CITIRA:  A fair deal for business, a winning deal for Filipinos

Sponsorship speech of Senator Pia S. Cayetano

Chairperson, Committee on Ways and Means

February 19, 2020

 

Mr. President, distinguished colleagues, today, I rise to sponsor and seek your support for Senate Bill No. 1357, per Committee Report No. 50, also known as the CITIRA bill, which has 2 main objectives:

 

(1) lowering the corporate income tax rate; and (2) modernizing the tax incentive system, making it more fair, efficient, and accountable.

Mr. President, from the onset let me clarify a major issue. A major source of resistance to this bill is the fear that incentives will be removed once this measure is enacted. This will not be the case, Mr. President. In truth, what we intend to do is to continue a sound incentives scheme, the details of which this representation will explain as we go along.

 

Having said that, allow me to start with a bit of history. 

I am sure that both Senate President Sotto and Senate Minority Leader Drilon, the leaders of both sides of this chamber, would also know from their experience that ever since a bill on rationalizing tax incentives was first proposed in 1995, the Department of Finance and the Department of Trade and Industry have urged Congress to finally make this crucial reform happen.

But even further down memory lane, when I was a college student in the school of Economics of the University of the Philippines, my father, the late Senator Rene Cayetano, was a member of the Batasan and was appointed as the Deputy Minister for Trade and Industry Administrator of the Export Processing Zone Authority otherwise known as EPZA. I had the opportunity to visit the export processing zones in Bataan, Baguio, and Cebu. In fact, my thesis was on fiscal incentives. This was in 1985.

And here we are today in the year 2020. 

Mr. President, in the series of hearings and meetings we conducted, we gave members of the business community, civil society, the academe, government, and business associations the opportunity to share their views in depth. The DOF and the DTI also held their own briefings with key stakeholders. The bill before us is a new and fairer deal between businesses and the Filipino people.

So where are we now and what are we doing? 

We are cognizant that Philippine enterprises are the backbone of the economy and that they contribute to national development by supplying much-needed employment and livelihood. And yet, companies doing business in the Philippines are slapped with a 30 percent corporate income tax rate, the highest in the region.

To address this, we will bring down the Corporate Income Tax rate from 30% to 20% over the next ten years. This should result in some 1.5 million more jobs, a feat I am certain we can accomplish, inso far as we have already provided millions of jobs to the economy. We believe that the reduction of 1% per year, is the pace that does not compromise the country’s vital fiscal resources.

However, Mr. President, we cannot talk about the corporate tax regime without earnestly discussing the tax regime for companies that have received unreviewed, and almost unconditional special tax treatment for decades.

 

From 2015 to 2017, the Philippine government granted more than one trillion pesos in tax incentives in the form of exemptions and tax discounts to various companies. In 2017 alone, the government granted billions of pesos to a select group of some 3,150 businesses. These companies pay an effective rate of 6 to 13 percent of Corporate Income Tax as opposed to other enterprises that pay the regular 30 percent Corporate Income Tax.

Let me make this clear again, I mention the amount of incentives, Mr. President, not to say that we will scrap them. All we want to do is rationalize them.

Incentives should not be given out to any corporation without the proper conditions. They should be performance-based and targeted, and granted in such a way that would benefit the public – by way of providing employment, boosting needed industries, and promoting the growth of less-developed areas in the country.

When we give out incentives on behalf of the people, then we are duty-bound to ascertain that we get what is rightly due to them. That is the essence of this bill: a fair deal for all, and the best deal for Filipinos.

My point, Mr. President, is that true incentives yield results, like the situation with our neighbors, Singapore and Malaysia. If a tax perk is given, without a clear set of conditions, without a time limit, and without adequate oversight, it’s not an incentive. It is a giveaway, and this country cannot afford corporate giveaways.

 

The billions of incentives we granted are equivalent to more than 10 percent of our 2020 national government budget, around 80 percent of DEPED budget, and more than four times the amount allocated to the Department of Health.

 

So let’s discuss tax incentive principles 

With billions of pesos on the line, we need to ensure that the incentives which the government provides are in accordance with the following principles based on international good practices:

 

  1. Performance-based: There should be clear attainment of actual investment, job creation, export, country-side development, and research and development commitments, else incentives will only be wasted. Parang scholarship grant, dapat may resulta, pasado sa exam at maka-graduate.
  2. Targeted: To minimize leakage and to avoid spreading our scarce resources too thinly, tax incentives should be given to activities with significant positive contribution to the economy, or those that really matter for the future, as specified in a strategic investment priority plan (SIPP), to be determined by the Board of Investments (BOI).
  3. Time-bound: There should be a reasonable timeframe for the enjoyment of incentives, and an extension period for companies that perform and contribute to the economy. Parang allowance na binibigay ng magulang sa anak, hindi pwedeng habang-buhay; and
  4. Transparent: Monitoring and evaluation of tax incentives should be institutionalized and reported by the government to the public. Yung pinaghirapang buwis ng ordinaryong taxpayer ang ginagamit nating pampondo sa incentives, kaya nararapat lamang na alam ng taumbayan kung saan napupunta ang buwis niya.

