of 25 percent or a lower tax of five percent on a company's gross income. "Under most circumstances, introducing the DoF legislation and abolishing tax holidays reduces effective tax rates and improves incentives to invest, while also improving short- and medium-term revenue collection," the IMF said in a working paper titled "Investment Incentives and Effective Tax Rates in the Philippines. According to the study, the government loses an amount equal to about one percent of the gross domestic product due to redundant tax incentives. It said the country's tax perk system is complicated as the government has ten investment promotion agencies, including the Board of Investments and the Philippine Economic Zone Authority, with different programs for investors. The perks are also attractive only to short-term investments as companies tend to leave after the expiration of the tax holiday. The study also said tax holidays can serve as an avenue for tax avoidance through transfer pricing and other schemes which would allow a company to shift earnings to affiliates which are still enjoying tax perks. "This is especially true for countries with weak revenue administrations and insofar leakage occurs from special economic zones. Thus, tax incentives present a risk to government revenue as their mere existence allows for potential abuse by investors not intended to receive them," the study said. The Finance department is seeking ways to rationalize tax incentives to achieve a healthy fiscal position after the budget deficit peaked at P210 billion in 2002. The government's budget deficit stood only at P12.4 billion at the end of 2007. - GMANews.TV