Revenue gains key to cut in corporate income tax

The reduction in corporate income tax rates under the Duterte administration’s second tax reform package will depend on the revenue gains once the government consolidates existing laws giving away incentives, according to the Department of Finance.

The DOF submitted the tax reform package through the Office of the Speaker upon the resumption on Jan. 15 of the regular session of Congress.

Based on DOF presentations before industry associations, the second tax package aims to broaden the tax base by repealing 150 special laws on investment tax incentives and consolidating them into a single omnibus law.

It will likewise repeal exemptions of government-owned and/or -controlled corporations, proprietary educational institutions and hospitals, regional headquarters, regional operating headquarters, incomes of resident foreign corporations from foreign currency transactions, nonresident cinematographic film owners, lessors or distributors, as well as owners or lessors of aircraft, machinery, vessels and other equipment.

While cutting down on incentives, the second tax reform package will bring down the corporate income tax rate starting Jan. 1, 2020 by 1 percentage point for every reduction in investment tax perks equivalent to 0.15 percent of gross domestic product in 2018 or an estimated P26 billion.

“The goal is to reduce the corporate income tax rate from 30 percent to 25 percent by 2022, while expanding the base by 0.75 percent of GDP or P130 billion in 2018 prices,” the DOF said.

The second tax package will also improve compliance by simplifying the tax rules for corporations, including slashing the optional standard deduction to 20 percent of gross income for both individuals and corporations from 40 percent at present; allowing deductions, including net operating loss carryover and depreciation; as well as defining medium and large (on a conglomerate basis) taxpayers.

To get incentives, investments must be performance-based, with an independent body or the fiscal incentives review board (FIRB) to measure it; time-bound, to enjoy five-year income tax holiday and/or reduced rate with no extension except for the capital equipment duty perk; targeted, or based on the three-year investment priorities plan (IPP) covering both local and foreign investors that will serve both domestic and international markets; as well as transparent, with the name of beneficiaries and tax incentives to be reported by the FIRB.