Just a little tweak of the Citira (Corporate Income Tax and Incentives Reform Act) and this may already be the answer to the fiscal stimulus being sought in Congress.
Similar objectives outlined in the proposed stimulus packages filed in Congress may also be achieved through Citira. And Citira could be a shorter route, it being in the advanced stage of legislation, with House Bill No. 4157 passed and Senate Bill No. 1357 filed.
Below, I have identified potential items for tweaking which can be considered, either in full or selectively. These are just examples and there could be many others. Some of these have been adopted in other countries as part of fiscal stimulus in response to the COVID-19 pandemic.
Let me just say upfront that since these are meant to address a temporary need or situation, a sunsetting provision is appropriate when recovery or normalcy is achieved.
Accelerated reduction of the Corporate Income Tax (CIT)
Citira proposes a 1-percent CIT reduction in 10 years, eventually reducing the current 30 percent CIT to 20 percent in 2030, assuming it is passed within the year. That means, it will take eight years for the country to attain the Asean average CIT rate of 22.5 percent, or 10 years to be at par with our closest comparable Thailand and Vietnam, assuming everything is constant.
Extended period of Nolco
(net operating loss carry-over)
The current rule allows a three-year Nolco. But if the projected recovery from COVID-19 is three to five years from 2020, losses during the year, and perhaps three years thereafter, may not benefit from Nolco because these are expired by the time business recovers and earn income. The Citira grants an extended Nolco of five years but only to those who qualify for incentives.
With minor tweaking, this same benefit can be extended to all taxpayers for losses incurred in 2020 (and perhaps three years thereafter) allowing companies to partly recover their losses through tax deductions.
China has allowed an eight-year Nolco for 2020 losses. United States, Norway, Poland, Slovakia even went as far as allowing 2020 losses to be carried backward (reverse Nolco) claiming the losses as deduction against 2019 and 2018 income.
Shortened processing of tax refunds
Tax refund claims are taxpayer’s operating capital trapped with the government either due to imperfections in the tax system or error of the taxpayer.
Thailand, India and Pakistan have shortened the processing of refund claims and accelerated the release of funds to claimants to improve their liquidity, especially the exporters.
TRAIN Act reduced the processing of refund claims from 120 days to 90 days, but submission of claims became more difficult now because of very stringent requirements before the application is accepted. During the period of recovery, perhaps this can be reduced further to 30-45 days and the requirements relaxed. Likewise, the billions of refund claims that are pending and have remained outstanding for a long time should be processed for immediate release.
Special additional deduction for expenses related to salaries and employee benefits
A wage subsidy to employers to avoid layoff. Thailand adopted the same. The stimulus package filed by Rep. Stella Quimbo is heavily focused on wage amelioration, with the Department of Labor and Employment as the implementing agency. To my mind, this route is exposed to enormous leakages. A direct support to business by way of additional tax deduction may be cleaner, if the right parameters and safeguards are put in place. In Citira, the same privilege is granted but only to qualified incentive-grantees.
Reduced income tax withholding
Taxes withheld from income and remitted to the government are, in fact, income taxes paid in advance. With the expectation of losses this year and the next three years, continuous collection of withholding taxes at the current rate will likely result in overpaid income taxes at year-end, resulting in refund claims or carryover, a circuitous and costly process. Again, a case of taxpayer’s money trapped with the government, instead of being used in business. A solution would be to reduce the rates to approximate the projected income level at year-end, or to suspend if losses are widespread.
Full income tax deduction and VAT exemption on investments in capital assets related to medical equipment and facilities, to encourage investment along this area.
Special additional deduction on expenses that encourage business behavior to support micro, small and medium enterprises (MSMEs).
For example, additional deduction for purchases from MSMEs. Or, additional deduction for landlords giving big discounts on lease rentals to MSMEs, such as that adopted in Malaysia. Or, a special deduction or incentive for MSMEs to list in PSE, PDEX, or for accessing the capital market.
On incentives, customization is the emerging trend. A selective, flexible and customized approach, not bounded by solid rules, giving more power to incentive-giving bodies. Of course, it goes without saying that this can be abused if it lands in the wrong hands.
Based on a comparative data of COVID-19-related fiscal and economic stimulus adopted in various jurisdictions, there are common measures identified, such as deferral of income tax filing and payment, full tax deduction for health-related facilities and supplies, soft loan facility to MSMEs, wage subsidy, full tax and VAT exemption on donation, deferral of loan payment, lower reserve requirement and policy rates, relaxation of regulatory rules, among others.
Most of these, we have done.
A unique move by US, UK, Germany, Switzerland and sweeping across Europe is the urgent call for advance or early tax payments for 2020 (due in 2021), offering attractive discounts, rebates and refunds for those availing. Surprisingly, it appears that nobody in the Asia-Pacific region has done that yet.
A sign that we are in a better situation, as of now. INQThis article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP. The author is Governor-in-Charge of the Management Association of the Philippines (MAP) Tax Committee and the MAP CEO Conference Committee, and the Founding Partner and CEO of Du-Baladad and Associates (BDB Law).