 

And let me add another principle: the incentive system should also be governed well. Currently, there are 13 different investment promotion agencies, or IPAs, each with its own charter and mandate, that offer different menus of incentives to various industries, sometimes not in line with national priorities, and often without the DOF or DTI knowing. As a result, there is no one simple set of incentives that the country may promote to potential investors. This can be very confusing and definitely not investor-friendly.

 

Another concern is that the number of industries that could potentially get incentives from these IPAs, which is some two-thirds of the economy, also makes our incentive system indiscriminately open to just any activity, and thus open to abuse.

 

This representation thus proposes that there be: (1) a set of incentives for different projects or activities, depending on the location and industry, and (2) incentives that shall be based on the Strategic Investment Priority Plan (SIPP), which will be determined by the BOI, in coordination with the Fiscal Incentives Review Board, IPAs, government agencies administering tax incentives, and the private sector. We also propose to expand the functions of the Fiscal Incentives Review Board, a body that currently grants incentives to government-owned or controlled corporations, to also approve all incentives given to private companies, as recommended by the IPAs. We also recommend this board to oversee the IPAs. This much-needed governance reform is at the heart of the CITIRA bill.

Before I proceed with more details of the proposed bill, allow me to acknowledge the work of some of our predecessors such as Senator Recto, who filed the first Fiscal Incentives Review Board expansion bill in 2001 and Senator Drilon, who authored the Tax Incentives Management and Transparency Act, or the TIMTA Law, passed in 2015. The law mandates companies to provide the government with data to estimate the tax incentives they receive, which is now being used to objectively assess our tax incentives. Both senators, along with Senators Lacson and Villar, have also filed in previous congresses bills on fiscal incentives rationalization. We are now building on their ideas to move the reform forward.

 

I would also like to put on record that our team painstakingly took the time to ease the transition period for investors and minimize the drastic changes the new incentive scheme could bring to their businesses.

 

Let me now discuss the salient points of the reform as proposed by this representation.

 

Reduction in the corporate income tax rate 

As mentioned earlier, the corporate income tax rate shall be lowered gradually by one percent every year, from the current 30 to 20 percent by 2029.

We have made the reduction of corporate income tax automatic in our version for the first five years to ensure predictability. By 2025, the reduction can be suspended by the President upon recommendation of the Secretary of Finance, if the projected deficit target as a percent of GDP exceeds the programmed deficit.

 

Modernization of the fiscal incentive system 

The centerpiece of the country’s current tax incentives regime is the income tax holiday or ITH for 4 to 6 years, and the special 5 percent tax on gross income earned, or GIE, in lieu of all taxes, both national and local.

 

The 5 percent tax on GIE is granted forever without conditions, even if the firm does not contribute to the economy in terms of jobs and exports at a level commensurate to the amount of incentives given. Colleagues, no other country gives incentives forever.

 

Dear colleagues, it is time to end a regime that distributes costs to many, and concentrates benefits to a few.

 

Sunset provisions 

After listening to the concerns and apprehensions of existing investor groups that will be affected by this bill, we came up with terms that address their request for a smoother transition period. This addresses our objective, which is to keep companies and investors here in the country while rationalizing the incentives that we give them.

 

For those granted ITH only 

Existing registered activities granted the income tax holiday shall be allowed to complete the remainder of their ITH period.

For those granted 5% GIE but not yet enjoyed

These are the firms with unfinished ITH and a succeeding Gross Income Earned (GIE) of 5%. In their case, their ITH will be allowed to expire on schedule and will be followed by a 5% GIE, with a maximum of 5 years. If the firm has no ITH but is about to go into 5% GIE, they will also enjoy 5% GIE, for a maximum of 5 years.

Granted and currently enjoying 5% GIE forever 

Existing registered activities that were granted the 5 percent tax on GIE, in lieu of all taxes, will be allowed 2 to 7 more years as a transition period, while paying the same rate of 5 percent GIE. The duration of the proposed transition period is as follows:

  • 2 years for those who have been receiving the GIE incentive for more than 10 years;
  • 3 years for those who have been receiving the GIE incentive for between 5 and 10 years;
  • 5 years for those who have been receiving the GIE incentive for below 5 years, and
  • A special 7 years for those that meet any of the following conditions:
  1. Exporting 100 percent of their goods and services, b. Employing at least 10,000 Filipino workers, or c. Engaging in highly footloose activities. And in addition Mr. President, after the sunset period, they will still be allowed to apply under the new incentive package where they will be assessed by virtue of the new package of this bill.

 

What is the new incentives package? 

