CORPORATE INCOME TAX AND INCENTIVES REFORM

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Karl Kendrick T. Chua

Undersecretary

Department of Finance

CORPORATE INCOME TAX AND INCENTIVES REFORM

Dispelling the Myths

Philippine International Convention Center, Pasay City

March 3, 2020

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2

Vision for the Philippines

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Poverty reduction is encouraging.

26.3 25.2

23.3

16.6

14.0

12 16 20 24 28

Poverty rate (percent)

Full-year poverty estimates among the population

Source: PSA

Note: Poverty rates for 2021 to 2022 represent government targets.

or lower

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Infrastructure spending

4

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Infrastructure spending

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Photo: IRRI

Rice liberalization is…

pro-consumer pro-farmer

pro-taxpayer pro-workers pro-children pro-poor

Photo: IRRI Photo: IRRI

7 7

Rice liberalization reform is a game-changer .

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Leading to a decline in inflation from its peak in September 2018

Photo: IRRI Photo: IRRI

8 3.4

3.9 4.3 4.5 4.6 5.2

5.7

6.4 6.7 6.7 6.0

5.1 5.2 4.4

3.8

3.3 3.0 3.2

2.7 2.4 1.7

0.9 0.8 1.3

2.5 2.5 2.9

0 1 2 3 4 5 6 7 8

2018 2019 2020

Percent

Rice Tariffication Law signed.

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9

Human capital development

These are some of the specific benefits that

Filipinos will receive under UHC if fully implemented.

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Impact on Taxpayer’s

Personal Income

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11

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Some economic priorities in next three years

1. Accelerate implementation of the Build Build Build infrastructure program.

2. Pursue economic reforms to increase FDI and jobs. Priority bills include the:

• Public Service Act amendment,

• Retail Trade Liberalization Act amendment, and

• Foreign Investment Act amendment.

3. Improve implementation of existing reforms such as the National ID Law, Ease of Doing Business Law, Universal Health Care Law, Rice Tariffication Law

4. Improve the productivity of agriculture, including distribution of individual titles to land reform beneficiaries.

5. Pursue the remaining tax reform packages to make the tax system simpler,

fairer, and more efficient, while ensuring sustainable financing for the

infrastructure program.

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Among our economic priorities is the passage of the remaining tax reform packages

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Package 2

Corporate income tax and incentives reform

Package 3

Property valuation

Package 4 Passive income and financial taxes

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Tax reform is about INVESTING

in our country’s FUTURE.

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MYTH #1

CITIRA is anti-incentives.

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CITIRA to promote a fair

and accountable tax incentives system

Every peso granted as tax incentive is a peso off the budget that could have been spent for infrastructure, health, education, and

social protection that benefit all, and not only a few.

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In 2017, over PHP 441 billion (2.8% of GDP) was granted to 3,150 firms.

Source: DTI, TIMTA, and DOF estimates

PHP 441 billion in foregone revenue in 2017 from

tax incentives, many of which are unnecessary incentives.

1.

Firms with no incentives pay the regular rate of 30% of net taxable income.

2.

For example, almost all of the

90,000 SMEs pay the regular 30%

rate.

3.

Firms with incentives pay between 6% and 13% effective tax.

In 2017, 989,166 registered firms, most of which pay the regular tax rate.

In addition, PHP 63 billion (0.4% of GDP) was lost due to possible

abuse of transfer pricing.

Total: PHP 504 billion (3.2% of 2017 GDP)

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a. This cannot be availed together with the ITH, among other conditions. The additional deduction shall be 100% if the activity is located in less developed areas. (Does not include TIEZA, SBMA, CDC, and APECO) b. Additional deduction of 50% of the value of training expenses incurred may be deducted from the 5% final tax due (not to exceed the national governments share of 3%). (Does not include BOI, TIEZA, SBMA, CDC, APECO, PIA, and PRA)

CITIRA offers a more competitive incentives menu that rewards performance with more incentives.

