Investment incentives and effective tax rates in the Philippines: a comparison with neighboring countries

Abstract

This paper compares the general tax provisions and investment incentives in the Philippines to six other East Asian economies – Malaysia, Indonesia, Lao, Vietnam, Cambodia and Thailand. It finds that general effective tax rates are relatively high in the Philippines, while investment incentives are comparable to those in neighboring countries. Tax holidays are most attractive for very profitable firms, creating redundancy, and for investment in short-lived assets. Two recently proposed tax reforms would replace tax holidays by a reduced corporate income tax rate or a low tax on gross receipts. The results suggest that this would result in stronger incentives to invest, while government revenue would increase. Alternatively, replacing tax holidays with a general reduction in the corporate tax rate and accelerated depreciation would either not provide the same incentives or be very costly.