Fitch Solutions is optimistic that the Corporate Recovery and Tax Incentives for Enterprises, or Create Act, will help boost the Philippines’ economic recovery, citing its impact on investors’ sentiment.
Create Act, that was signed into law on March 26, gradually lowers corporate income tax from 30 percent to 25 percent for big businesses, and to 20 percent for small and medium enterprises.
“The removal of the tax uncertainty should prove a boost to foreign investor sentiment towards the Philippines and help the recovery in foreign direct investment inflows, which fell 24.6 percent in 2020,” the unit of Fitch Group said in a commentary dated June 10 and released Friday.
It said Create Act will put the Philippines’ CIT level at par with other countries in the region such as Malaysia at 24 percent, Indonesia – 22 percent, and Thailand and Vietnam, both at 20 percent.
The report said the impact of the law on government revenue is seen to be countered by the bid to increase the tax base and collection rates “while other tax and grant incentives will be rolled back.”
It, however, noted the need for other measures to boost investors’ sentiment, noting that tax reform alone will not address the issues regarding how the country attracts FDIs.
“The likely disruption to government infrastructure investment again in 2021 will delay much needed logistical improvements and spending on utilities that are needed to support business hubs. Other challenges, such as labor skills and government policy uncertainty also need addressing post-elections due in 2022 and could determine the success of the Create bill in boosting the economy’s long-term growth outlook,” it said.
Meanwhile, Fitch Solutions expects the government’s budget gap to remain high, at 7.7 percent of gross domestic product this 2021, and 6.5 percent of GDP next year, because of pandemic-related financing requirements.
It, however, discounted this as an issue in the near term vis-à-vis the public debt outlook as it forecasts a fiscal consolidation in the coming years.
The share of the government’s budget deficit to domestic output rose to 7.6 percent in 2020 from 3.4 percent in the previous year due to higher spending needed to address the impact of the virus-induced pandemic.
Fitch Solutions expects higher funding requirements for the government this year since Covid-19 remains high and the number of people who have been vaccinated remains low.
“We see limited risks from running wide deficits in the near term given the economy’s need for demand and investments. However, longer-term pressures on public financing will warrant a substantial tightening of fiscal support over the medium term,” it added.*PNA