CITIRA: Lopsided reform package

by Rey Gamboa (The Philippine Star), 29 Oct 2019

The latest twist in the tussle over the wordings of the proposed Corporate Income Tax and Incentives Rationalization Act (CITIRA), most recent being the “surrender” of the Philippine Economic Zone Authority to the controversial removal of the current gross income taxation scheme for economic zone locators, has most everyone in the business community on tenterhooks.

In the name of peace, battle-weary PEZA director-general Charito Plaza announced that compromises would be in order, specifically “to end the agony of uncertainties which has created fears to industries’ possible exits and the massive job losses, affecting peace and prosperity in the country.”

In exchange for giving up the five percent tax on gross income earned (GIE) currently enjoyed by companies in PEZA’s special processing zones, Plaza asked for a longer transition period for its companies to migrate to the corporate income tax regime.

This has not been well-received by affected locators, and as of the last recon, have stated that they will continue to appeal to lawmakers in the Senate that they be shielded for at least 15 years from any changes that would come from CITIRA.

Unacceptable trade-off

Under the current version of the proposed law, which passed the Lower House’s muster recently, locators with PEZA residency of more than 10 years need to give up their tax perks in two years’ time, those between five years and 10 years’ occupancy in three years, and those below five years in five years.

Aside from giving up the five percent on GIE incentive, locators also lose the option to apply for a tax credit certificate (TCC) on the refund of input VAT for zero-rated sales or transaction.

Such changes seem to be unacceptable given the dangled trade off, which would be a gradual, albeit slow, reduction in corporate income tax of one percent every year starting 2020 from the current level of 30 percent to 20 percent until 2030.

Even other “sweeteners” that the Department of Finance (DOF) has laid out have not been received well by locators who still prefer the simplified five percent of GIE system after the expiry to their income tax holidays over the many laid out “conditional” terms.

New incentives include a 10 percent deduction for depreciation for qualified capital expenditure for buildings, a 20 percent deduction for depreciation for qualified capital expenditure for machinery, up to 100 percent deduction on research and development expenses, up to 100 percent deduction for labor training, up to 100 percent deduction on country-wide infrastructure development, up to 50 percent deduction for reinvesting profits in the manufacturing industry, up to 50 percent for domestic input expense, up to 150 percent for direct labor expenses, exemptions from customs duty for the import of raw materials and equipment, and an enhanced net operating loss carry-over.

Biggest nightmare

Many of the dangled perks are feared by locators, as well as many foreign businesses in the country, to end up with making business dealings in the country tougher given the long history of corruption by government agencies in the country.

“Uncertainty is the biggest nightmare in doing business,” business groups had emphatically pointed out in a recent position paper. Conditional perks often lead to “negotiations” with people in government agencies, and open up avenues for under-the-table dealings.

PEZA locators value the straightforward rules in special economic zones, which have limited the opportunities for vague interpretation of incentives and becoming prey to marauding government servants.

More stick than carrot

The tax reform efforts that the DOF has been pushing since 2017 for businesses is shaping up to be more a stick than a carrot, especially for PEZA locators.

In exchange for the too-slow reductions in corporate income taxes, retrogressing to a regime when transparency may not be as transparent as promised is enough to make businesses balk at the plan by government for a more rationalized incentive system.

Perhaps, the biggest concern should be how other countries that compete against the Philippines for attracting investors. Indonesia, for example, will cut its CITs to 20 percent starting in 2021 from the current 25 percent rate. India recently bared its plan to introduce larger corporate income tax cuts, which should be a concern for our IT-BPO segment.

The uncertainties spawned by the US-China trade war, and the continued aggressive campaign by Vietnam to attract affected supply chains in China, have prompted Thailand to offer a new investment package with more tax cuts and incentives.

Taking things slowly

Current and prospective investors in the Philippines are seeing CITIRA for what it really is: a way for the government to push growth to the countryside and favoring small and medium enterprises (SMEs), but without enough incentives for businesses to help.

Our lawmakers are duty-bound to make sure that CITIRA will deliver the promised reforms in the country’s current convoluted tax structure, but not lose current and future investors that are expected to nourish countryside growth.

Locators are asking for a stay in the grandfather rule, i.e., keeping the incentives they were promised by PEZA when they made the decision to invest in the Philippines, and this may well be within their rights. In this regard, a longer transition period, like 15 years, to shift to a new tax regime should be strongly considered.

The Philippine government is eyeing the creation of 1.5 million jobs, but if investors will not be willing to stay, then the tax reform initiative may cause more harm than good.