Economic zone firms will be allowed to keep paying tax on gross income earned (GIE) under their regulator’s proposal to Congress, but the rate will be increased and the perpetuity removed.
The Philippine Economic Zone Authority (Peza) last week submitted to Congress its proposed enhancements to House Bill 4157, or the Corporate Income Tax and Incentives Rationalization Act (Citira) bill. The proposal was transmitted upon the request of legislators, who will convene in a bicameral conference once the measure is passed by the Senate.
Under the proposal, locators in economic zones get to maintain most of their fiscal incentives, particularly the payment of GIE in lieu of all local and national taxes availed upon the expiry of their income tax holiday (ITH).
As a compromise, the GIE rate is increased from 5 percent at present to 7 percent, of which 5 percent is remitted to the state and 2 percent to the local government. This is also in line with what economic zone firms have been saying: that they are willing to pay higher GIE for as long as the tax perk is retained under the Citira bill.
Only locators belonging to the struggling garments and textile industries, and economic zone developers get to pay 5 percent of GIE under the Peza proposal.
Perpetuity out
In another compromise, the perpetuity of paying GIE is removed by the Peza in its suggested version of the Citira bill. Unlike in the existing setup where economic zone firms can choose to perpetually pay GIE, the proposal caps the period of enjoying the incentive at 20 years, after which locators can pay reduced corporate income tax (CIT).
Under the Citira bill approved by the House of Representatives, the rate of reduced CIT is set at 17 percent in 2022, dropping 1 percent every two years to 13 percent by 2030.
The Peza is seeking to stretch to four years, from three years in the bill, the ITH of economic zone firms situated in Metro Manila. It is also proposing the extension of the tax break of those operating in areas adjacent to the nation’s capital to six years, from four years; and of those in the regions to eight years, from six years.
Moreover, the Peza deleted in its proposal the whole Chapter III of the Citira bill that creates the Fiscal Incentives Review Board (FIRB) tasked primarily to set and review the general policy on the grant of incentives to investors.
The FIRB is chaired by the finance chief, assisted by the secretaries of trade, of socioeconomic planning, of budget and the executive secretary. In petitioning for the removal of the FIRB, the Peza wants to return the authority to confer and administer incentives to investment promotion agencies, including it.
The Citira bill, the second package of the government’s tax reform program, was approved by the House last year and is undergoing deliberations in the Senate.
Its prolonged legislation is sending uncertainties to foreign investors, making it difficult for them to expand operations without a final tax structure in place. These uncertainties may be reflected in investments registered with the Peza that slumped 16.18 percent to P117.54 billion last year, from P140.24 billion in 2018, according to official data.
Investments applied by foreigners declined 27.91 percent to P49.25 billion, from P68.32 billion, while those posted by locals slipped 5.04 percent to P68.28 billion, from P71.91 billion.
Economic zone firms warned that many of them will be compelled to pack up operations here and relocate to another Southeast Asian economy if their incentives are lifted. This impending capital flight is projected to result in job losses of up to 700,000, according to estimates by the Joint Foreign Chambers of the Philippines—a figure that some ranking Finance officials doubt.
Apart from rationalizing incentives, the Citira bill will reduce CIT to 20 percent, from 30 percent at present, which is the highest rate in the region.