Marivic Spain, Chairman and CEO, P&A Grant Thornton: Interview: Interview – Asia

Interview: Marivic Spain

How can comprehensive reform of corporate and personal tax rates help increase revenue and reduce informal economic activity?

SPANISH MARIVIC: Studies have consistently concluded that a tax system that is fair and easy to comply with and administer will generate productive revenue. Such a revenue boost could come from a variety of sources: voluntary compliance by the informal sector, increased compliance by those already in the tax net, increased business activity due to greater levels of investment from both domestic and foreign investors, and the multiplier effect of increased government spending as a result of increased revenue.

Steps are currently being taken for tax reform, including a reduction in income tax rates for individuals and corporate taxpayers. This relief, leading to higher net income and take-home pay, can stimulate the economy through additional consumer spending. For businesses, a higher net income means that there are more funds available to expand the business. A lower tax rate will reduce savings from tax avoidance and evasion and therefore provide a greater incentive for tax compliance. Combined with administrative reforms to increase the likelihood that tax non-compliance will be caught and penalized, these measures could effectively help address the growing informal economy in the Philippines.

How did the Philippine Financial Reporting Standards (PFRS) help small and medium enterprises (SMEs) become more competitive?

SPANISH: The provisions of the PFRS are mainly carried over from the International Financial Reporting Standards issued by the International Accounting Standards Board. As such, adoption of PFRS by SMEs will ensure that financial statements issued by SMEs follow internationally recognized accounting standards. Investors should have no difficulty in understanding the financial statements of SMEs as they are governed by the same accounting standards adopted by other countries.

In addition, investors will be able to compare the financial statements of SMEs in the Philippines with SMEs from other countries as well as large corporations. Investors will be able to more easily evaluate the financial statements prepared by SMEs under the IFRS and hopefully this will encourage investment.

What tax regime reforms can prepare the Philippines for the risks generated by cross-border trade and improve international tax planning?

SPANISH: Large companies are usually able to plan their transactions well to take advantage of differences in taxation between jurisdictions and are willing to invest in jurisdictions that provide lower tax rates. Being a relatively high tax jurisdiction, the Philippines must be more careful to ensure that income is properly attributed to Philippine entities. It is in the country’s best interest to ensure that the tax rules regarding cross-border transactions are clear and can be easily applied.

The Philippines can also benefit greatly from a higher level of cooperation with the international community. Steps have been taken to harmonize cross-border tax initiatives under the OECD Base Reduction and Profit Shifting (BEPS) project. The Base Reduction and Profit Shifting Package addresses the problem of tax loss due to loopholes in existing international rules that allow corporate profits to disappear or be artificially diverted to low- or no-tax environments where little or no economic activity.

In view of the BEPS initiative, greater efficiency in the administration of tax rules and regulations should be the focus of tax reform, not simply lower tax rates that allow the Philippines to be competitive with its neighbors. Clearer and more consistent rules will benefit the country as well as companies doing business in different jurisdictions.