UMVA has learned that the Philippines is on the cusp of a major overhaul in its investment attraction strategy, driven by the looming implementation of the Organization for Economic Co-operation and Development’s Pillar Two framework.
This framework, which establishes a 15% global minimum tax on multinational enterprises, is set to erode the effectiveness of income-based incentives, prompting a Congressional think tank to sound the alarm on the need for reform.
The Congressional Policy and Budget Research Department has identified an “incentive paradox,” where tax incentives currently reduce the effective tax rates of multinational enterprises below the 15% global minimum threshold, potentially costing the country P162.9 billion in foregone revenues.
In a bold recommendation, the think tank suggests 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, effectively safeguarding its tax base.
The study also emphasizes the need to strengthen the capacity of the Bureau of Internal Revenue to implement more complex international tax rules, ensuring the country can adapt to the evolving global tax landscape.
Looking ahead, the think tank recommends a gradual transition from income-based incentives to Qualified Refundable Tax Credits, which are more compatible with global minimum tax rules and more effective in providing targeted support to priority sectors.
These sectors, including research and development, green energy, digital transformation, and skills development, are poised to benefit from a more performance-based and transparent incentive regime.
In the long term, policymakers are urged to adopt a “Plan B” strategy that reduces reliance on tax incentives and strengthens non-tax competitiveness measures, such as infrastructure development and workforce development.
Such measures are less vulnerable to the effects of the global minimum tax, providing a more stable and sustainable foundation for attracting investment and driving economic growth.
The Philippines is at a crossroads, and the decisions made now will determine its ability to compete for investment in a rapidly changing global economy.
