DoF identifies abuses in corporate tax system

By Elijah Joseph C. Tubayan, Reporter
THE DEPARTMENT of Finance (DoF) is seeking to stop what it called “abuses” in the corporate tax system under the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill.
The DoF said the debates on the second tax reform package have been focused on fiscal incentives and have “unfortunately ignored one vital public concern, which is the possible rampant abuse of these perks as well as the practice of transfer pricing and spread of harmful tax practices.”
The DoF listed the top abuses of tax incentive regimes in the Philippines, which include enterprise zones with regional investment incentives, but are diverting their activities outside the region; transfer pricing schemes to lower payable taxes by transferring activities to a sister firm; and disguising non-qualifying activities into qualifying activities.
Other abuses include domestic firms restructuring as foreign investors to get special tax rates; existing firms transforming into new entities to qualify for new incentives; reporting churning or fictitious investments; schemes to accelerate income or defer deductions at the end of a tax holiday period; overvaluation of assets for depreciation, tax credit, or other purposes; and employment and training credits, where firms employ fictitious employees and roll out fake training programs.
“Some of these abuses we can control or enforce better, but no amount of enforcement will be adequate if our current system is prone to these abuses,” Finance Undersecretary Karl Kendrick T. Chua was quoted in a statement as saying.
He said these abuses are estimated to cost the government some P43 billion in 2015 alone, on top of the P301 billion in tax incentives that were granted by various investment promotion agencies.
The proposed reforms to plug the abuses in the TRABAHO bill include the improvement of general anti-avoidance rules especially on firms’ allocation of income and deductions, gains and loss determination and recognition, and stricter definition and implementation of related measures.
This includes tightening the definition of exporters to a firm that exports 90% of its sales, from the current 70%, disallowing the double registration of activities, strict implementation of the new investment-new incentive scheme, expanding the definition of large taxpayer, and defining a medium taxpayer, among others.
The TRABAHO bill mainly seeks to cut the corporate income tax rate gradually from 30% currently to 20% by 2029, while limiting fiscal incentives in a maximum of five years to industries identified in the Strategic Investments Priority Plan (SIPP) that also satisfy performance indicators.
Redundant incentives will be repealed, but the measure would retain and harmonize some perks in a single menu which, among others, include: a three-year income tax holiday, followed by a special income tax rate of 18% starting 2021, to decline to 13% by 2029; allowable deductions on labor, research and development, training, infrastructure development; and some customs duties exemptions — limited to up to five years — before they are subjected to the regular corporate tax scheme. It will also disallow the use of value-added tax and local tax incentives.
The House of Representatives approved the TRABAHO bill, or House BIll No. 8083 on final reading in September, while the Senate has yet to come up with a committee report. The DoF aims to have the measure signed into law before yearend.