The Duterte administration is urging the Congress to approve an improved system of tax incentives for enterprises that is performance-based, timebound, targeted and transparent, as drawn from the best corporate practices of the more competitive economies in the region in terms of attracting foreign direct investments (FDIs), Finance Secretary Carlos Dominguez III has said.
This improved, better-designed set of incentives, along with the gradual lowering of the corporate income tax (CIT) from 30 percent to 20 percent, are outlined in the proposed Corporate Income Tax and Investment Rationalization Act (CITIRA), which Dominguez hopes the Congress will pass by March this year.
Dominguez said the sooner the Congress approves the CITIRA, the quicker potential investors will drop their wait-and-see attitude and decide to set up their businesses here to further rev up the economy and create at least 1.5 million jobs.
Finance Undersecretary Karl Kendrick Chua, who is leading the efforts of the Department of Finance (DOF) in pushing the congressional approval of the CITIRA, said earlier that uncertainties by investors over this measure are not because of its provisions per se, but because of the length of time it has taken the Congress to act on this business-friendly reform.
Dominguez said at a recent forum the new system of fiscal incentives under CITIRA “will encourage job creation, upskilling, and linking up small and medium enterprises (SMEs) into the export value chains.”
“Under the new system envisaged under CITIRA, incentives will be targeted, transparent, time-bound and performance-based. We just want to adhere to standards very similar to that of other countries,” Dominguez said.
He said CITIRA will ensure incentives are timebound and performance-based, like in Singapore where incentives are given up to 40 years but subject to a performance review every five years.
“Investment regulations (in Singapore) require firms to regularly submit progress reports and any breach of the performance contract is subjected to revocation of the incentives. This is what time-bound and performance-based mean,” Dominguez said.
CITIRA will also ensure that incentives are specifically targeted and more transparent, like in Thailand where the names of incentive recipients are published on its Board of Investments (BOI) website, he said.
Thailand also installed a good system to target industries by giving more tax incentives and longer availment periods to high-priority sectors that are pre-identified under its investment priority plan, he added.
To correct the current chaotic system of 13 separate investment promotion agencies (IPAs) independently awarding incentives, he said that CITIRA aims to follow what is considered the best practice in the region—which is in Malaysia, where the grant of incentives is centralized in the National Committee on Investment, “thereby providing greater development coherence in the incentives system.”
In terms of net foreign direct investment (FDI) inflows, the Philippines, with $9.83 billion in 2018, trails countries like Thailand with $13.2 billion, Indonesia with $19.82 billion and Singapore with $81.85 billion for the same period, based on data gathered by the Bangko Sentral ng Pilipinas (BSP).
Dominguez said CITIRA will overhaul the current system that has given away P441 billion of tax perks in 2017 alone to only 3,150 companies that enjoy discounted CIT rates of between 6 and 13 percent, while almost a million other firms, including SMEs that employ a majority of Filipino workers, pay the regular rate of 30 percent, which is the highest in the region.
He said the government was also cheated of about P63 billion in 2017 by firms that either abused transfer pricing rules or shifted profits and costs to reduce their tax liabilities.
Combining this loss with the P441 billion in tax perks given away to favored companies, he said the government’s foregone revenues reached a staggering P504 billion in 2017 alone, which was already around 93 percent of the budget of the Department of Education (DepEd) and more than five times the budget of the Department of Health (DOH) for that fiscal year.
Moreover, some companies have been receiving incentives from 15 to more than 40 years now without the government being able to determine if the perks they have been receiving are actually benefiting the Philippine economy.
The CITIRA was approved in the House of Representatives in September last year. The other tax reform components—Package 3, which aim to reform the land valuation system and Package 4, which seeks to rationalize the tax rates in the financial sector–were likewise approved by the House last year.
All these packages under the Comprehensive Tax Reform Program (CTRP) tax are pending in the Senate.
Dominguez has considered the significant progress in Congress of the CITIRA as well as the enactment into law of Package 2 Plus of the CTRP, which increased taxes on tobacco, alcohol and e-cigarettes, as among the “legislative achievements” of the Department of Finance (DOF), as led by Chua and the DOF-Strategic, Economics and Results Group (SERG).
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