Refining CITIRA further

Nothing much seems to be settled in the continuing discussions over the proposed Corporate Income Tax and Incentives Rationalization Act (CITIRA) in the Senate, even as the President recently certified the bill as urgent.

It does not help that the spread of COVID-19 in the Philippines is pushing our senators to prioritize their time and effort on the potentially crippling health issue before they adjourn for a seven-week break from March 13 to May 3.

The President’s certification is supposed to help the Senate by allowing it to fast track the approval process of the bill with a second and third reading on the same day, thus doing away with the required three-day interval.

CITIRA is turning out to be a truly hard nut to crack for the Department of Finance (DOF) as opposition to its proposed restructuring of fiscal incentives continues to linger, the latest being a position paper bearing the signatures of some of the more prominent business groups in the country.

The Joint Foreign Chambers of the Philippines (JFC), Information Technology and Business Process Association of the Philippines (IBPAP), and Semiconductor and Electronics Industries in the Philippines Foundation Inc. (SEIPI) are pushing for further refinements in the Senate’s version of CITIRA.

Specifically, they ask for shortening the 10-year schedule of corporate income tax (CIT) reduction, extending the transition period to the new proposed incentive scheme, and the retention of powers and functions of the Philippine Economic Zone Authority (PEZA).

CIT reduction

As delays in the deliberation of CITIRA are likely, it is timely to discuss the proposed reduction in CIT from the current 30 percent to 20 percent after 10 years resulting from incremental reductions of one percent every year.

The Philippines currently has the highest rate among ASEAN members. This is five percentage points higher than what Indonesia offers, and 10 percentage points higher than what Cambodia, Thailand and Vietnam currently give.

In five years, or by 2025, assuming the protracted CIT reduction that the Senate bill’s version is supporting will pass this year, we will only be at par with what Indonesia is offering today. Recently, however, Indonesia announced plans to lower CIT rates to 20 percent by 2023.

If our government really wishes to bring the CIT to a competitive levels with other countries in the region, then immediately lowering the tax rate to 25 percent this year would send a firm signal to investors and businesses that the country is serious about sustaining its economic growth.

Bringing down the tax rate to 25 percent would also immediately pump prime small businesses and leave them with additional revenues to reinvest. The lower CIT for 90,000 small and medium enterprises that comprise 99 percent of the country’s business sector would have a far more reaching economic effect on our economic growth.

Hardened stance against transfer pricing

The semiconductor and electronics industry, represented by SEIPI, submitted a separate position paper to the Senate reacting to the bill that proposes to increase the current five percent tax rate on gross income earned (GIE) to eight percent on the first year, to 10 percent after two more years.

SEIPI is now proposing a seven percent perpetual GIE tax rate in lieu of all the taxes assessed on it being export enterprises, plus a transition period of seven years. Furthermore, it wants eligibility terms to a lower export threshold of 90 percent instead of 100 percent.

The latest position is another conciliatory move that takes into consideration the DOF’s hardened stance against the current practice of many export-oriented industries on transfer pricing.

The DOF estimates that the government lost an estimated P63 billion in 2017 from possible transfer pricing abuse and misallocation of profits and costs. It accuses that a company under three tax regimes (special, regular and exempt) can shift costs among activities to minimize taxable income and thus tax liability.

For example, a firm could pad direct costs with indirect costs in order to minimize tax payments under the five percent GIE regime. A firm can also shift income under the regular to the income tax holiday (ITH) regime, or direct and indirect costs under ITH to the regular regime to minimize tax payments.

Likewise, a firm can shift indirect costs under a five percent GIE regime to a regular regime to claim deductions, or shift direct costs under the ITH regime to the five percent GIE regime to claim such as deductions and minimize tax payments.

Not on a perpetual basis

For and in consideration of the semiconductor and electronics industry’s long-standing economic contribution in the country, specifically in creating jobs in special economic zones outside Metro Manila, a lower GIE rate may be considered – but not on a perpetual basis.

A more cautious treatment on this industry would be in line with the fact that its companies can easily relocate to another country, thus immediately affecting the livelihood of 380,000 direct jobs and 2.66 million indirect jobs from 2022 to 2026, if we are to believe SEIPI figures.

This would also compensate for the higher cost of operating in the Philippines where the cost of electricity is higher, and where logistics services and labor costs are 10 percent and 28 percent higher than the ASEAN average.

CITIRA aims to promote a fair and accountable tax incentives system, and the bill introduces an enhanced monitoring system of incentives, including a comprehensive cost and benefits review. Going forward, this should be able to guide our government on how to calibrate incentives to the semiconductor and electronics industry to arrive at a win-win arrangement.

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