CITIRAfic financial incentives

by Wilmer T. Tardio (The Philippine Star) – 24 Sept 2019

As a second tranche of the comprehensive tax reform package, House Bill 4157, also known as the Corporate Income Tax and Incentives Rationalization Act (CITIRA), which replaced the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill, was approved by the House of Representatives on third and final reading on Sept. 13 and submitted to the Senate on Sept. 16.

One of the objectives of the CITIRA is to ensure fairness and transparency in the grant of incentives which will help bring in the greatest benefits, such as higher and more dispersed investments, more jobs and better technology.

If enacted into law, CITIRA will provide a single set of fiscal incentives for registered projects or activities under the Strategic Investment Priority Plan (SIPP). These incentives include income tax incentives, enhanced deductions from the taxable income of registered enterprises, customs duty exemption and value-added tax (VAT) incentives. Since these incentives will be uniformly applied to registered enterprises with qualified projects or activities, the CITIRA bill will eliminate the current differences in the incentives granted by different investment promotion agencies (IPA) including the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA). As such, the CITIRA is envisioned to promote fairness and impartiality in granting incentives across registered enterprises.

It may seem that only new registered enterprises whose activities qualify under the SIPP are entitled to avail the new single set of incentives. What will be the income tax impact of the CITIRA bill to existing registered enterprises, particularly to existing PEZA-registered entities?

Under the CITIRA bill, existing registered enterprises, such as PEZA-registered enterprises, currently enjoying the income tax holiday (ITH) incentive can continue to enjoy the same for the remaining period of the ITH or for a maximum period of five years, whichever comes first. The five percent tax on gross income earned (GIE) will commence only after the lapse of the ITH incentive. However, the said five percent tax on GIE will only be continued for a limited period of two years (for activities enjoying the incentive for more than 10 years), or three years (for activities enjoying the incentive between five to ten years), or five years (for activities enjoying the incentive for less than five years). On the other hand, existing registered enterprises who are currently enjoying the five percent tax on GIE can continue such availment for the same limited period of two to five years, depending on the duration of such availment prior to the effectivity of the CITIRA.

Another option for existing PEZA-registered enterprises whose activities qualify for registration under the SIPP is to be governed by the provisions of the CITIRA. As a consequence of registration under SIPP, existing registered enterprises shall be required to surrender their existing certificates of registration, which shall be deemed as an express waiver of their privilege to avail of the incentives provided in the incentives law under which they were previously registered. This includes the waiver of the five percent tax on GIE incentive, in lieu of all national and local taxes.

As provided under CITIRA bill, registered enterprises whose projects and activities are registered under SIPP shall be qualified to avail of the ITH incentive for a duration of three years (for registered enterprises located in Metro Manila), or four years (if located in Laguna, Bulacan, Cavite and Rizal), or six years (if located elsewhere). After the expiration of the ITH incentive, registered enterprises may choose to be taxed under:

(1) The reduced corporate income tax (CIT) rates incentive of 18 percentage starting Jan. 1, 2020 which will subsequently be reduced by one percent point every other year until it reaches 13 percent by 2030; or

(2) The regular CIT rate with the following enhanced deductions incentive:

• 30% depreciation allowance of qualified capital expenditure: 10% for buildings and 20% for machineries and equipment;

• Up to 50% additional deduction on direct labor expenses;

• Up to 100% additional deduction on research and development;

• Up to 100% additional deduction in trainings;

• Up to 100% deduction on infrastructure development;

• Up to 50% deduction for reinvestment allowance to manufacturing industry;

• Deduction of net operating loss carry-over (NOLCO); and

• Up to 50 percent additional deduction on domestic input expense.

As opposed to the perpetually available five percent tax on GIE incentive under existing laws, the reduced CIT rates of 18 percent to 13 percent shall be enjoyed only for a limited period of two years for registered enterprises located in Metro Manila, three years if located in Laguna, Bulacan, Cavite and Rizal, and four years if located elsewhere. The same limited duration shall likewise apply to the enhanced deductions incentive except for the deduction for major infrastructure works, reinvestment allowance to manufacturing industry and NOLCO which are allowed for a maximum period of five years, subject to certain conditions.

Given the different set of tax incentives that can be enjoyed under the CITIRA, and the available options, existing PEZA-registered enterprises and other registered enterprises may find it worthwhile to conduct a tax cost and benefit analysis of its current registration vis-à-vis the possible impact of the CITIRA bill to the business operations in the long run.

On the part of the government or the lawmakers, a careful and thorough review of the provisions of this bill, taking into consideration its impact on existing and potential future foreign investments, may help create a good balance of obtaining a rationalized fiscal incentives to improve tax collections, on one hand, and keeping and attracting foreign investors, on the other hand, which will all redound to the benefit of the country and the Filipinos.