Senate Ways and Means Committee Chair Senator Pia Cayetano has filed Senate Bill 1357, the Committee Report on the Corporate Income Tax and Incentives Rationalization Act or CITIRA, and has sponsored it in the Senate’s plenary session. Nine of the 15 regular members and all three ex-officio members signed the committee report. Of the 12, one signed with reservation, three said they will interpellate, and six said they might introduce amendments. One of those who did not sign said he would interpellate. There are no disclosed reasons for the other five not signing, except that they were not physically present (truest for a controversially detained Senator) at the time.
This is the first time since the 13th Congress that a fiscal incentives reform bill has reached this far in the Senate. Reaction to the bill seems more muted now (especially compared to the last two years). Is CITIRA finally seeing the light at the end of the tunnel?
SB 1357 addresses most of the concerns raised against CITIRA, with a few remaining issues. These concerns revolve around the fear of scaring away investors and job losses because of the changing investments incentives regime. Enterprises in economic zones are also apprehensive about losing their insulation from local government interference, and having to deal with a new authority.
The first part of CITIRA partly addresses the job loss worry as well as the loss of investments. The corporate income tax (CIT) rate will be cut by one-percentage point every year starting 2020 until it settles to 20% in 2029. It puts a brake to cuts beyond 25% or starting 2025, subject to meeting the deficit target. (Note that the House version cuts the rate by two-percentage points every two years starting 2021 until 2029, and provides for the possibility of advancing the scheduled reduction if adequate savings are realized from the rationalization of fiscal incentives.) This will benefit 300 times more enterprises than those that receive fiscal incentives
We at Action for Economic Reforms (AER) reiterate the need for more prudence in the CIT rate reduction. We recommend that the tax effort (of not lower than 16%) be an additional criterion. This safeguards against future fiscal adventurism that could encourage increasing deficit targets to accommodate further tax cuts. It is also an incentive to be more mindful of our tax performance and for tax authorities to beef up efforts to improve collection. A one-percentage decrease in the CIT rate will cost the country P23-30 billion a year. Further, starting 2022, the national government will experience a huge loss in its share of national revenue in favor of the LGUs’ internal revenue allotment (IRA). In 2019, the Supreme Court ruled (in a case popularly known as the Mandanas case) that Congress erred in its restrictive definition of national taxes to only include national internal revenue taxes as the base for computing the IRA. According to the Supreme Court, the base should also include tariffs and customs duties, and portions of the VAT and tobacco excise tax, among others. This means that the national government will have to yield 40% of collections from all these to the LGUs. To illustrate how huge an impact this will have, in 2018 customs collection alone reached almost P600 billion. Notwithstanding the hoped-for positive economic impact of lower tax rates and greater fiscal autonomy for LGUs, the contraction of revenues at the disposal of the national government will hurt, and will have to be covered some other way.
Given international and regional tax competition, the Philippines (which has a 30% top rate) faces tremendous pressure to lower CIT rates. In ASEAN, Indonesia has the next highest rate at 25% and is planning to lower it to 20%. Next are Malaysia and Lao PDR at 24%, then Thailand and Vietnam at 20%. It is tempting to bite the bullet and match what our closest competitors offer. Considering the potential impact, it pays to have a more judicious approach. It may well be that things will work out, our tax effort will increase, and the deficit will remain stable. But let’s not be too hasty. Let’s first make sure that systems are in place to manage adjustments and to maximize the gains from the initial CIT rate cuts before we push further.
On the reform of fiscal incentives, SB 1357 is much clearer and more generous. The sunset period for existing incentives includes the remaining years of income tax holiday (ITH) previously granted and a maximum of five years for the special tax rate of 5% on gross income earned, with additional two years for special cases (e.g. 100% exporter, more than 10,000 jobs, or footloose investment). Availment of incentives under the new regime will be for five to eight years, with ITH for two to four years and a special (reduced) CIT for three to four years. The SCIT will be 8% in 2020, 9% in 2021, and 10% from 2022.
The SCIT is in lieu of all local and national taxes, which addresses concerns about LGU interference, with national government’s share progressively increasing from 6% (2020) to 8% (starting 2022). Qualified enterprises also get duty exemption on the importation of capital equipment, raw materials, spare parts, or accessories, VAT exemption on importation, and VAT zero-rating on local purchases.
If a qualified firm so chooses, it can receive enhanced deductions in lieu of ITH and SCIT. These include: depreciation allowance on qualified capital expenditure (an additional 10% for buildings and an additional 20% for machinery) for assets directly related to the production of goods and services; a 50% additional deduction on labor expense; a 100% additional deduction on R&D expense; a 100% additional deduction on training expense; a 50% additional deduction on domestic input expense; a 50% additional deduction on power expense; a 50% deduction for reinvestment allowance in manufacturing industry; and, enhanced net operating loss carry-over.
To qualify for incentives, a registered enterprise should be engaged in a project or activity included in the strategic investments priorities plan (SIPP), meet agreed performance targets, install an adequate accounting system, and comply with e-receipting and e-sales. It should also file an annual tax incentives report.
The SCIT is lower than the estimated equivalent of the 5% on GIE (15% of net) currently enjoyed, but it expires in three to four years. Nevertheless, if an enterprise continuously innovates and qualifies in successive SIPP, it can enjoy incentives on the new qualified product or operation.
A good possible amendment is the inclusion of training provided to student trainers or immersees from public educational institutions. With the K to 12 reforms and various enhancements in the techvoc and higher education programs, students have been required to render from 80 to several hundred hours of practical work training. As it is, there are more students than there are spaces available in enterprises and offices for them. Including this in the possible enhanced deductions (i.e., training to direct employees and student trainees accepted by the enterprise) will increase collaboration between industry and the education sector, and will provide better training opportunities for our students. For this, approval of the program by the Department of Education, Commission on Higher Education, and Technical Education and Skills Development Authority will be helpful.
Finally, CITIRA enhances the policymaking, oversight and reporting functions of the Fiscal Incentives Review Board (FIRB). That the FIRB is co-chaired by the Department of Trade and Industry and the Department of Finance ensures the complementation of revenue and industrial policy objectives.
The FIRB is clear on the publication responsibility of the FIRB of the tax incentives, tax payments and benefits data and related information by industry group. We at AER would like to have this enhanced by clarifying benefits data to include actual availers and their compliance to performance targets.
With the enhancements introduced by CITIRA, the Philippines approximates what are on offer in other ASEAN countries, especially when both the ITH and SCIT periods are considered. The incentives are also available to both domestic and foreign enterprises.
CITIRA is a strong bill. With a few more refinements as discussed above, CITIRA will be a much stronger bill.
Jenina Joy Chavez is a trustee of Action for Economic Reforms and heads its industrial policy program.