If Citira were passed three years ago when a Citira bill was first filed in Congress, our corporate taxpayers should now be enjoying a corporate tax discount of 3 percent. The corporate income tax (CIT) rate should now be at 27 percent. Not 30 percent.
By now, with an annual CIT reduction of 1 percent, the accumulated windfall profits of 1 percent, 2 percent and 3 percent from the first to the third year could have gone a long way, either reinvested for expansion, modernization, or new business ventures that could have generated more business activities and created more jobs. That windfall profit could have increased earnings per share that could have driven better valuation for companies.
By now, had the savings from tax cuts been used to subsidize the cost of production, and bring down value of consumer goods, individuals and corporates alike should now be enjoying cheaper and more affordable prices of goods and services.
By now, with a CIT rate of 27 percent, we should have come closer to the regional average of 22.5 percent, just 4.5 percentage points away, which could not have been a deal-breaker for foreign investors eager to access our rich domestic market and God-given resources.
Had we passed Citira on year one, we could have timely provided that certainty required by investors to plan and make decisions quickly. But we didn’t. So now, after three years, we blame that indecisiveness as the cause of falling foreign direct investments (FDI) and the inability of our businessmen to chart their investment plan.
But as the saying goes, it is better late than never. Alleluia! Here at last, Citira has reached the floor of the Senate.
The Senate version of Citira, Senate Bill (SB) No. 1357, was filed weeks ago by a passionate tax reformer in the person of Sen. Pia Cayetano, who, in her introduction to the bill, has admitted that her thesis in college was about the Philippines’ tax incentives system.
Along with Cayetano on the day of filing were the Secretaries of the Department of Finance (DOF) and the Department of Trade and Industry (DTI), seated together, and side-by-side defending and championing the immediate passage of this bill. Surprising! Never before has this happened. In previous tax reforms, or attempts to do a tax reform, the heads of the DOF and DTI were always at opposite ends of the bench, exchanging sharp looks at each other, and opposing one another. In unison, all three (Cayetano, DOF and DTI) were pushing for Citira’s immediate passage.
Then a fourth voice joined from an unexpected source, the chair of the House ways and means committee, Rep. Joey Salceda declaring in a Makati forum that he will fully support the Senate’s Citira version despite significant differences from that of the House version, which he himself authored and filed. The reason, he said, is to have Citira passed without further delay. Salceda has always been known as a passionate tax reformer who goes all out defending his views.
Then a fifth voice joined—the biggest private business and professional groups. In a joint statement issued last March 5, the big and influential business groups declared their support for SB 1357, requesting and imploring the Senate and the Lower House to move quickly and decisively saying, “while there remain few key issues in the Senate Bill that must be addressed, we strongly believe that passing the law will provide long-delayed certainty that will help the Philippines compete for job-creating investments.
The uncertainty over the Citira must end!
I join as the sixth voice—a private individual, a law-abiding taxpayer, a professional tax lawyer.
Time is of the essence, my friends.
Simply put—we are running out of time to do something that is necessary. To do a tax reform requires the right timing and right ingredients. We have these now—the political will and the high acceptance rating of the President being most crucial, coupled by a strong economic team. We may not have the same opportunity again, maybe, not in the near future. We only have two years left and we still have three remaining components of the reform.
Discussions on Citira started three years back and the prolonged delay in its passage has caused more damage to the economy than expected, according to some sources. The decline in foreign direct investments, or decline in local reinvestments or expansions, are due to a “wait-and-see” stance of businessmen, and not because of fear of changes to be introduced by Citira on the current tax incentives regime.
Looking at SB 1357, the changes introduced were streamlined (compared to the House version), retaining only those needed to keep fiscal balance, attain competitiveness and achieve fairness. Most notable changes introduced by SB 1357 are as follows:
It retains the reduction of the CIT from 30 percent to 20 percent in 10 years. The yearly reduction for the first five years is guaranteed and unconditional. The rest is conditioned upon performance not exceeding programmed deficit, before it can proceed to the next reduction.
On incentives rationalization, the transition is longer and less obstructive compared to that of the House. Commitments on Income Tax Holiday (ITH) are respected allowing incentive-grantees to enjoy until expiration. Gross income earned (GIE) incentives after the expiration of ITH are allowed for another five years at the same rate of 5 percent. Those under full GIE are given a transition period of from two to seven years. It classifies incentive-grantees into basic, enhanced and advanced depending on locality and industry. The ITH period is from two to four years, while the Special Corporate Income Tax (SCIT) is from three to four years, extendible for a period not exceeding a total of 12 years.
The SCIT retains the GIE regime but increased the rate from 5 percent to 8 percent on year one; 9 percent in year two and 10 percent in year three and onward. The GIE was adopted as an accommodation to some industries that prefer a one-stop-shop in the payment of taxes. The 50 percent reduced income tax proposed by the House was dropped.
Investment promotion agencies will continue to do the same except policy making and approval of incentives which shall be with the Fiscal Incentives Review Board (FIRB). The secretaries of DOF and DTI cochairs the FIRB, with Neda, DBM and Office of the President as members.
Special deductions in lieu of ITH and SCIT are newly introduced or enhanced, such as double deduction for research and development and training expense. A 150-percent deduction for reinvestment of profits, power expense and domestic input expense is newly introduced.
In ending, I echo the business groups’ call to put an end to the uncertainty over Citira. INQThe author is governor in charge of the Management Association of the Philippines, or MAP Tax Committee and the MAP CEO Conference Committee, and the Founding Partner and CEO of Du-Baladad and Associates (BDB Law). Feedback at map.org.ph and dick.du-baladad@bdlaw.com.ph. For previous articles, please visit map.org.ph.