Peza insists on status quo in fiscal incentive system

by Roy Stephen C. Canivel, Philippine Daily Inquirer, 30 May 2020

The Philippine Economic Zone Authority (Peza) has warned against experimenting on new tax breaks in the middle of the pandemic, but the Department of Trade and Industry (DTI) said the updated tax reform bill was exactly what businesses need now.

Based on their respective statements, the Peza and the DTI have apparently found themselves on opposite sides again on the issue of tax breaks, even though the Peza is an investment promotion agency attached to the DTI.

While it had a number of names in the past, the tax reform bill is now called Corporate Recovery and Tax Incentives for Enterprises Act (Create).

The Create bill made some substantial changes in the previous version of the tax package called Citira, or Corporate Income Tax and Incentives Reform Act.

Changes include an immediate reduction in the corporate income tax (CIT) to 25 percent from the current 30 percent, the highest in Southeast Asia, as opposed to the gradual cut over a 10-year period under the Citira. The reduced rate under Create is intended for implementation in July.

The bill also gives companies longer time to enjoy their current tax breaks.

Amid the business sector’s call for help from the government, Finance Secretary Carlos Dominguez III said the bill was “the country’s biggest stimulus program for enterprises.”

“Aside from the outright 5 percent reduction in the [CIT] and the additional two years in the transition period of registered enterprises, the Create bill does not really offer a concrete economic stimulus to affected companies,” Peza Director General Charito Plaza said.

“We fear that instead of assisting enterprises struggling from the effects of the community quarantine due to COVID-19, the Create bill in its present form may actually cause companies to close their operations in the country and transfer to our Asean (Association of Southeast Asian Nations) neighbors as what some enterprises did already,” she added.

While the immediate drop in CIT this year might provide relief to struggling firms, many companies in economic zones are already benefiting from low tax rates, that is the 5-percent gross income earned (GIE) tax which they pay in lieu of local and national taxes.

Create extends the transition period, or the time companies can hold on to the 5 percent GIE, to 4 to 9 years. In comparison, the Citira, which was passed in the Lower House, provided for a transition period of 3 to 5 years, while the pending Senate version provided 2 to 7 years.

Peza wanted a status quo for five years, before the transition period starts. The IT and Business Process Association of the Philippines (IBPAP) also backed this proposal.

“Now more than ever, we reiterate our position for status quo in order to give our registered enterprises an opportunity to recover from the COVID-19 crisis. This is not the time for the government to experiment on new fiscal incentives but rather to extend all the necessary assistance to all companies which are adversely affected by this pandemic,” she said.

Meanwhile, Rey Untal, ­IBPAP president and CEO, said in a statement that the group supported the immediate CIT reduction and the effort to extend tax deductibility of losses (net operating loss carry-over or Nolco) incurred in taxable year 2020 for an additional two years for all affected taxpayers.

He, however, requested that new projects should have at least 10 years of incentives; that the Fiscal Incentives Review Board would have jurisdiction over very large investments, like more than $1 billion, while investment promotion agencies can continue to cover anything below that threshold, and that Peza would stay being a one-stop-shop “as they have been an effective proponent of the country as a premier investment destination.”

Trade Secretary Ramon Lopez, who chairs the Peza Board, has no complaint about the Create bill.

“The DTI fully supports the Create bill because it is better than the status quo and the Citira; and it is better for new and incumbent investors,” he said.

“This is what’s needed now. We have been talking about why the Philippines is not getting a big share of foreign investments. This is definitely one of the key answers,” he added.