By: Euney Marie J. Mata-Perez on October 31,2019

So much has been written about the rationalization of tax incentives under the proposed Comprehensive Income Tax and Incentives Rationalization Act (Citira) or House Bill 4157. Thus, an understanding as to how the rationalization actual works is crucial.

In the overall, Citira proposes a single-menu of incentives, clear criteria for their grant and monitoring, and the centralization of the oversight of the granting of the incentives through the Fiscal Incentives and Review Board (FIRB). These proposals seek to address the lack of direction and grant of incentives by numerous IPAs or investment promotion agencies in our country. The government believes the rationalization of tax incentives will solve a host of problems, including tax leakages or foregone revenues (estimated at P441 billion in 2017) and the failure of incentives to benefit or target priority industries and areas. For us tax practitioners, it will eliminate the confusion and issues that arise in the application or availment of incentives under our numerous incentives laws.

At present, we have more or less 14 IPAs, which include the Philippine Economic Zone Authority (PEZA), the Bases Conversion and Development Authority (BCDA), Clark Development Corp., among others. Under the proposed Citira, all IPAs maintain their functions and powers to grant incentives except as modified by the law. However, they shall grant incentives only to the extent of approved registered projects or activities under the Strategic Investments Priorities Plan (SIPP).

Aside from being granted the oversight powers over IPAs, the FIRB is also empowered to formulate incentive policies, suspend the grant of incentives, and even grant tax subsidies to government-owned and -controlled corporation and government instrumentalities.

The Secretary of Finance shall be the chair of the FIRB. He shall exercise oversight functions and shall have veto power over the approval and cancellation of tax incentives. The Secretary of Finance shall also be the co-chair of all existing and future IPAs.

The President, in the interest of national economic development and upon recommendation of the FIRB, may grant additional or longer period for incentives. In other words, the President (and only the President) shall have the power to grant incentives not indicated in the Tax Code.

The FIRB’s recommendation to the President, however, shall be limited to activities which have a comprehensive sustainable development plan with clear inclusive business approaches and innovations, a minimum investment of $200 million, or a minimum direct employment of at least 1,500 within three years from commercial operations.

In general, the grant of the incentives would be based on the following principles: performance-based, targeted (given to activities with significant positive externalities as specified in the SIPP to be formulated by the Board of Investment or BOI), time bound (with sunset provisions), and transparent (reported and monitored).

To qualify for incentives, the enterprise must be engaged in an activity under the SIPP, install an adequate accounting system or establish a separate corporation for each registered project if the IPA should so require. It is also required to comply with e-invoice and e-sales requirement under the Tax Code.

The SIPP shall be formulated by the BOI, in coordination with the office of the President, the FIRB, concerned IPAs and other government agencies, and the private sector. It shall be valid for three years and include activities that comply with the Philippine Development Plan and other government programs.

In formulating the SIPP, the BOI shall take into account various factors, such as the generation of employment, adoption of inclusive business activities, and value adding production of micro, small, and medium enterprises (MSMEs), use of modern or new technology, adoption of adequate environmental protections stems, adressing of supply or value-chain gaps, and promotion of market competitiveness.

The BOI shall also identify agribusiness activities, as well as the less developed areas or those recovering from armed conflict or major disasters, and determine activities that can spur economic activity.

No double registration of incentives shall be permitted. The different IPAs may require domestic enterprises to list their shares with the stock exchange within five years from registration.

It was reported by the Department of Finance that among the Association of Southeast Asian Nations member-states, it is only the Philippines that provides incentives without term limits. The Citira puts a cap to this term to a maximum of 19 years.

Sunset provisions will be granted to those presently enjoying incentives. For instance, those presently enjoying the gross income tax of 5 percent are entitled to continue enjoying the incentives for a period not exceeding five years. The same is true for those enjoying income tax holidays. The issue though is whether or not the sunset periods granted are too short for enterprises to make adjustments to the new regime.

Several laws or their provisions that are inconsistent with Citira will be repealed, of course.
In the overall, rationalizing our tax incentives, closely monitoring their grant and having a centralized body to supervise such grant would be beneficial to our country. This will make the grant of incentives clearer and simpler, and will eliminate the confusion that the interplay of our various incentives laws create. It is also expected to address our government’s revenue leakages.

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How does Citira-proposed tax incentives rationalization work?