Think tank Action for Economic Reforms welcomed the sponsorship of Senate Bill 1357 or the senate version of the Corporate Income Tax and Incentives Reform Act (CITIRA) bill.
In a statement on Friday, AER lauded the efforts of Senate Ways and Means chairperson Pia Cayetano in coming up with a reasonable, reform-oriented version that she was able to pass at the committee level despite much resistance from a few but noisy, fear-mongering vested interests.
SB 1357 will make fiscal incentives given to firms “performance-based, time-bound, targeted, and transparent” with priority given to business activities that generate domestic employment; promote research, development and innovation; promote agribusiness; and invest in areas that are less developed or are recovering from disasters and conflicts, among others.
“We support this bill that seeks to sharpen the focus of the incentives and align them to broader development goals. We view the bill’s proposal to extend the sunset period for firms currently paying the rate of 5 percent of gross income earned [GIE] in lieu of all taxes, from five years in the House to seven years as a reasonable compromise. This will allow firms to gradually transition into the new regime of incentives, thus preventing shocks that may result in capital flight or massive job loss.” AER Coordinator Filomeno Sta. Ana III said.
AER has advocated this reform for more than a decade. A long overdue reform has achieved a breakthrough.
However, AER expressed caution over the manner of reducing the corporate income tax from the current rate of 30 percent to 20 percent by 2029, for this can possibly result in huge revenue losses.
The bill has shown caution by reducing the rate by a percentage point a year till 2029, and also by having further reduction in 2025 and beyond contingent on meeting the programmed level of government deficit.
AER urged the Senate to strengthen the safeguard by also making the further income tax reduction after 2025 contingent on a level of tax effort that will not go lower than 16 percent, which the country will achieve once the comprehensive reforms are in place.
The safeguards are necessary to ensure that the country does not compromise its solid fiscal position. Willie Casas
“Automatically lowering corporate income taxes without considering the country’s fiscal situation is imprudent. It can happen that a future government will simply increase the deficit to a dangerous level, just to accommodate further reduction of taxes. This has negative consequences,” Sta. Ana explained.
Sta. Ana added that the safeguards are imperative in light of the “looming fiscal crisis” brought about by the Supreme Court ruling on the Mandanas case.
The Supreme Court ruling will in effect increase the budget allocation for local government units at the expense of the national government, thus putting pressure to obtain more revenues. The increased budget for LGUs (but decreased budget for the national government will come from the revenue collection of the Bureau of Customs and other national taxes.
AER further emphasized the urgency of passing a good version of the CITIRA to take advantage of opportunities arising from the current global economic situation.
“The urgent passage of the reform will remove the prevailing investor uncertainty. Restructuring our incentives system and lowering the CIT will attract business firms that want to relocate their production from China to neighboring countries amid the Sino-American trade war and China’s health crisis. Now is the time to act quickly to seize this opportunity,” AER Industrial Policy Coordinator Jenina Joy Chavez said.
AER also strongly endorsed the creation of the Fiscal Incentives Review Board or FIRB. This according to Chavez, “is an essential feature of the bill. Good governance as expressed through the FIRB is the key to make sure that incentives are given on the basis of transparency and sound economic criteria.