Let’s Talk Tax
By Paul Vinces C. Leorna
It has been more than a year since the first version of the Corporate Income Tax and Incentives Rationalization Act (CITIRA) bill was discussed in Congress. Some said the passage of the CITIRA bill will discourage investment and cause the pullout of foreign investors, displacing workers; others said the bill will eliminate unfair incentives, attract more foreign investment, and make SMEs more competitive in the region.
Since the first version, other versions of the CITIRA bill have come up — the most recent of which is Senate Bill No. 1357. Could this be the final version that is signed into law?
SENATE BILL NO. 1357’S SALIENT POINT ARE AS FOLLOWS:
Reduction of corporate income tax
The CITIRA bill gradually reduces the corporate income tax by 1 percentage point every year, from the current 30% to 20% by 2029, beginning Jan. 1, 2020, making our tax rates regionally competitive. However, the President may suspend the reduction beginning 2025 upon the recommendation of the Secretary of Finance should the projected deficit target as a percentage of the Gross Domestic Product exceed the programmed deficit as determined by the Development Budget Coordination Committee. This provision suggests that the government is anticipating possible economic concerns once the corporate income tax rates start decreasing.
I hope the passage of the bill will lead to tax savings for companies, with such savings possibly directed towards growth and expansion. This growth is expected to contribute to the improvement of the Philippines’ economic standing in the Asia-Pacific.
Increase in tax rates on certain income
The preferential income tax rates afforded to Regional Operating Headquarters (ROHQs) is proposed for repeal. Compared to current tax rules, ROHQs paying 10% on their taxable income will be subject to regular corporate income tax two years after the effectivity of CITIRA. From the previous 10% income tax rate, ROHQs will be subject to a 27% income tax rate at that stage of the reduction in corporate income tax rates.
Final tax rates on the interest income on bank deposits under the expanded foreign currency deposit unit of resident foreign corporations are to rise to 15%. Currently, this passive income is only subject to a final tax rate of 7.5%.
Capital gains tax (CGT) on the unlisted shares of resident foreign corporations and nonresident foreign corporations is likewise increased to 15%. This is a shift from current 5 or 10% CGT rate on net capital gains realized during the taxable year from the sale, barter, exchange, or other dispositions.
The increase in the final tax rate and CGT may be considered “catch-up” provisions since, under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the 15% tax rate for both is already applicable to domestic corporations.
Introduction of new title in the Tax Code – ‘Tax Incentives’
The provisions on tax incentives include an option in favor of companies with qualified activities to avail of Income Tax Holidays (ITH) for two to four years; and thereafter, to avail of Special Corporate Income Tax (the tax rate is 10% beginning Jan. 1, 2022, based on gross income earned) for three to four years, which could be extended for another three or four years. Another option is for these companies to avail of the regular corporate income tax rate with enhanced deductions for five to eight years, which may be extended for three to four years. Availing of either tax incentive option shall not exceed 12 years.
Companies with registered projects or activities prior to the effectivity of the bill will be allowed to continue paying the preferential tax rate of 5% on gross income earned for a maximum of seven years, as provided under the sunset provision of the bill. However, it is important to note that the maximum seven-year duration will only be allowed for companies that (1) export 100% of their output; (2) employ 10,000 Filipino workers in an incentivized activity; or (3) are engaged in manufacturing that would qualify as a “footloose project or activity,” as defined in the Bill.
In the bill, the government aims to provide incentives that are targeted, time-bound, and transparent, promoting innovation, high-technology projects, and agribusiness.
Proposed effectivity date of the CITIRA Bill
A newly-signed law generally takes effect 15 days after its complete publication in the official gazette or in a newspaper of general circulation. In the CITIRA bill, however, there is a retroactive clause on the reduction of the corporate income tax rate, the increase in certain final tax rates, and the amendment in the computation of allowable interest expense, which is proposed to retroact to Jan. 1, 2020.
Could this be the final version of the CITIRA bill? We can never be certain just yet. What is rather certain is our need to prepare and keep abreast of the changes that are surely underway. One can also imagine the process of scrutiny the proposed amendments have undergone and are yet to undergo from all stakeholders before it takes final form.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Paul Vinces C. Leorna is a Semi-Senior of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.