CITIRA saga

Getting a bill to pass through the legislature can be a mean feat, and this is so true for House Bill 4157 or the proposed Corporate Income Tax and Incentives Rationalization Act (CITIRA) which was approved on third and final reading last week.

The CITIRA bill’s forerunner, the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill, also passed third and final reading at the Lower House during the previous 17th Congress, but unfortunately got lost in translation on the Senate floor.

Hopefully, discussions will run smoothly this 18th Congress, enough so that the unified bills can successfully hurdle bicameral sessions, then sent to the President – again, hopefully, to receive the green light and finally become law.

Eight lawmakers voted against CITIRA, voicing objections that the law was “hastily” passed, and that lowering corporate income taxes was not going to really matter if the state of doing business in the Philippines does not improve.

“Hastily” may be a bit of an exaggeration, especially since the House during the 17th Congress declared that it had devoted extensive committee deliberations and consultations that involved countless macroeconomic, industry and sectoral studies, as well as consultations.

Still, all the hard work done by the Lower House has been put to good use since it was able to pass HB 4157 early enough. The ball is now with the Senate, and lack of time can no longer be an excuse despite the persistent contradictory views raised against some of the approved bill’s provisions.

From simple to complex

Did you know that the CIT rate in 1939 was at eight percent of net taxable income? It was a simple tax table where companies declared all their income derived from both local and overseas operations as per Commonwealth Act No. 466.

Over time, the CIT rate was adjusted to 12 percent in 1946, 16 percent in 1950, two-tiered rates of 20 percent and 28 percent in 1951 under RA 600. There was no differentiation between domestic or foreign companies.

In 1959, RA 2343 introduced different tax treatments between corporations, i.e., domestic (DC) and resident foreign corporations (RFC), and subjected to a two-tiered rate of 22 percent and 30 percent, depending on the net taxable income NTI. Non-resident foreign corporations (NRFC) were subjected to a single rate of 30 percent based on gross income.

More changes would be introduced, but the general vibe was the introduction of more provisions that would lead to an increasingly complex tax system.

Today, to navigate the voluminous documents relating to Philippine taxation, you need tax experts: an individual specialist if you have a micro or small company, a partnership for a growing business that requires more subtlety in tax management, and a full-fledged company to handle conglomerates.

Significant impact

Gradually lowering corporate income taxes (CIT) from the current 30 percent to 20 percent by 2029 under CITIRA may not make the Philippines an overnight darling of foreign investors, not just because it is still difficult to open and operate a business here in the country, but also because other countries are lowering their CIT rates.

While a staggered decline in the proposed tax rate is understandable because of the drastic effect on state revenue collections, as what had happened in 2009 when the CIT rate was reduced from 35 percent to the current 30 percent, it may not be enough to lure new investors.

In the ASEAN region, the Philippines still dictates the highest CIT rate, with Indonesia and Myanmar following next with 25 percent. Laos and Malaysia are at 24 percent, Cambodia, Thailand and Vietnam at 20 percent, Brunei at 18.5 percent, and the lowest by Singapore at 17 percent.

Unfortunately, while CIT collections by the Bureau of Internal Revenue continue to account for the lion’s share of total tax takes, its efficiency was – and continues to be – far lower compared to Malaysia, Vietnam and Thailand.

By the time the Philippines will have fully implemented the proposed two-percentage points reduction every two years until the CIT rate reaches 20 percent, other countries may have reduced their rates to ensure they remain even more competitive.

Banking on reformed incentives

Still, the Lower House is confident that the proposed CITIRA that it transmitted to the Senate will withstand scrutiny by the Upper House legislators, and therefore muster better support this time around.

Any decreases in CIT collections are expected to be recovered by a rationalization of tax incentives in the Lower House’s proposed CITIRA: companies that hire workers locally and buy local inputs will be eligible to a 50 percent tax deduction; reinvestments will be 100 percent deductible; and investing in the countryside comes with a 10-year tax holiday.

Thus, the proposed law would generate 1.5 million new jobs, and contribute an additional 1.1 percent to the country’s gross domestic product growth in the first year of implementation, and 3.6 percent every year thereafter until 2030.

How our esteemed senators will take these projections, especially since the Philippine Economic Zone Authority (PEZA) continues to voice its concerns about how the Lower House’s CITIRA bill would adversely affect incentives given to the special economic zone locators, remains to be seen.

PEZA is now asking for exclusion in the proposed rationalization of incentives until the effects of a new law will have been tried and tested. Since incentives given to special economic zone companies are supposedly sizeable, heeding PEZA’s request for status quo might mean going back to the drawing board for new calculations – and further delays. Abangan.

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