Package 2 : Corporate Income Tax and Incentives Rationalization

Package 2 of the Comprehensive Tax Reform Program (CTRP) seeks to lower the corporate income tax (CIT) rate gradually from 30% to 20%, reorient fiscal incentives toward strategic growth industries, and make incentives available to investors who make net positive contributions to society.

Legislative status

  • House of Representatives: Approved on third and final reading (10 Sept 2019)
  • Senate: First committee hearing conducted (17 Sept 2019)

Why the reform is needed

Problem 1:

The Philippines currently imposes the highest corporate income tax (CIT) rate in the ASEAN region. This hampers the country’s ability to compete with other countries with a lower CIT rate.

Comparative CIT rates in ASEAN

Solution 1:

Package 2, also known as the Corporate Income Tax and Incentives Rationalization Act (CITIRA), seeks to reduce the corporate income tax rate to make it regionally competitive and bring back jobs. This measure will benefit more than 99% of companies, most of which are micro, small, and medium enterprises (MSMEs), who employ the majority of Filipinos. Savings from a lower corporate income tax rate will also allow companies to expand and create even more jobs. This measure, as proposed by the Department of Finance, is expected to create up to 1.5 million jobs.

 

Problem 2:

We have a corporate tax incentive system that is overly generous to a few companies at the expense of the majority.

In 2017 alone, the Filipino people granted PHP 441 billion (or 2.8% of GDP) in tax incentives to only 3,150 companies, including those on the elite list of Top 1,000 corporations. These companies pay an effective discounted corporate income tax rate of 6 to 13%.

In contrast, under the current corporate taxation system, firms with no incentives, which include almost all of the country’s 90,000 small and medium enterprises (SMEs), pay the regular CIT rate of 30 percent of their net taxable income–the highest in the region.

 

Companies that do not receive incentives are subject to the regular rate of 30% Companies that do receive incentives pay an effective rate of only 6 to 13%

 

The Philippines is also the only major economy in the world with a system that grants incentives to companies in perpetuity or “forever.” All other countries have a maximum duration and it applies only to few highly targeted industries and is not automatically given.

Duration of ITH in ASEAN

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. Around half of these incentives granted are worth it and yield a net positive benefit to the Filipino people; however, around half of these incentives are unnecessary or redundant.

PHP 441 billion of foregone revenues in 2017 could have funded…

Foregone revenues in 2017

 

Solution 2:

Package 2 seeks to promote a fair and accountable tax incentives system to make sure that every peso granted as a tax incentive yields a net positive benefit to society and that the industries and locations that deserve help are truly supported.

Under Package 2, incentives will be:

Package 2 principles

Salient provisions of House Bill 4157

#1

The corporate income tax (CIT) rate will be reduced from the present 30 percent, in annual increments of 1 percentage point, all the way to 20 percent by 2029. This will build up and benefit more than 99 percent of all corporations, mostly micro, small, and medium enterprises (MSMEs).

Comparative CIT rates in ASEAN

#2

All firms who are qualified can get up to 10 years of incentives, and additional 9 years if they meet a certain set of conditions, for a total of 19 years. All incentives are renewable if the applicants are qualified.

Area or Condition Income Tax Holiday (years) Reduced CIT or enhanced deductions (years)
AREA
National Capital Region 3 2
Adjacent areas (Cavite, Laguna, Rizal, Bulacan) 4 3
All other areas 6 4
OTHER CONDITIONS
Relocating from NCR or adjacent areas 2 1
Investing in agribusiness activities 2 1
Located in areas recovering from armed conflict or major disaster 2 1

#3

After the ITH period, a firm can avail of the reduced CIT rate, which will also be gradually decreased from 18 percent of net taxable income in 2020 to 13 percent in 2030. This will replace the previous tax on gross income earned (GIE).

Center Special rate (%) Share of national government (%) Share of provincial government (%) Share of municipal government (%)
2020 18 15 1.5 1.5
2022 17 14 1.5 1.5
2024 16 13 1.5 1.5
2026 15 12 1.5 1.5
2028 14 11 1.5 1.5
2030 13 10 1.5 1.5

#4

Alternative to the reduced CIT rate, a firm may avail of the menu of enhanced deductions under Package 2. Summarized below is a list of allowable deductions that rewards performance with more incentives:

Type of expense Under status quo Under Package 2
Direct labor expense Up to 150% deduction a Up to 150% deduction
Training expense Up to 150% deduction b Up to 200% deduction
Domestic inputs purchased Up to 100% deduction Up to 150% deduction
R&D costs Up to 100% deduction Up to 200% deduction
Depreciation allowance 10% for buildings, 20% for machinery
Reinvestment allowance for manufacturing Up to 50% of reinvested profit (within 5 years from time of reinvestment)
Infrastructure development Up to 100% deduction c Up to 200% deduction
Net operating loss carry-over Carried over for the next 3 years Incurred during first 3 years carried over next 5 years

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)

c. The enterprise may deduct from taxable income an amount equivalent to 100% of necessary and major infrastructure works (infrastructure, public utilities, and other facilities, such as irrigation, drainage or other similar waterworks infrastructure) with the prior approval and provided that the title to all such infrastructure works shall upon completion, be transferred to the Philippine Government. (For BOI only)

#5

A sunset period will be given to existing registered activities. After the sunset period ends, firms can reapply for the new menu of incentives under Package 2. For existing activities under the ITH period, this shall continue until the remaining ITH ends or for 5 years, whichever comes first. If the remaining ITH period is less than 5 years, firms can enjoy the GIE for the remainder of the 5-year period. For those enjoying the GIE, the following schedule shall apply:

Number of years enjoying 5% GIE Number of years allowed to continue
Below 5 years 5
Between 5 and 10 years 3
Above 10 years 2

#6

The Fiscal Incentives Review Board (FIRB) will have oversight function over all investment promotion agencies (IPAs) and approve all incentives in accordance with the law. All IPAs will retain their one stop shop functions.

The identification of priority sectors through the Strategic Investment Priorities Plan (SIPP) will be done by the Board of Investments (BoI).

Current vs proposed structure

Publications