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 2018)
  • Senate: First committee hearing conducted (Jan 2018)

Salient provisions

Package 2 will level the playing field for Filipino businesses by gradually reducing the CIT rate from 30% to 20%.

The Philippines has the highest CIT rate among ASEAN countries, making it difficult for the majority of the country’s businesses to become competitive. Some 90,000 corporate taxpayers in the Philippines are small and medium enterprises (SMEs) and most of them pay the regular CIT rate of 30%. More than 10,000 micro enterprises also pay this rate.

Having the highest CIT rate in the ASEAN region puts the Philippines at a disadvantage against our neighbors with regard to domestic and foreign investment. By lowering CIT, we will improve the competitiveness of all businesses, especially MSMEs, and encourage robust business activity, investment, and tax compliance.

Comparative CIIT rates in ASEAN

The following four principles should serve as the basis of an ideal incentives package:

Performance-based

Today, some incentives are given forever and recipients are not required to meet performance targets that benefit society. The granting of incentives should result in positive developments that would not have happened otherwise: additional job creation; countryside development; innovation; research and development. It is the same principle when one is granted a scholarship for college. The scholarship is not given forever and is not free. Instead, you must meet grade requirements and graduate within a reasonable period of time. We should therefore give incentives to firms that (1) actually need them, and (2) perform well.

Targeted

We cannot give incentives to an unlimited number of groups or industries. We must identify sectors that are aligned with our national development priorities. Remember that if we give one group an incentive, we are asking another group to pay more. Under today’s unfair system, granting overly generous incentives to a select few requires that the rest of the taxpayers, a majority of which are micro and small enterprises, pay a much higher rate at 30 percent. Tax incentives should be given to activities that result in significant benefits to the country as specified in a Strategic Investments Priority Plan (SIPP).

Time-bound

The granting of tax incentives should include sunset provisions. For instance, the government should help infant industries while they are struggling to become competitive and world-class. After a reasonable amount of time, it is only fair to expect the same industry to contribute back to the country. The absence of a time limit on incentives is detrimental to accountability and performance.

Transparent

Each peso given as an incentive to a company is a peso not invested in public health, education, social protection, or infrastructure. Therefore, regular monitoring and evaluation of tax incentives should be institutionalized to ensure that what society gains outweigh the cost of incentives. Recipients and the amount of incentives received should be reported to the government and the public.

Benefits of the reform

The CIT rate will be reduced from the present 30% to 28% in 2021, and then all the way to 20% by 2029. This will build up and benefit 98% of all corporations, mostly SMEs.

BENEFITS OF THE REFORM

  • For corporations registered for incentives, TRABAHO will provide additional tax deductions for:
    • labor cost,
    • training cost,
    • purchases from local suppliers,
    • infrastructure development,
    • research and development, and
    • accelerated depreciation allowance.
  • Encourage registered corporations to:
    • generate more and better jobs,
    • be more efficient and competitive,
    • locate in the countryside,
    • introduce innovation, and
    • invest in agribusinesses.

Publications