Shift to CIT seen to substantially cut IT-BPM growth

MANILA, Philippines — The information technology - business process management (IT-BPM) industry expects the shift to a corporate income tax (CIT) regime under the second package of the government’s tax reform program from the current payment of five percent on gross income earned (GIE) to cut the sector’s growth by 40 percent to 50 percent.

Given the estimated reduction in growth from the shift to CIT, the Information Technology and Business Process Association of the Philippines (IBPAP) said it is pushing for a longer transition period of 10 years under Package 2 for continued payment of GIE, but at a higher rate of seven percent from five percent at present, as a compromise.

IBPAP president Rey Untal said in a press conference yesterday that moving to a CIT regime from the current five percent on GIE enjoyed by IT-BPM firms registered with the Philippine Economic Zone Authority after their income tax holidays expire would be financially difficult and reduce the growth of the industry by up to 50 percent.

“We stand the risk of less growth as a result. Meaning, people will tend to invest less. They will not necessarily leave, but most likely expand elsewhere,” he said.

Based on a study conducted by the group, he said moving to a CIT regime would mean a 130 to 170 percent increase in taxes to be paid by IT-BPM firms.

“That is a substantial jump. This is not about us not wanting to contribute, but to remain competitive. You’ve heard comparison with India. As it stands now, we are 17 percent more expensive than India,” he said, noting the price difference is expected to even increase when the shift to CIT happens.

Meanwhie, the longer transition period of 10 years and higher GIE rate of seven percent being proposed would soften the landing for IT-BPM firms as it would mean a 40 percent hike in taxes they have to pay.

Package 2 or the Comprehensive Income Tax and Incentive Rationalization Act (CITIRA) bill aims to gradually lower the CIT rate to 20 percent by 2029 from the current 30 percent, and rationalize fiscal incentives including removing the five percent on GIE.

Under the CITIRA bill, there would be a transition period of two to five years depending on how long firms have been enjoying the GIE benefit.

In addition to longer transition period at a higher GIE rate of seven percent, Untal said the IBPAP would also want the IT-BPM industry to be part of the Strategic Investment Priorities Plan, as well as to preserve the one-stop shop model of the PEZA to allow the industry to encourage existing locators, as well as new firms to invest in the Philippines.

He said the IBPAP is trying to secure a meeting with the Department of Finance, which is pushing for the tax reform program, to be able to explain its position on the CITIRA bill.

“We are certainly very open to a continuing dialogue. And we want to have continuing conversations because if we can resolve this and figure out a way for a soft landing for the industry where we also contribute to what they (government) are standing for which is to help fund independently some of the Build Build Build projects then, everybody is a winner,” he said.

The CITIRA bill and other policies affecting the IT-BPM industry, along with the need to improve skills of talent pool and how digital transformation would allow IT-BPM firms to grow would be discussed during the upcoming 11th International Innovation Summit on Nov. 12 at the Marriott Grand Ballroom in Pasay City.

During the event, IBPAP will also present the results of a study undertaken for the recalibration of targets under the IT-BPM roadmap as the industry is growing at a slower than expected pace.

Under the current roadmap, the IT-BPM sector aims to grow revenues by nine percent annually, and to increase employee count by eight percent per year to generate $38.9 billion worth of revenues and have 1.8 million direct employees by 2022.

Last year, the IT-BPM sector was estimated to have raked in up to $24.8 billion worth of revenues, and directly employed 1.23 million employees.