Finance Secretary Carlos Dominguez III has welcomed the filing in the House of Representatives of a bill that aims to institute reforms in the country’s corporate tax system as he expressed the hope that the legislature can begin hearing the measure as soon as the Congress resumes its regular session in May following its traditional Lenten break.
Dominguez said the swift approval of House Bill (HB) No. 7458, which provides for graduated cuts in the corporate income tax (CIT) rate and the modernization of investment incentives, would level the playing field for business and make corporate income taxation transparent, more accountable and more equitable for both large and small corporations.
“With the timely filing of the measure in the House, we are optimistic that this proposal, along with the remaining tax reform packages, would be approved by the Congress within the year,” Dominguez said.
Corporate tax reform comprises Package 2 of the Duterte administration’s Comprehensive Tax Reform Program (CTRP). The DOF is targeting to introduce this year the rest of the CTRP packages that mainly cover property and capital income taxation.
HB 7458, authored by Deputy Speaker Raneo Abu, Deputy Majority Leader Aurelio Gonzales and Rep. Dakila Carlo Cua, who chairs the House ways and means committee, was filed last March 20. It is expected to be referred to the appropriate committee that will deliberate on the measure when the Congress resumes session on May 14.
According to Finance Undersecretary Karl Kendrick Chua, the bill provides for a one-percentage point reduction in the current 30 percent CIT every year for domestic corporations, resident foreign corporations and non-resident foreign corporations starting 2019, provided that the cut would not reach lower than 20 percent, while modernizing fiscal incentives to make them performance-based, targeted, time bound, and transparent.
Similar to the version proposed by DOF and Department of Trade and Industry, the bill also aims to formulate a three-year Strategic Investments Priority Plan (SIPP) to ensure that only industries that provide positive spillover to the economy, based on rigorous cost-benefit analysis, are given incentives.
“HB 7458 also aims to either amend or repeal tax incentive provisions and processes contained in 114 special laws,” Chua said. “The long list of incentives managed by investment promotion agencies have “caused confusion among investors availing themselves of these tax perks,” Chua said.
Under the bill’s simplified and harmonized menu of incentives, he said businesses under the SIPP may be granted up to three years of income tax holiday (ITH), a reduced CIT rate of 15 percent up to 5 years inclusive of the ITH, a 50 percent tax allowance for qualified capital expenditures, along with varied rates of tax deductions for research and development, training, labor expenses, infrastructure development, and reinvestment.
Also, this bill includes a DOF proposal to expand the mandate of the Fiscal Incentives Review Board (FIRB) beyond government-owned and -controlled corporations (GOCCs) to include the approval of incentives to all registered enterprises as recommended by the various investment promotion agencies (IPAs) and the reconstitution of this body with the Secretary of Finance as chairperson, Chua said.
In step with the goal of making investment incentives time-bound, the bill also contains a “sunset” or a phase-out provision for incentives granted to registered enterprises over two to five years, depending on the length of time these businesses have already benefited from such perks.
HB 7458 also includes the improvements proposed by the DOF in the reporting and monitoring requirements under the Tax Incentives Management and Transparency Act (TIMTA) to further promote accountability on the part of registered enterprises.
The bill likewise contains provisions that aim to strengthen the enforcement powers of the Bureau of Internal Revenue (BIR), particularly with regard to the prosecution of tax cases.
To improve tax compliance, HB 7458 includes the DOF proposal to simplify and improve the administration of allowable deductions and tax payment processes, and to expand the definition of large taxpayers and institutionalize a medium taxpayers segment in the BIR.
Chua said that compared with other economies in the Association of Southeast Asian Nations (ASEAN), the Philippines imposes a high CIT rate of 30 percent but is among those at the bottom in terms of collection efficiency, with only a 12.3 efficiency rate.
Thailand’s CIT rate is only 20 percent but it collects almost triple–a 30.5 percent efficiency rate–that represents 6.1 percent of its gross domestic product (GDP). Vietnam’s CIT rate is 25 percent but it collects even more with a 29.2 percent tax efficiency rate representing 7.3 percent of GDP. Malaysia’s 24 percent CIT generates a 27.1 percent efficiency rate in terms of collecting taxes, which is 6.5 percent of GDP.
Moreover, the Philippines is the only country that gives incentives (the 5 percent gross income-earned tax) in lieu of all taxes, both national and local taxes, “that last forever” regardless of the performance of the incentive recipient, Chua noted. “We have been granting incentives for 50 years, and it is time we reevaluate whether the benefits are worth the cost.”
In adhering to the key principles of being performance-based and targeted, Chua said investment incentives “must create jobs, meet export targets, or achieve countryside development,” among other criteria.