Foreign chambers and the electronics and business processing industry associations have asked the Senate committee on ways and means to further improve its existing version of the Comprehensive Income Tax and Incentives Rationalization ACT (CITIRA), taking into account the recent developments, including the novel corona virus disease 2019 (COVID-19), hounding the economy locally and globally.
A March 3 letter of the business groups to committee chair Sen. Pia Cayetano took note of the need for a faster rate reduction of corporate income tax (CIT) to all enterprises as well as a longer transition period for export companies to shift to the CIT.
“In 2019, global economic growth was harmed by the disruptive US-China trade disputes.
In recent months, the Philippines has experienced a volcanic eruption in proximity to many of the country’s largest export industrial estates, and the harmful effects of the spreading pandemic (COVID-19) certainly did not help and is now being felt by the Philippine economy (manufacturing firms that are dependent on supplies from China, to the hotel and airline industries are down),” the groups said in their letter.
They said the uncertainty created by the proposed…CITIRA tax regimes for existing foreign investors led to significant reductions in inward foreign direct investments in PEZA (Philippine Economic Zone Authority) and other major special economic zones.
The groups also cited the performance of the US stock exchanges which recently suffered their worst drop since 2008 due to the lingering impact of COVID-19.
“Such events are leading to realignments of regional logistics supply chains as the reliance of multinational firms on manufacturing in China is being questioned, leading to accelerated diversification out of China into Southeast Asia, especially Vietnam,” the groups said.
Unfortunately, the Philippines is not benefiting with increased inward foreign direct investments (FDI) due to policy uncertainty over the last two years over the future of fiscal incentives.
“Thus, by providing exporting registered business enterprises (RBEs) a long transition period to enjoy existing incentives and providing an attractive package of incentives for new investors, we believe that the Philippines will strengthen its fiscal policies in order to once again attract significant inflows of foreign investment in the manufacturing and service industries,” the groups said.
The 10-year period is being proposed to further encourage industries that export 100 percent or almost 100 percent of their goods and/or services.
The groups also expressed concern on the following: the short transition period granted to regional operating headquarters (ROHQs); the lack of clarity on whether existing registered business entities can register their expansion activities or renew their incentives; the grant of exclusive and original jurisdiction to the secretary of the Department of Finance (DOF)
to interpret provisions of tax incentives; and the extreme reductions in the powers and functions of investment promotion agencies.
While the business groups see a better incentive package in Senate Bill No. 1357 which they said was an improvement from the previous versions of CITIRA, “there remain a number of concerns which the foreign chambers and business groups hope can be addressed.”
Too little, too slow
The groups said the proposed reduction of CIT of two percentage points every two years, which will only begin to take effect in 2020, is “too little, too slow” especially as the Philippines has long suffered from high corporate tax rates, which has proven to have been ineffective compared to the experience of other countries in Southeast Asian.
“It is a no-brainer for investors considering Southeast Asia as an investment destination not to pick the Philippines, given that we have the highest CIT rate, highest cost of power, and less than desirable state of infrastructure, among others. No wonder that the Philippines is receiving the least amount of FDI almost every year among major Asean economies,” they said.
The groups propose a 25 percent CIT rate on domestic enterprises beginning Jan 1, 2020, reduced a percentage point every year hereafter until the rate reaches 20 percent in Jan. 1, 2025, five years ahead of the DOF-backed House bill counterpart.
Based on the groups’ proposal, foreign corporations will follow the same rates and schedule except that their allowable deduction for interest expense will also be reduced to 20 percent beginning Jan. 1, 2020 and further cut by , four, three, and five percentage points by 2021, 2022, 2023 and 2024 until the interest rate reduction is zero percent by 2025 when the CIT rate is 20 percent.
On ROHQs, the groups bat for a 10 percent taxable rate but after two years from the effectivity of CITIRA, existing ones shall be subject to the regular corporate income tax.
The business associations, however, propose that global corporate centers such as those in the shared services industry be taxed 10 percent of their taxable income, for the periods to be provided under the Strategic Investment Priorities Plan but in no case to exceed four years from the effectivity of CITIRA
Support for BPOs
On prioritized projects or activities, the groups propose to specifically include information technology and business process outsourcing and management services Tier III activities and not be limited to highly technical manufacturing and services activities
This would make it explicitly clear that business process outsourcing which generate high-paying jobs for Filipinos and substantially contribute to the country’s foreign exchange reserves will definitely remain a registrable activity and entitled to the critical support of the
government.
The groups are pushing for adoption of a P5-billion Structural Adjustment Fund proposed under House Bill 4157 to support the IT-BPO industry to help prepare Filipino employees maintain their competitive advantage and employability.
No to exclusive powers
On the Fiscal Incentives Review Board (FIRB), the groups seek the deletion of a provision granting the DOF secretary the exclusive and original jurisdiction to interpret the provisions on the tax incentives, saying “such power will ultimately render nugatory and useless the mandate of the FIRB as a collegial body.”
The groups recommend that a representative from one of the IPAs and from one of the industry associations of the RBEs be included as part of the technical committee so that the FIRB can get the perspective of these two important stakeholders.
With the FIRB given the power to approve or disapprove the grant of tax incentives only for
investments exceeding $ 1 billion, the groups said
IPAs should be allowed to maintain their approving power for investments not exceeding $1 billion .
One crucial changed pushed by the industry groups is the provision that explicity states expansion of registered activities may qualify to register under CITIRA as well as renewal of expiring registered project or activities and shall be entitled to applicable incentives.
PSE backs tax cuts
Meanwhile, the Philippine Stock Exchange (PSE) is throwing its support for the passage of the CITIRA that gradually lowers CIT rate.
Jose Pardo, PSE chairman, said lowering the CIT rare to 25 percent by 2024 and 20 percent by 2029 will be considerably beneficial to Philippine corporates.
Ramon Monzon, PSE president, said the tax cuts will make the Philippines an attractive investment destination for new foreign and domestic businesses and encourage existing companies to expand their operations.
The PSE officials said the initiative to reform the country’s incentives program will benefit the country through “the imminent countryside development through fiscal incentives that will be granted to businesses in less developed areas through CITIRA.” (I. Isip with R. Castro)
