15% income tax in lieu of income-tax holiday

The Department of Trade and Industry (DTI) announced that it has reached an agreement with the Department of Finance (DOF) on the contentious measure to streamline fiscal incentives.

Trade Secretary Gregory L. Domingo said they are now looking at replacing the income-tax holiday (ITH) incentive with a 15-percent tax on net income for 10 years for firms registered with the Board of Investments (BOI).

“We’re looking at the possibility of offering 10-year 15-percent tax on net income in lieu of ITH for BOI-registered firms,” Domingo said.

He noted that if this pushes through, the country will have the lowest income-tax rate in the region, equivalent to what Hong Kong is currently offering.

Domingo defended the tax rate as reasonable, and expressed confidence that companies would prefer paying corporate-income tax at a lower rate than availing themselves of ITH for the first four years of operation when they hardly make profit, essentially failing to take advantage of their ITH incentive.

Domingo clarified, however, that the 15-percent reduced tax is not in lieu of national or local taxes.

The prevailing corporate income tax for enterprises, foreign and domestic, is currently at 30 percent.

The trade chief said their position is already “95-percent consolidated” with that of the finance department, but details on the implementation of the new incentive is still being ironed out.

The trade department has already submitted its position paper to both chambers of Congress, he said, and the actual consolidation will be taken up in the weeks to follow before either chamber schedules the next hearing on the rationalization of fiscal incentives bill.

According to an earlier report, the finance department estimates that the BOI and the Philippine Economic Zone Authority (Peza) grant an average annual ITH of P16 billion and P21 billion, respectively, or P37 billion in foregone revenues for the government.

However, if the reduced corporate income tax of 15 percent is applied, the same data from the Department of Finance show, Peza and BOI would get back P10.5 billion each, or P21 billion in revenues recovered annually.

Both investment-promotion agencies offer ITH for up to six years to investors, depending on the status of the projects, or if they are pioneer or nonpioneer.

Projects listed in the annual Investment Priorities Plan are entitled to ITH, duty-free importation of capital equipment and additional tax deduction on expenses for training, among others.

Consolidation of mandatory laws

On the automatic-incentive provisions enshrined in as much as 50 different laws governing various industries, Domingo conceded that granting incentives indefinitely, which the laws prescribe, is wrong in principle.

“It’s a very bad policy to give incentives on a permanent basis. And that’s what these laws have granted. Because incentives, by nature, should only be given when it is needed…to the extent we can consolidate and refer all incentives to one law, better,” Domingo said.

The trade chief noted that among the laws whose automatic-incentive provisions can be repealed are the downstream oil industry deregulation act and jewelry act. –Catherine N. Pillas, Businessmirror