With a corporate income tax (CIT) rate of 30 percent, the Philippines has the highest CIT among ASEAN countries. Despite the high rate paid by businesses, efficiency remains very low due to leakages brought about by our outdated and complex tax incentive system.
To address this concern, Package 2 (P2) of the Comprehensive Tax Reform Program (CTRP) aims to lower the CIT rate from 30 percent to 20 percent over the span of a decade, gradually scaling it back by one percent every year. If passed, Package 2 will bring the Philippine CIT rates closer to the tax rates of our ASEAN neighbors and help businesses — especially small and medium enterprises (SMEs) — to become more competitive. It will also encourage robust business activity, investments and tax compliance.
CITIRA for growth
Package 2 (P2), also known as the Corporate Income Tax and Incentives Reform Act (CITIRA), seeks to make the Philippines more competitive and level the playing field for businesses through a reduction of the corporate income tax (CIT) rate and the modernization and improvement of the fiscal incentive system. It will help create an enabling environment for businesses, generate quality jobs, and spur growth throughout the entire archipelago.
The passage of the CITIRA bill — proposed by the Duterte administration — is bound to reduce the corporate income tax rate from 30 percent to 20 percent to energize SME owners to grow, expand and compete and modernize and improve the corporate tax incentives system.
SME owners express optimism that this reform can help ease the burdens of small businesses. “Pag maliit na negosyante ka, andami dami mong binabayarang taxes no? Nandyan na iyong business taxes, VAT, then you pay local taxes sa munisipyo, city hall, and then you pay taxes on the rent, you pay taxes on the goods, then meron pang taxes na 30 percent income tax. Somehow, eh kung maliit kang negosyante parang medyo it’s burdensome sa isang maliit na negosyante iyon,” shares SME owner Bong Magpayo.
“Ang isang negosyante, hindi naman nagtatapos iyan sa malaki iyong benta. Sa dami ng babayaran, kung minsan maliit na lang iyong natitira. Siguro sa 20 years na naming nagbi-business, siguro maganda ring tingnan ng government yung ireview ung siguro yung mga kailangan bayaran ng negosyante. Like siguro nga yung taxes,” expresses SME owner Kamela Seen.
Stimulating SME growth
Savings from a lower CIT rate can be used by SMEs to invest in more equipment, open new branches, and most importantly, hire more people. Based on historical data, government reasonably expects more than half of additional savings from the lower corporate income tax rate to be reinvested back into the company. Lowering the corporate income tax rate will also make the Philippines more competitive for foreign investment versus other countries. Investments create jobs.
For the government to lower the CIT rate for all businesses without substantially losing revenues which must be spent on infrastructure, health, education, housing and other investments in our people, the government also has to modernize the corporate tax incentive system to make sure that incentives will continue to be given to deserving companies and activities while those that are redundant are gradually phased out.
Snowballing support from the business sector
Various groups within the business sector have also expressed their support for the CITIRA bill and welcomes this positive development — with optimism that this will indeed spur the growth of the SME sector.
“That is a welcome development for us.” Magpayo mentioned that he can use the savings from the lower CIT rate to expand, buy equipment, ingredients, and expand his team. “Sana matuloy iyan,” he hopes.
“As a voluntary and self- regulating governing body for the Philippine franchising sector, the Philippine Franchise Association (PFA) deems CITIRA as an opportunity to improve the country’s corporate income tax and fiscal incentive system to attract more investments from domestic and foreign investors. We believe that this will invigorate our community of small to large franchises, both homegrown and international. CITIRA will complement the efforts of PFA in expanding businesses and creating millions of jobs to support economic development and nation- building. CITIRA also supports our vision for the Philippines to be the “Franchise Hub of Asia,” shares PFA.
“[CITIRA] will not only make us more competitive in attracting foreign investments, but it will also make our domestic corporates at par with their counterparts, thus making them more competitive as they expand their operations outbound under an integrated ASEAN market,” according to a statement from Philippine business groups.
“For over a decade now, the Philippine Chamber of Commerce and Industry (PCCI) has been advocating for a corporate income tax (CIT) rate that will make the Philippines competitive in a field of countries competing for the same direct investments funds. The country right now has the highest corporate tax at 30 percent, putting the country at a disadvantaged position versus our ASEAN neighbors in terms of attracting foreign direct investments (FDIs). High corporate tax similarly marginalizes MSMEs. Because while they pay for the 30 percent CIT, many do not benefit from tax incentives. Government’s own estimates show that 99 percent of corporate taxpayers pay the regular tax rate of 30 percent,” explains the PCCI.
This article was published in the Philippine Star on December 15, 2019.
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