Direct labor expense Training expense

Domestic inputs purchased R&D costs

Power expense

Depreciation allowance

Reinvestment allowance for manufacturing

Net operating loss carry-over

Under status quo

Up to 150% deduction^a Up to 150% deduction^b Up to 100% deduction Up to 100% deduction Up to 100% deduction

- -

Carried over for the next 3 years

Under CITIRA

Up to 150% deduction Up to 200% deduction Up to 150% deduction Up to 200% deduction Up to 150% deduction

10% for buildings, 20% for machinery Up to 50% of reinvested profit

(within 5 years from time of reinvestment) Incurred during first 3 years

carried over next 5 years

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MYTH #2

CITIRA exposes investors to unnecessary

red tape and harassment by government agencies.

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All IPAs will retain their one-stop shop functions for investors

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*FIRB may delegate approval to IPA or the Technical Committee. 21

The FIRB will have oversight functions over all IPAs, and approves all incentives, unless delegated.

Current structure

PEZA, BOI, CEZA, PPMC, TIEZA, and all other IPAs

Process and approve application for incentives

for private entities

FIRB

Process and approve application for subsidies for

GOCCs and other government agencies

Proposed structure

Congress

Decides on the incentives package

FIRB

Oversight and approver of all tax incentives and subsidies*

BOI

Determines the priority sectors through the SIPP

CEZA ZCSEZ APECO

PPMC TIEZA BCDA

PIA SBMA

AFAB

PEZA CDC RBOI

Recommends to FIRB qualified RBEs for incentives

IPAs

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NCI I

NCI II

Secretariat

Board

Technical Committee

Secretariat

Malaysia

National Committee on Investment

Philippines CITIRA

Fiscal Incentives Review Board

Note: Secretary level

OP DOF** DTI* DBM NEDA

DOF** DTI DBM NEDA BIR BOC

Note: Next in rank level

NTRC, head is DOF asec

FIRB follows the Malaysian model in tax incentives administration.

**Chairperson

*Co-chairperson

OP

MOF*

(DOF)

MITI*

(DTI)

MIDA (BOI) IRB

(BIR) BNM

(BSP) MEA

(NEDA)

Note: Minister level

MOF*

(DOF)

MITI*

(DTI)

MIDA*

(BOI) IRB

(BIR) BNM

(BSP) MEA

(NEDA)

Note: Vice minister level

*Co-chairperson

MIDA (BOI), head is vice-minister level

Note: IPAs and other agencies may co-opt as

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MYTH #3

CITIRA will make

the Philippines uncompetitive.

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Source: Asian Development Bank and PWC

We have the highest corporate income tax rate in the region.

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CITIRA will lower the corporate income tax rate to

make it regionally competitive and create 1.5 million jobs over the next decade.

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The incentive system is being

improved to make sure that we can:

Image source:

flaticon.com

Innovate Improve our position in

global value chains Participate in more high-

value activities

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Skilled and hardworking talent pool that needs sufficient human capital investments.

Solution: investment in K12, TESDA, UHC

Ambitious infrastructure development program that requires fiscal commitment.

Solution: PHP 8 trillion BBB

Sizeable small and medium enterprise community that deserves to be treated fairly through easier doing business

processes. Solution: EODB

Government is hard at work to improve conditions for all businesses and ultimately, the Filipino people

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The corporate income tax (CIT) rate reduction is the biggest incentive for Philippine businesses

Key provision HB 4157 SB 1357

SEC. 5

Section 27 (A)

SEC. 6

Section 28 (A)(1) Section 28 (B)(1) Corporate

income tax (CIT) rate

1 percentage point (ppt) reduction every year

2020: 29%

2021: 28%

2022: 27%...

2029: 20%

1 ppt reduction every year

2020: 29%

2021: 28%

2022: 27%...

