The Department of Finance has thanked the Senate ways and means committee led by its chairperson Sen. Pia Cayetano for keeping the proposed menu of superior tax incentives performance-based, targeted, time-bound, and transparent in the Senate version of the Corporate Income Tax and Incentives Reform Act.
Cayetano sponsored the measure—Senate Bill 1357—in the Senate plenary.
“While there are differences in the House and the Senate versions of CITIRA, we are thankful that both versions, by and large, agree that the proposed system of corporate tax incentives has to be performance-based, targeted, time-bound, and transparent,” Finance Sec. Carlos Dominguez III said.
“The Senate version addresses many stakeholder concerns, including the one-stop shop feature of the Philippine Economic Zone Authority, issues on power costs, provisions for footloose firms and activities, and the length of the sunset period for corporations to continue enjoying their current incentives. The Senate version has made these adjustments, while remaining consistent with the key principles of this tax reform,” Dominguez added.
Under SB 1357, CITIRA would reduce corporate income tax rates by one percentage point every year from the current 30 percent to 20 percent by 2029.
Firms with qualified activities may avail of 2 to 4 years of income tax holiday, and another three to four years of the Special Corporate Income Tax rate, which would be eight percent of gross income by 2020, nine percent by 2021, and 10 percent by 2022, in lieu of all taxes.
The SCIT may be extended by three or four years at a time for a maximum of 12 years.
Firms with qualified activities may also avail of the regular CIT tax regime with enhanced deductions for five to eight years, which may be extended by three or four years at a time for a maximum of 12 years.
Enhanced deductions include up to 50-percent additional deduction on power expense, which is a new provision not found in earlier versions of the bill; up to 50-percent additional deduction on labor expense; up to 100-percent additional deduction on research and development; up to 50 percent additional deduction on domestic input expense; a deduction for reinvestment allowance to the manufacturing industry (up to 50 percent of reinvestment); depreciation allowance of the assets acquired for the entity’s production of goods and services (additional 10 percent for buildings and 20 percent for machinery); and enhanced net operating loss carry over.
The Senate version also extends the sunset period for firms currently paying the rate of 5 percent of gross income earned in lieu of all taxes, from five years in the House to seven years for firms that export 100 percent of output, employ 10,000 Filipino workers in the incentivized activity, or are engaged in “footloose” manufacturing.
The bill defines “footloose” as a manufacturing activity or project with a direct labor expense to asset ratio of at least 70 percent for three consecutive years immediately preceding the year of implementation of CITIRA, exports 100 percent of its manufactured goods, and whose actual area of operation is outside Metro Manila.
Meanwhile, Finance Undersecretary Karl Kendrick Chua said: “We are hopeful that the adjustments made by the Senate committee to address stakeholder concerns will help expedite the discussions–and lead to the timely congressional approval of the CITIRA.”
“As many investors and credit rating agencies tell us, speed is a concern at this stage. The sooner we pass CITIRA, the earlier the ‘wait-and-see’ attitude of many investors will end and the sooner more investment will flow into the country,” Chua said.
He said the DoF was never against the grant of tax incentives to deserving companies, so long as the system is highly performance-based and includes measures to monitor whether or not incentives recipients deliver the jobs and investment that they had committed to when they first applied for special tax treatment.
Both the Senate and House versions of CITIRA maintain the expansion of powers of the Fiscal Incentives Review Board, which would exercise oversight and policymaking powers over the country’s investment promotion agencies, and approve the grant of incentives to qualified activities.
“Clearly, both the Senate and House committees on ways and means agree that a fairer and more accountable system of granting incentives through the FIRB is the way to go. The FIRB, as a good governance institution, will ensure that the system grants incentives to deserving firms,” Chua said.
The DoF has called for CITIRA’s enactment by March 13, before the Congress adjourns for its traditional Easter break.
CITIRA was among the priority bills endorsed by President Duterte in his 4th State-of-the-Nation Address in July 2019.
In his SONA speech, the President said, “It will energize our MSMEs (micro, small and medium enterprises) and encourage them to expand their business. The MSMEs hold the promise of raising a lot of Filipinos [from poverty].”