The Department of Finance (DOF) said the proposed second package of the comprehensive tax reform program (CTRP), also known as the Corporate Income Tax and Incentives Rationalization Act (CITIRA) bill, will improve the current fiscal incentives system, which treats more than two-thirds of the economy as priority industries.
CITIRA aims to correct this by offering superior incentives targeted towards industries and areas that truly deserve them, the DOF said.
A recent study conducted by the DOF showed that the priority industries covered by the 2017 Investment Priorities Plan (IPP) account for a total of 69.4 percent of the whole economy in terms of gross value added (GVA).
In a statement, Finance Undersecretary Karl Kendrick Chua said, “We cannot dispute that the many industries receiving incentives have made valuable contributions to the economy and to the Filipino people. Many of them are important, but given that the current system is poised to subsidize more than two-thirds of the economy, policymakers need to make tough choices between which industries and activities to prioritize if we are to ensure that every peso given away as a tax incentive yields a net positive benefit to society.”
“Package 2 of the CTRP aims to make the incentive system performance-based, targeted, time-bound, and transparent. Such a system will allow us to actually prioritize and provide superior incentives to specific industries, areas, and activities for the right reasons, such as the creation of quality jobs, investments in research and development (R&D), and expansion in less-developed areas and areas recovering from calamity or armed conflict, among others.”
“Under the proposed Package 2, for example, companies that qualify for incentives may choose to avail of up to 50 percent additional deduction on direct labor expense, up to 100 percent additional deduction on training and development expenses, and up to an additional 50 percent on top of the 100-percent deduction now allowed on the purchase and use of inputs from domestic suppliers, which will benefit local industries and producers.”
The CITIRA bill was approved by the House of Representatives last month and is now being discussed by senators in the committee level in the Senate.
Chua explained that incentives, which are foregone revenues, are a limited resource of the Filipino people and must be spent well.
In 2017, for instance, the Philippine government gave away a total of P441 billion in incentives–an amount equivalent to 2.8 percent of GDP (gross domestic product)–to only 3,150 companies.
This select group of firms, which account for less than half of one percent of more than 989,000 companies currently registered in the Philippines, pay discounted tax rates of around 6-13 percent. In contrast, small and medium-sized enterprises (SMEs), which employ most of our workers, have to pay the much higher corporate income tax (CIT) rate of 30 percent, which is the highest in the region.
To benefit these tens of thousands of SMEs that currently pay the 30-percent CIT rate, the Duterte administration is pushing for the urgent passage of the proposed Package 2 of the CTRP as it seeks to gradually reduce the CIT rate from 30 to 20 percent and to rationalize the fiscal incentive system to correct decades of neglect.
Under the proposed Package 2, incentives will be given to industries covered by the Strategic Investment Priorities Plan (SIPP), which will be formulated by the Board of Investments (BOI).
Based on the BOI’s recent presentations, the first version of the SIPP will likely cover all industries currently receiving incentives to cushion them from the potential impact of the reform. However, the ultimate goal of CITIRA is to eventually limit incentives to activities that truly provide a net positive impact to society.