2029: 20%

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Conditions for CIT reduction

29

SEC. 5

Section 27 (A)

SEC. 6

Section 28 (A)(1) Section 28 (B)(1)

Condition for CIT reduction

If savings are realized, then advance the next decrease;

If deficit is breached, then postpone the next decrease

No condition for 2020 to 2024:

If deficit will be breached, then cut spending;

With condition for 2025 to 2029:

If deficit is breached, then postpone the next decrease

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Sunset period for income tax holiday (ITH) availers

SEC. 10

Section 311(A)

Sunset period for income tax holiday availers (ITH)

Section 311(B)

Sunset for unfinished ITH with succeeding gross income earned (GIE)

Allow ITH to expire on schedule with max of 5 years

Allow ITH to expire on schedule

Allow ITH to expire followed by a 5% GIE, with a maximum of 5 years

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Sunset period for gross income earned (GIE) incentive availers

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SEC. 10

Section 311(C)

Sunset period for forever GIE tax availers (in years)

More than 10y: 2y 5 to 10 y: 3y

Less than 5y: 5y

More than 10y: 2y 5 to 10y: 3y

Less than 5y: 5y

Conditions for special 7y:

100% exporter, or 10,000 jobs, or footloose sector

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Special tax rate during sunset

SEC. 10

Section 311 (C)(1) to (4) Special tax rate during the sunset period for GIE

Gross income regime 2020: 5%...

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RHQ/ROHQ sunset

33

SEC. 6

Section 28(A)(5)(a)(b) Sunset for RHQ/ROHQ

RHQ: maintain exemption ROHQ: 2 years

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ROHQ

regime

can risk

a grey

listing

from

OECD

FHTP

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Availment period for new incentives

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SEC. 10

Section 296(A)

Availment period for new incentives (in years)

NCR: 5y

Around NCR: 7y Other areas: 10y

5 to 8 years depending on category

Category is based on geographic and industry targeting where:

A is for basic

B is for enhanced C is for advanced ITH + SCIT = total A: 2+3=5 years B: 3+4=7 years C: 4+4=8 years

Extensions allowed, total of 12 years for all incentives.

Note: ITH refers to income tax holiday and SCIT refers to special corporate income tax rate.

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Additional incentives availment

SEC. 10

Section 296(B)

Additional incentives availment (in years)

Relocating outside NCR: +3 years

Agribusiness: +3 years

Poor, disaster, or conflict areas:

+3 years

None

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Incentives package A: standard

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SEC. 10

Section 294(B)

Special rate regime

Net income regime Gross income regime

Key provision HB 4157 SB 1357

SEC. 10

Section 294(B) Special rate (total)

Fix rate 2020: 18%

2021: 18%

2022: 17%...

2030: 13%

Fix rate 2020: 8%

2021: 9%

2022: 10%...

2030: 10%

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“In lieu of” provision

SEC. 10

Section 294(B)

“ ”

In lieu of local business tax In lieu of all taxes, national and local (status quo based on IPA charter)

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Incentives package B: performance-based

SEC. 10

Section 294(C)

Incentive package B:

Performance-based incentives:

Additional deduction when availing of regular rate and in lieu of special rate

Included Included

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Key provision HB 4157 SB 1357

SEC. 10

Section 294(C)(2) Labor

Up to 50% Up to 50%

SEC. 10

Section 294(C)(5) Domestic input

Up to 50% Up to 50%

SEC. 10

Section 294(C)(6) Power

0% Up to 50%

SEC. 10

Section 294(C)(7)

Reinvestment for manufacturing

Up to 50% Up to 50%

SEC. 10

Section 294(C)(3)

Research and development

Up to 100% Up to 100%

SEC. 10

Section 294(C)(4) Training

Up to 100% Up to 100%

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Additional depreciation and NOLCO

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SEC. 10

Section 294(C)(1) Building

10% 10%

SEC. 10

Section 294(C)(1)

Equipment and machinery

20% 20%

Key provision HB 4157 SB 1357

SEC. 10

Section 294(C)(8)

Net operating loss carryover

3 years loss carryover 5 years 3 years loss carryover 5 years

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Power of the president to grant additional incentives

SEC. 10

Section 301

Additional incentives

(special power of president)

President can approve special applications;

Conditions:

High priority sector or

USD 200 million investment or 1,500 jobs;

President can approve special applications, max of 40 years;

Conditions:

High priority sector or

USD 1 billion investment or 10,000 jobs;

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43 Notes:

1. Firms with existing registered activities can reapply to avail of the new menu of incentives, provided certain criteria are met.

