26 Aug 2019
PHILIPPINES: Cuts to Corporate Income Tax and Overhaul of FDI Incentives Mooted
The corporate income tax (CIT) rate is set to be cut from its current level of 30% to 20% by 2029. The move forms part of the Corporate Income Tax and Incentives Reform Act (CITIRA), which is expected to come in to force by the beginning of 2021. In addition to reducing the tax burden on the business sector, the bill is also expected to overhaul a number of the existing arrangements related to several FDI incentive schemes.
If adopted, the proposed CIT change will see the rate of the levy reducing by 2% every two years from 2021 onwards, before settling at a final rate of 20% in 2029. The schedule, however, may be advanced if it is deemed that the country has made good on any resulting tax revenue shortfall.
As for the revisions to the FDI incentive programme CITIRA aims to introduce a cut-off date for a number of such schemes, many of which are currently of no specific duration. More specifically, the introduction of a fixed five-year duration for all CIT exemption schemes – currently available for FDI projects in the country’s Special Economic Zones (SEZs) – is proposed. In addition, an existing scheme that offers foreign investors the option to pay a 5% tax on gross income (instead of CIT), following the end of any initial tax holiday period is also to be abolished, as are a number of schemes that currently facilitate the duty-free import of machinery and capital goods.
In addition to specifying a fixed duration for such schemes, CITIRA also aims to make them more performance-based and better focussed. In line with this, the bill provides the Philippine president with the discretion to grant special fiscal incentives to any FDI project that is generating a significant level of local employment, facilitating the transfer of technology and involves an investment of at least US$200 million. Similarly, FDI incentive schemes are now proposed to be introduced in sectors that fall within the country’s Strategic Investments Priority Plan, which is revised every three years.
While the Philippine Economic Zone Authority, as well as a number of overseas chambers of commerce, have criticised the overhaul of the FDI incentive scheme as likely to deter overseas investors, the government believes that the reduction in the CIT rate – currently the highest in the ASEAN bloc – will more than compensate for the planned revisions.
The proposed changes form part of phase two of the Philippines’ national Comprehensive Tax Reform Programme, which introduced major changes to the country’s personal income tax regime when its first phase was initiated last year.