The government’s plan to improve our corporate tax system and to develop a more efficient and competitive tax incentives regime has been ongoing for quite some time. In February, the proposed measure, known as the Corporate Income Tax and Incentives Reform Act (CITIRA) Bill, reached the Senate. Many hopes were raised that the CITIRA Bill would soon be enacted into law.
Unfortunately, the COVID-19 pandemic broke out. Along with it are the measures undertaken by the government such as declaring a state of public health emergency and imposing community quarantine in several areas to contain the spread of the virus. These measures halted many social and economic activities and changed various aspects of our everyday lives.
The CITIRA Bill was not spared change. Given the COVID-19 situation, several changes were proposed to the bill to recalibrate it, to be more responsive to the needs of businesses, and to aid taxpayers in their recovery.
Below are some of the proposed key changes to CITIRA Bill, now known as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), that legislators are currently evaluating:
OUTRIGHT REDUCTION OF CORPORATE INCOME TAX RATE
Under CITIRA, the corporate income tax (CIT) rate will be reduced by 1 percentage point every year starting Jan. 1, 2020, until it eventually reaches 20% by Jan. 1, 2029. Under CREATE, businesses can enjoy earlier the benefit of paying income tax at lower rates due to an outright reduction of the CIT rate from 30% to 25% by July 1, 2020. Afterwards, starting Jan. 1, 2023, there will be a 1 percentage point decrease every year until the CIT rate reaches 20% by Jan. 1, 2027.
Businesses can use the funds saved from the cut in the CIT rate to revitalize operations and retain their workers.
EXTENDED PERIOD OF NET OPERATING LOSS CARRY-OVER
Net operating loss is the excess of deductible expenses over the gross income of a taxpayer in a given taxable year. Under the current rules, the net operating loss can be carried over as a deduction from gross income to the next three succeeding taxable years. Under the CITIRA Bill, there were no provisions amending this rule.
Under CREATE, however, the net operating loss incurred by non-large taxpayers for the taxable year 2020 can be carried over as deduction from gross income for the next five consecutive years. This provision will help taxpayers recover the losses incurred in 2020 when many businesses were forced to stop their operations or operate at limited capacity due to the COVID-19 pandemic.
LONGER SUNSETS FOR BUSINESSES CURRENTLY ENJOYING INCENTIVES
Under the reform on the tax incentives, the incentives currently being enjoyed by businesses registered with different investment promotion agencies (IPAs) are being modified to make the incentives performance-based, targeted, time-bound, and transparent. Companies currently enjoying incentives under the existing laws governing their respective IPAs, however, will still be allowed to enjoy existing incentives for a certain period.
Under CREATE, businesses currently registered with different IPAs can still enjoy 5% gross income tax for four to nine years from effectivity of new tax incentive schemes. This is an extension of two years from the two to seven years of sunset period provided under the CITIRA Bill. This will give ample time for businesses to adjust to and evaluate the new incentive schemes.
TARGETED INCENTIVES FOR BUSINESSES IN IDENTIFIED AREAS
One aspect of the new tax incentives schemes under both CITIRA and CREATE is to provide a longer period of tax incentives for businesses that will locate in less-developed areas and areas outside of metropolitan regions. This geographic targeting is in support of the government’s “Balik Probinsya, Bagong Pag-asa Program,” which aims to decongest Metro Manila.
In terms of industry targeting, activities which include highly technical manufacturing, agriculture, fishing, forestry, and service activities requiring knowledge, modern science, engineering, and research resulting in significant value-added and high-paying jobs, as well as activities that may draw in investment capital of $1 billion, will be highly prioritized.
Moreover, the President is given flexibility in granting tax incentives. Upon the recommendation of the Fiscal Incentives Review Board, the President may modify the mix, period, or manner of availing of incentives for a highly desirable project or a specific industrial activity based on defined development strategies, such as creation of high-skilled jobs and attracting significant foreign capital or investment subject to limitation that the period for availing of incentives shall not exceed 40 years.
Over the past few months, we have seen how our government dug deep into its pockets to support its people and put up the fight against the COVID-19 outbreak. With this fight came lockdowns, business shutdowns, layoffs, and disrupted supply chains, which have taken a heavy toll on our economy. Some of the proposed provisions of CREATE to help businesses recover from the pandemic may mean a reduction in government revenue, but these will also help attract a new wave of multinational businesses to invest in our country, thereby giving our economy a much-needed boost. We can only hope that the proposed measures will be passed into law as early as possible.
The pandemic and tax reform both entail change. While the changes brought about by the former may be something we wished never happened, the changes that the latter may bring would definitely be most welcome.
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.
John Paulo D. Garcia is a manager of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.