Under our version of CITIRA, a registered activity may be granted an income tax holiday of 2 to 4 years, followed by a Special Corporate Income Tax (SCIT) rate, that is based on Gross Income Earned (GIE). The Special Corporate Income Tax Rate will be equivalent to 8% GIE for 2020, 9% for 2021, and 10% for 2022 and onwards.

 

Like the current system, this shall be in lieu of all other taxes, and can be availed for 3 to 4 years, depending on the location and activity. This provision preserves the one-stop shop nature of present incentives. We hear the concerns of investors that they do not want to deal with many government agencies when paying taxes. This is why we retained the “in lieu of” provision and one-stop-shop. Based on my discussion with the firms, this particular provision already addresses 90 percent of their concerns.

 

The initial availment of tax incentives, which includes Income Tax Holiday plus the Special Corporate Income Tax Rate is from 5 to 8 years, depending on the category of the registered activity as indicated on the screen. There are three categories: basic, enhanced, and advance. This is our response to the need to make incentives more targeted to locations that need them and industries that we want to promote.

Duration of income tax holiday (ITH) and Special Corporate Income Tax (SCIT), per category 


There is more good news in our version. The availment of Special Corporate Income Tax may be extended by 3 to 4 years at a time or more than once, up to a maximum of 12 years, depending on the category, so long as the firm remains true to its performance commitments.

In lieu of the Special Corporate Income Tax, the registered activity may instead be granted the enhanced deductions shown on the screen subject to the regular prevailing corporate income tax rate. These enhanced deductions incentivize good behavior, such as local job creation, exports, and investment in hi-tech. As proposed by the DTI, our enhanced deductions menu was expanded to include deductions for power costs to account for the country’s challenges in this area. The expanded deductions list is shown on the screen.

Like the ITH and Special Corporate Income Tax (SCIT), the availment of enhanced deduction may be extended also for up to 12 years.

 

To attract the biggest investors, like what Vietnam did with Samsung, the President may give incentives for a longer period of up to 40 years for highly desirable projects, provided that the benefit that the public could derive from such investment is clear and convincing and far outweighs the cost of incentives that will be granted.

 

Governance of fiscal incentives 

To ensure that incentives granted are performance-based, time-bound, targeted, and transparent, the present Fiscal Incentives Review Board’s function is expanded so that it can provide proper oversight over the IPAs, in the same way that the GCG law of 2011 created the Governance Commission on GOCCs to oversee the GOCCs and ensure better performance and accountability.

Under our proposal, the Board will be chaired by the DOF and co-chaired by the DTI, with representatives from the Office of the President, DBM, and NEDA.

 

Let me assure all the officials and employees of the IPAs that we are not abolishing your agencies or cutting down your jobs. IPAs will continue to perform their function of promoting investments in the Philippines, receive and process applications, and recommend to the Fiscal Incentives Review Board worthy incentives for approval by the Board. None of you shall lose your jobs because of this reform. Sec. 9 of Senate Bill No. 1357 provides: The IPAs shall maintain their functions and powers as provided under the special laws governing them except on the approval of incentives.

 

Mr. President, esteemed colleagues, allow me to underscore one final point, and this is the urgency of our task ahead. Let us end the uncertainty.

 

As an economics graduate, Mr. President, I was trained to think of resources, including our fiscal space, as limited. With limited fiscal resources, from the hard work of our countrymen, we must ask ourselves the following questions as we deliberate on this measure:

 

  1. Should we cut taxes for the many, or should we keep conditions loose for the few?
  2. Should we move incentives towards Philippine labor and Philippine products, or should we continue privileges that have gained our economy little value-added?
  3. When we spend our country’s fiscal resources, do we prefer more accountability, or less?

 

On these basic questions of principle, I trust that this Senate of the People has seen the merits of this reform.

 

Further, as part of our commitment to the United Nations 2030 Agenda for Sustainable Development, all efforts must be exerted to achieve the Sustainable Development Goals (SDGs) by 2030. This is the ideal future, a future where there is no poverty, and where our people and economy thrive.

Rationalizing incentives and lowering the corporate income tax will bring in more investments and provide more jobs for Filipinos. This ensures we remain on target with SDG 8, which promotes decent work and economic growth; SDG 9, promoting inclusive and sustainable industrialization and fostering innovation; and of course, SDG 1, which calls for ending poverty in all its forms. This is only the beginning, as working on just one SDG creates a ripple effect on all the other SDGs, especially on hunger, health, education, and equality. A flourishing economy driven by the Filipino people will safeguard the country’s future, even beyond 2030.

 

Dear colleagues, you have appointed me to be chair of the ways and means committee and trusted this representation to study the matter and make recommendations. I humbly ask that you review these proposals, keeping in mind that the greater majority will benefit from the lowering of the corporate income tax and that a rationalized incentives scheme that rewards investments that are result-based will lead to greater prosperity for our nation.

 

Thank you, Mr. President. 

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