Global minimum tax seen leading to overhaul of PHL incentives regime

By Pexcel John Bacon

THE PHILIPPINES may need to change the way it attracts investors as the Organization for Economic Co-operation and Development’s (OECD) Pillar Two framework, which establishes a 15% global minimum tax (GMT) on multinational enterprises, increasingly erodes the effectiveness of income-based incentives, a Congressional think tank said.

In a discussion paper, the Congressional Policy and Budget Research Department (CPBRD) of the House of Representatives laid out what it called the “incentive paradox,” in which tax incentives reduce the effective tax rates of MNEs below the 15% global minimum threshold.

Citing separate studies by the Department of Finance and Deloitte, the paper noted that approximately P162.9 billion in potential revenues could be foregone in the absence of a GMT framework.

“Within the evolving framework of Pillar Two, the Qualified Domestic Minimum Top-Up Tax or QDMTT emerges as a critical policy tool for reconciling Pillar Two with domestic fiscal incentives,” it said.

The CPBRD recommends a phased reform of the Philippine fiscal incentives system to remain competitive in attracting investment under the OECD Pillar Two global minimum tax framework.

As a short term measure, the study proposes the passage of a Qualified Domestic Minimum Top-Up Tax to protect the country’s right to tax and prevent the shifting of income to other jurisdictions.

The study also stressed the need to strengthen the capacity of the Bureau of Internal Revenue (BIR) to implement more complex international tax rules.

The think tank also recommends, over the medium term, the gradual transition from income-based incentives such as the Income Tax Holiday (ITH) and Special Corporate Income Tax (SCIT) to Qualified Refundable Tax Credits (QRTCs).

According to the paper, QRTCs are more compatible with the global minimum tax rules and are more effective in providing targeted and performance-based support to priority sectors such as research and development, green energy, digital transformation, and skills development.

In the long term, the CPBRD urged policy makers to adopt a “Plan B” strategy that would reduce reliance on tax incentives and strengthen non-tax competitiveness measures.

These include developing infrastructure and logistics, energy security and price stability, improving regulatory efficiency and the rule of law, and strengthening workforce development.

The study noted that such measures are less vulnerable to the effects of the global minimum tax because they do not directly reduce companies’ effective tax rates.

“Accordingly, the Philippines should reposition its incentive regime toward instruments that are more targeted, transparent, performance-based, and consistent with global tax rules,” authors Jubels C. Santos, Toshihiro Gerald J. Ota, Jhoanne Estipular Aquino, and Novel V. Bangsal said.