Firms to get superior incentives, extra deductions under proposed corporate tax reform bill

Date Posted : August 21, 2019

Firms to get superior incentives, extra deductions under proposed corporate tax reform bill

Date Posted : August 21, 2019

Department of Finance (DOF) officials have allayed concerns about incentive reform, emphasizing that qualified firms will receive superior incentives, including additional tax deductions, when Package 2 of the Comprehensive Tax Reform Program (CTRP) is passed into law.

“The fear-mongering about the removal of incentives should stop. Package 2 will actually give superior incentives for the right reasons, such as the creation of good jobs, investment in research and development, and expansion in the countryside among others,” said Finance Undersecretary Karl Kendrick Chua. “These types of activities will be able to claim additional deductions, which will reduce companies’ tax liabilities.”

“For example, Package 2 allows an additional deduction of up to 50 percent on direct labor expense. This means that for every job created, companies can deduct up to 150 percent of direct labor expense, compared to just 100 percent in the present regime,” Chua said.

He pointed out that this particular incentive would benefit workforce-heavy industries like manufacturing and the IT-BPO sector, and encourage new investors to create jobs.

The Finance official said another superior incentive under Package 2 is that companies that invest in upgrading the skills of their Filipino employees may receive an additional deduction of up to 200 percent of the cost of their workers’ trainings, or double the 100-percent deduction given now.

Under Package 2 of the CTRP, the government plans to lower the corporate income tax (CIT) rate gradually from 30 percent to 20 percent, and modernize the fiscal incentive system to establish a single menu of superior incentives that are performance-based, time-bound, targeted, and fully transparent.

DOF officials have explained previously that this reform bill would result in superior incentives available to all investors.

“When you look at the changes we are making, it’s easy to agree with the thinking behind it,” Chua said. “Incentives are meant to encourage positive behavior, and we want to make sure our incentive system benefits firms whose activities are beneficial to the Philippines like job creation and training.”

The Philippines gave away an estimated P1.12 trillion in tax incentives and exemptions to a select group of 3,150 companies from 2015 to 2017, according to the DOF.

Such foregone revenues include income tax incentives, tax incentives on customs duties and tax incentives on import value added tax (VAT).

Additional deductions that firms can avail of under the DOF-proposed incentive system, include: up to an additional 50 percent on top of the 100-percent deduction now allowed on the purchase and use of inputs from domestic suppliers, which will benefit local industries and producers; and up to an additional 100 percent or double the current 100-percent deduction on research and development (R&D) costs by R&D firms, which encourages innovation in such firms as semiconductor and tech companies.

Chua said that Package 2 allows companies to depreciate buildings and machinery directly used in qualified projects at an accelerated rate of 10 percent and 20 percent, respectively, allowing them to recover the cost of these investments more quickly.

Moreover, under this bill, business losses incurred during a company’s first three years of commercial operation can be deducted from gross income within the next five consecutive taxable years from the year when such losses were incurred, he said.

This enhanced net operating loss carry-over (NOLCO) gives firms more time to recover their initial losses, he added.

“We are also introducing an allowance which encourages firms to reinvest their profits into registered projects, or the reinvestment allowance. This will allow firms to claim up to 50 percent of profits reinvested into registered projects as a deduction for income tax purposes within five years from the time of reinvestment.” Chua said.

Infrastructure development is also encouraged through a deduction of up to 100 percent on expenses for public infrastructure, utilities, irrigation, and drainage. The official explained further, saying, “We see this as being useful to companies located in less-developed or far-flung areas, where their operations will benefit from the infra they build, while they can deduct part or all of this as a tax expense.”

“So you see, we are not anti-incentives, and it is not true that we are removing them altogether,” Undersecretary Chua said. “We are giving superior incentives through a system where both the Filipino people and firms with registered activities benefit.”

President Duterte said in his State-of-the-Nation Address that the proposed corporate income tax (CIT) and incentives reform package would benefit small and medium-scale enterprises (SMEs). Under the current system, a select group of some 3,000 companies, including those on the elite list of Top 1,000 corporations, enjoy incentives that allow them to pay discounted tax rates of between 6 percent to 13 percent of net income only, while most SMEs pay the regular 30 percent.


Date Posted August 21, 2019

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