REPRESENTATIVE Jose Ma. S. Salceda, who chairs the House Ways and Means committee, said he does not support the continuation of taxes based on Gross Income Earned (GIE), calling it a source of abuse and adding momentum to the government’s bid to end GIE tax incentives enjoyed by economic zone locators.
On Friday, the House of Representatives approved on third and final reading House Bill 4157 or the Corporate Income Tax and Incentives Rationalization Act (CITIRA) which removes the perpetual 5% tax on GIE and limits income tax holidays to three years.
Mr. Salceda, who represents the second district of Albay, said that GIE is the “mother of abusive transfer pricing.”
Transfer pricing is practiced by companies that transact with affiliates and is regulated by global accounting standards, which require that such transactions reflect a fair, commercial, “arms-length” price. A parent company’s sales to a foreign affiliate could be priced in such a manner as to cause the affiliate to lose money or minimize earnings, thereby evading tax.
“The data clearly establish that abuse of transfer pricing has resulted in tax leakages of P295.8 billion from 2011 to 2017,” Mr. Salceda said.
He added that GIE “unfairly favors” certain industries over others.
“GIE is unfavorable to those with high gross margins, such as service-oriented firms with virtually no cost of goods sold. GIE unfairly disadvantages firms whose main source of revenue is job creation (such as business process outsourcing (BPO) companies) because they do not spend on raw materials,” Mr. Salceda said.
Mr. Salceda also said that removing GIE will “improve the effectivity of the deductions-based incentives that encourage job creation, infrastructure, research and development, and workers’ training, and use of domestic products.”
HB 4157 seeks to cut the current 30% corporate income tax rate — the highest among major Asian markets — by one percentage point every other year until it falls to 20% in 2029.
Amendments to the original version of the bill grant businesses near Metro Manila a four-year income tax holiday and three years of reduced corporate income tax, while those farther away will enjoy a proposed six-year income tax holiday and four years of reduced corporate income tax.
“Removing the GIE will improve efficiency. The GIE makes it difficult to determine ‘true’ cost of goods, especially for service industries. Businesses with legitimate operating and administrative costs will not be able claim these costs as deductions, increasing their tax burden,” said Mr. Salceda. — Vince Angelo C. Ferreras