2. Since incentives are granted on a per project basis, a firm can apply for a fresh set of incentives through new projects, subject to certain requirements.

3. SCIT stands for the special corporate income tax that can either be the special corporate income tax rate.

4. Enhanced deductions subject to regular corporate income tax may be availed in lieu of the ITH and SCIT.

5. Total number of years of receiving incentives under the new incentives regime shall not exceed 12 years.

No Case Status Existing

incentives

Transition period

Total years of transition

Application for qualified

activity

New

incentives regime SCIT extension if

conditions are met

Total years for new

regime

Same firm to apply

new activities

Total years of enjoying

incentives

ITH SCIT

1 Category A activity

Continuing activity (less than 5 years of 5%

GIE)

2 out of 4 yearsof ITH

(2018 to 2021)

Finish 2 years of ITH

and 5 years of 5% GIE

(2020 to 2026)

7 years Allowed None

5 years (2027 to

2031)

3 years (2032 to

2034)

8+ years (max of 12

years)

Allowed 15+years

2 Category B activity

Continuing activity (less than 5 years of 5%

GIE)

4 years of ITH and 4 years of 5%

GIE (2012 to 2019)

5 years of 5% GIE

(2020 to 2024)

7 years (2025 to

2031)

4 years (2032 to

2035)

years)

3 Category B activity

Continuing activity (between 5

and 10 years of 5%

GIE)

GIE (2009 to 2019)

(2020 to 2022)

7 years (2023 to

2029)

4 years (2030 to

2033)

years)

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Notes:

1. Firms with existing registered activities can reapply to avail of the new menu of incentives, provided certain criteria are met.

2. Since incentives are granted on a per project basis, a firm can apply for a fresh set of incentives through new projects, subject to certain requirements.

3. SCIT stands for the special corporate income tax that can either be the special corporate income tax rate.

4. Enhanced deductions subject to regular corporate income tax may be availed in lieu of the ITH and SCIT.

No Case Status Existing

incentives

Transition period

Total years of transition

Application for qualified

activity

New

incentives regime SCIT extension if

conditions are met

Total years for new

regime

Same firm to apply

new activities

Total years of enjoying

incentives

ITH SCIT

4 Category C activity

Continuing activity (more than 10 years of

5% GIE)

GIE (2005 to 2019)

(2020 to 2021)

8 years (2022 to

2029)

4 years (2030 to

2033)

12 years (max of 12

years)

5

Category C activity (footloose)

Continuing activity (more than 10 years of

5% GIE)

GIE (2005 to 2019)

(2020 to 2026)

8 years (2027 to

2034)

4 years (2035 to

2038)

years)

6 Category C activity

New activity (ITH yet to

start, no GIE)

6 years of ITH to start

on 2022

6 years of ITH (2022 to

2027)

8 years (2028 to

2035)

4 years (2036 to

2039)

years)

In summary, CITIRA provides a reasonable sunset period.

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45

1.97 1.30 0.13 9.80

-1 1 3 5 7 9 11

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Approved foreign investments by investment promotion agency and foreign direct investments, in USD billions

BOI PEZA Other IPAs FDI

Source: PSA

1. Wider gap between total FDI and approved FDI means most ’

2. PEZA approved investments have been declining even without Package 2.

3. BOI approved investments are higher than PEZA, suggesting that ’ to invest.

4. Prior to 2013, PEZA approved FDI were consistently higher than total FDI. This suggests that many approved ’ z

USD billions

The far majority of investors see other more

important reasons for investing in the Philippines

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Record high FDI

pledges in 2019

despite

CITIRA

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Our goal: a comfortable life for all Filipinos

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Thank you!

For more information, please visit:

For questions, you may directly email us at:

http://taxreform.dof.gov.ph/publication/recent-presentations/

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