10-year period to lower CIT under Citira — too long?
Credit to Author: EUNEY MARIE MATA-PEREZ| Date: Wed, 23 Oct 2019 16:20:59 +0000
In a joint statement released this week, 11 business groups expressed support for the “overall corporate income tax framework” under the proposed Corporate Income Tax and Incentives Rationalization Act (Citira) or House Bill 4157. Citira proposes, among others, the lowering of the existing 30-percent corporate income tax (CIT) to 20 percent and the rationalizing of our fiscal or tax incentives. It has been approved on third and final reading by the House of Representatives last month, fasttracking the government’s corporate tax reform package.
The business groups include the Bankers Association of the Philippines, Cebu Business Club, Federation of Filipino Chinese Chambers of Commerce and Industry, Financial Executives Institute of the Philippines, Foundation for Economic Freedom, Management Association of the Philippines, Organization of Socialized Housing Developers of the Philippines, Subdivision and Housing Developers Association, Tax Management Association of the Philippines, UP School of Economics Alumni Association, and Women’s Business Council Philippines.
The business groups especially noted that the lowering of the CIT from 30 percent to 20 percent would make the country, as well as Philippine-based companies, more competitive, and would widen the tax base. The group, however, proposed the following refinements to the Citira:
The scheduled CIT rate reduction should be fixed and not conditional, although an acceleration of rate reduction, should fiscal circumstances warrant, is welcomed to be competitive with Association of Southeast Asian Nations (Asean) peers. Uncertainty is the biggest nightmare in doing business.
A reasonable fixed transition period for concerned firms under the gross income earned (GIE) regime to adjust their operations and prevent dislocation should be considered.
Under the proposed Citira, the lowering of the CIT is to be spread over 10 years, or until 2019. The business groups described the period as 10 “long” years. The Citira does empower the President to accelerate the lowering of the rate when “adequate savings are realized” from the rationalization of the tax incentives also proposed under the bill. However, the business groups, while welcoming the acceleration, hinted that the 10-year reduction period may give rise to “uncertainty.” This is because it is subject to conditions.
It is indeed highly probable that because of the ten-year “long” reduction period, the impact of the CIT reduction will not be felt immediately by the business community.
Also, most likely, during such 10-year period, our Asian neighbors will also decrease their rates further, making us lag behind again. Thus, the objective of making our country and businesses competitive may not be achieved. A reduction over a shorter period, like five years, would be more dramatic and felt by the business community, and will probably attract more investors and improve our competitiveness more.
The other suggestion mentioned in the joint statement is to consider a reasonable fixed transition period for concerned firms under the 5-percent GIE regime (presently enjoyed by registered enterprises operating within economic zones) to adjust their operations and prevent dislocation. However, what is “reasonable” could be subject to several interpretations.
The Citira Bill proposes the doing away of the 5-percent GIE, and instead proposes a reduced 18-percent corporate income tax, which will be further reduced gradually to 13 percent in 2029. In transition, however, it proposes that those enjoying the 5-percent GIE be allowed to continue enjoying the incentive for a period of two to five years, depending on the number of years that they have enjoyed the incentive. For instance, those who have enjoyed the incentive for at least 10 years are given an additional two-year period to enjoy the same. The issue probably is how long should the transition period be? A longer transition period will of course give the businesses more time to adjust.
There is no doubt Citira will significantly impact our competitiveness. A reduction of the CIT is much welcome, but a shorter reduction period would be more ideal. On the other hand, a longer transition period for those affected by the rationalization of incentives will benefit businesses more.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is the President of the Asia-Oceana Tax Consultants’ Association and a past president of the Tax Management Association of the Philippines. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF Counsel’s website at www.mtfcounsel.com