The Market Monitor Minding the Nation's Business
Riza Lozada
(First of two parts)
Overshadowed by the papal visit was the “birth” of the Association of Southeast Asian Nations (Asean) economic community, a bloc envisioned to be similar to the European Union, and which Philippines officials hope to put the country in equal footing with its neighbors in the association.
But many do not share the optimism, as the Philippines is joins the community with a serious handicap – it lags way behind its Asean neighbors and peers in Asia in terms of foreign investments.
Former Budget Secretary Benjamin Diokno said in a study that while the Philippines was one of the most aggressive in seeking the acceleration of the establishment of the Asean Economic Community (AEC) from the original 2020 target to 2015, it has been drawing the least in foreign direct investments in Asean.
“By the end of 2015 and beyond, foreign investors will vote with their feet. They will choose to invest in countries with good-governance records, favorable tax regimes, and superior public infrastructure,” he said.
Diokno noted that based on the tax system and the state of public infrastructure, the Philippines would be the least-preferred destination in the emerging bloc.
“If a foreign investor were to invest in one of the fastest-growing regions in the world, where would it invest? A strong candidate is the Asean-6 region consisting of Indonesia, Malaysia, Philippines, Thailand, Singapore and Vietnam,” he said.
With the Asean integration, a foreign firm investing in any of these countries or even in other emerging Asean members (Laos, Cambodia, and Myanmar), would have access to a huge consumer market of 620 million and regional economy that is estimated to grow to $3.8 trillion by 2017.
Diokno said that among the five biggest Asean economies, the Philippines has the highest total tax rate as percent of commercial profits which is 44.5 percent, as opposed to Singapore’s 27.1 percent, Thailand’s 29.8 percent, Indonesia’s 32.2 percent, and Malaysia’s 36.3 percent.
Sadly, despite its high tax rate, the Philippines has one of the lowest tax-to-gross domestic product (GDP) ratio of 12.8 percent, as opposed to Thailand’s 17.6 percent, Malaysia’s 16.1 percent, Singapore’s 13.8 percent, and Indonesia’s 11.8 percent.
The tax-to-GDP ratio measures the efficiency of the government in revenue collection that should rise parallel to economic growth.
The Philippines’s statutory corporate-tax rate is the highest in the region at 30 percent, with Singapore as the lowest at 17 percent, he said.
“Other things equal, where do you think would foreign investors invest: the Philippines or Singapore? That’s a no-brainer, of course. And if you throw in Singapore’s superior infrastructure and the low cost of doing business, the choice is even more obvious,” he said.
Diokno noted that Thailand and the Philippines started with the same high statutory, corporate income-tax (CIT) rate at 30 percent but Thailand has responded to the need for tax harmonization by reducing its CIT rate from 30 percent to 26 percent in 2012 and to 20 percent in 2013.
“The Philippines, on the other hand, has stood firm,” Diokno said adding the conflict between the high corporate-income tax (CIT) rate and the low tax effort can be attributed to rampant smuggling; the proliferation of redundant fiscal incentives which had been estimated, conservatively, at one percent of GDP; and poor tax administration.
“Economic theory suggests that the higher the marginal tax rate, the higher the deadweight loss—the social costs of taxation,” he said.
He said the government can afford to lower CIT rates if the tax base were broader, which could happen if there were fewer tax incentives.
He said rationalizing fiscal incentives has been tried before but without success.
“Several administrations —Ramos, Estrada, Arroyo, and even Aquino III— have tried to streamline fiscal incentives, remove the redundant ones, and make incentives performance-based but the proposed reform to rationalize fiscal incentives has failed because of strong political lobby by vested interests,” he added.
He referred to fiscal incentives as “pork barrel on the tax side.”
“Tax incentives are enjoyed by select industries and are protected by some politicians. In fact, politicians love to give away fiscal incentives in return for financial support from the favored groups in future elections,” he added.
Diokno believes the CIT could be reduced to a more competitive level of about 25 percent if the corporate tax base were broadened by rationalizing fiscal incentives.
To be continued