Interview: Marivic Españo
How can comprehensive reform of both corporate and personal income tax rates help boost revenue and reduce informal economic activity?
MARIVIC ESPAÑO: Studies have consistently concluded that a tax system which is fair and easy to comply with and administer will be revenue productive. Such a revenue boost can come from different sources: voluntary compliance by the informal sector, increased compliance by those who are already in the tax net, increased business activity due to greater levels of investment from both local and foreign investors, and the multiplier effect of increased government spending resulting from an increase in revenues.
There are currently moves being made for tax reform involving lowering income tax rates for individual and corporate taxpayers. This relief, resulting in higher net income and take-home pay, could boost the economy through additional consumer spending. For businesses, a higher net income means that more funds are available for business expansion. A lower tax rate will reduce savings from tax avoidance and evasion, and therefore provide a greater incentive to comply with tax obligations. Coupled with administrative reforms to increase the probability of tax non-compliance being caught and penalised, these measures could effectively help address the growing informal economy present in the Philippines.
How have the Philippine Financial Reporting Standards (PFRS) helped make small and medium-sized enterprises (SMEs) more competitive?
ESPAÑO: The provisions under the PFRS have basically been carried over from the International Financial Reporting Standards issued by the International Accounting Standards Board. As such, the adoption of the PFRS by SMEs will ensure that financial statements issued by SMEs follow internationally recognised accounting standards. Investors should have no difficulty understanding the financial statements of SMEs, since they are governed by the same accounting standards adopted by other countries.
Moreover, investors will be able to compare the financial statements of an SME in the Philippines with SMEs from other countries, as well as large corporations. Investors will be able to evaluate financial statements prepared by SMEs under the PFRS more easily, and this will hopefully encourage investment.
What tax regime reforms can prepare the Philippines for the risks generated by cross-border trade and enhance international tax planning?
ESPAÑO: Big companies are generally able to plan their transactions well to benefit from differences in taxation in various jurisdictions and are keen to invest in jurisdictions that provide lower tax rates. Being a relatively high tax jurisdiction, the Philippines should therefore be more cautious in ensuring that income is properly attributed to Philippine entities. It is in the best interest of the country to ensure that the tax rules concerning cross-border transactions are clear and can be easily implemented.
The Philippines can also benefit greatly from a higher level of cooperation with the international community. There have been moves to harmonise cross-border tax initiatives under the OECD Base Erosion and Profit Shifting (BEPS) project. The BEPS package addresses the issue of taxes being lost due to loopholes in existing international rules that allow corporate profits to disappear or be artificially shifted to low or no-tax environments, where little or no economic activity takes place.
In view of the BEPS initiative, greater efficiency in the administration of tax rules and regulations should be the focus of tax reform, rather than just lower tax rates that enable the Philippines to be competitive with its neighbours. Clearer and consistent rules will be of benefit to the country, as well as to companies that conduct business in different jurisdictions.
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