THE MAJOR AND OTHER AMENDMENTS PROPOSED BY CITIRA
By: Euney Marie J. Mata-Perez on September 19,2019
The House of Representatives of this 18th Congress approved on third and final reading House Bill 4157 or the Citira (Corporate Income Tax and Incentive Rationalization Act), Package 2 of the government’s Comprehensive Tax Reform Program. As we all know, the counterpart version of this bill (previously named Tax Reform for Attracting Better and High-Quality Opportunities or Trabaho bill) was approved by the House of Representatives of the 17th Congress way back in September 2018. However, the deliberations of the previous bill did not progress since then because of the 2019 elections. Now, it will be the Senate’s turn to deliberate on it.
The major amendments of the Citira (as proposed) are the reduction of the regular corporate income tax (RCIT) rate starting 2021 from 30 percent to 20 percent by 2029, and the rationalization of the tax incentives, with the objective of making the incentives targeted, time-bound, and transparent.
The RCIT rate reduction has long been awaited. However, the benefits of a reduction spread over a 10-year period may not be dramatically felt as compared to if it were spread over a shorter period. As of today, we have the highest corporate income rate in the region. By the time we hit 20 percent in 2029, our neighbors may have further reduced their rates, making us lag behind again. The government’s fear is admittedly the possible loss of revenues; thus, Citira empowers the President to accelerate or advance the reduction if adequate savings, as certified by the Secretary of Finance, are generated from the rationalization of fiscal incentives.
No doubt, the rationalization of incentives, which include the removal of special income tax rates applicable to certain entities like those operating in economic zones and regional operating headquarters, will affect many enterprises. But it is also about time that our incentives be rationalized and monitored centrally (through a Fiscal Incentives and Review Board or FIRB, as proposed under the Citira). (We will discuss the Citira’s incentives reforms in a separate article).
Also, it is about time that incentives be granted to boost the countryside. The Citira authorizes the granting of additional incentives to areas which are lagging behind economically, recovering from major conflict and businesses (including agri-business) located outside urban areas.
In any case, it is important to note that the Citira is also proposing several other amendments to our Tax Code. Some of these are as follows:
1. Strengthening the power of the commissioner of the Bureau of Internal Revenue to issue subpoena duces tecum and expressly stating that criminal action may be instituted for failure to obey such subpoena;
2. Adding a clear numeric measure in determining what is a non-resident citizen – citizens who work abroad and whose employment requires them to be abroad for a period of 183 days or more in a taxable year (the old language just stated “most of the time”);
3. Amending to 15 percent the capital gains tax on sale of shares of domestic corporations realized by resident and non-resident foreign corporations (an amendment which was inadvertently omitted in Train 1 or Republic Act 10963);
4. Revising the taxpayers’ option to claim the optional standard deduction (OSD) of 40 percent of gross income to apply such option to individuals (at present, the 40 percent OSD for individuals is based on their gross sales or revenues) and to small and medium-sized enterprises or corporations only, and not to all corporations in general.
5. Strengthening the power of the BIR commissioner to reallocate, distribute and even now impute income in related party transactions and adding a definition of what constitutes ‘tax avoidance’, making such a scheme not acceptable if the ‘tax avoidance’ scheme is not merely incidental. (This was the subject of my article published on Aug. 23, 2018);
6. Adding ‘recapitalization’ and ‘reincorporation’ as among the transactions exempt from income under Section 40 of the Tax Code, and expressly stating that transfers of properties used in business for shares of stock covered said section shall be exempt from VAT. (The exemption from VAT on such properties transferred have been upheld by several decisions of the Court of Tax Appeals.);
7. Adding a provision defining what are liquidating dividends (as gains or loss arising from liquidation or dissolution of a corporation) which shall be considered taxable income (thus, subject to the regular tax rates) or loss, as the case may be;
8. Exempting, from percentage tax, common carriers which operate or own not more than two units of tricycles;
9. Providing that waivers of periods to assess shall be made upon a taxpayer’s application (replacing the old language that such a waiver is upon agreement between the taxpayer and the BIR commissioner), and limiting the extension to only six months at a time;
10. Mandating the grant of refunds (instead of issuance of tax credit certificate) with respect to taxpayers cancelling their VAT registration due to retirement of business;
11. Incorporating additional provisions on e-invoicing;
12. Increasing the penalties for several offenses; and
13. Making punishable with hefty fines plus imprisonment any violation of the Tax Code that undermines, weakens, or renders into disrepute our economic system, or ‘economic sabotage’ for short.
There is no doubt that the Citira, if and when passed into law, will be an important piece of legislation with pervasive effects on taxpayers, especially corporate taxpayers. We should be aware of and be prepared to face the changes it will introduce.