THE Philippine economy’s third-quarter growth is currently the envy of everybody in the region. Bolstered by upbeat consumer spending and strong construction and infrastructure investment, our 7.1-percent GDP growth rate for the period is Asia’s best. This is an auspicious sign of things to come. Barring hitches, pundits say the Philippine economy is set to expand at this rate until 2018 despite threats of protectionism in the US, our top trading partner, under President Donald J. Trump.
To make the US economy more investment-friendly, Trump has promised to cut corporate tax to 15 percent, from 35 percent. Not to be outdone, British Prime Minister Theresa May also pledged to make the UK’s corporate tax the lowest in the Group of 20, which comprises 19 countries plus the European Union.
A competition to cut corporate-tax rates appears to be heating up globally. And it does not require a rocket scientist to figure out why world leaders are doing this. At a time when global economic growth remains subdued, government leaders are looking at fiscal policy changes to invigorate their ailing economies. Following this logic, a country that can offer the lowest corporate-tax rate has the biggest opportunity to attract multinational investors.
The Duterte administration’s tax-reform initiative appears headed in the right direction, particularly its commitments to lower corporate- and individual-tax rates. Despite the political noise, our fundamentals remain intact. Yet, we can make the Philippines more investor-friendly by reducing the country’s corporate-tax rate, which currently stands at 30 percent, the highest in Asean. Compare this with our neighbors: Corporate-tax rate in Singapore is 17 percent; Cambodia, 20 percent; Vietnam, 22 percent; Thailand, 23 percent; and Indonesia, 25 percent.
It’s about time we realize that our high corporate-tax rate has for the longest time served us nothing but deter investors from locating in the Philippines. In the event that tax cuts are implemented, the country will have better chances to compete with regional rivals. Only then can we exploit our demographic advantage associated with our young and growing population and fully capitalize on our key assets, such as our English-speaking work force.
The government has to roll out its tax reforms soon to show the world it is serious in its drive for increased competitiveness. In the months ahead, global investors will be following where Philippine corporate-tax rates will settle. This is important because a survey by the University of the Philippines School of Economics has found out that investments are negatively related with tax rates. The study said for every percentage point increase in corporate-tax rates, the reduction in investments is 6 percent to 8 percent.
It’s good to know Chinese investors are planning to come over and help finance big-ticket infrastructure projects. But we can’t afford to lose global investors from our traditional trading partners, such as the US or the UK. According to Bloomberg, “Trump’s move can potentially change the business logic of US multinationals, which now prefer to stash international profits—more than $2.5 trillion of them—overseas”.
Low corporate income-tax rate can make a country’s economy attractive for investment. The Philippines would do well to make its corporate-tax rate more attractive to free-moving global capital. The more investors we can attract, the more jobs we can create.