CITIRA modifies the economic structure by lowering the income tax on 1 million small and medium enterprises.

The outdated and “dysfunctional” tax regime based on gross income earned (GIE) is about to end with the expected enactment into law of the new Corporate Income Tax and Incentives Rationalization Act (CITIRA) which the House recently passed with a vote of 170-8 and six abstentions..

Tthe GIE is the mother of abusive transfer pricing, which resulted in P296 billion in taxes lost to abusive firms, according to House Ways and Means Committee chair and one of the bill’s principal authors, Albay Rep. Joey Salceda

“While the House is willing to give reduced corporate income tax rates as incentive for qualified business enterprises, it firmly rejects the dual tax structure—GIE for those with incentives and CIT for the rest,” Salceda explained.

CITIRA is the centerpiece and second package of the Comprehensive Tax Reform Program of the Duterte administration and has been designated it as the country’s principal national response to the US-China trade war. It modifies the economic structure by lowering the income tax on 1 million small and medium enterprises (SMEs), which employ most of the labor force while rationalizing incentives of some 3,100 corporations and make them perform.

The measure removes the perpetual 5 percent tax on GIE and encourages investors and locators to reapply after the five-year or seven-year period, to qualify for the incentives.

Salceda said locators need to relinquish their incentives, including the 5% tax on GIE paid in lieu of all local and national taxes. They will be given up to five years to surrender their tax perks.

“Data have clearly established that the abuse of transfer pricing has resulted in tax leakages of P295.8 billion from 2011 to 2017. This has principally been enabled by the coexistence of two different tax bases—the GIE and the corporate income tax, or CIT. This duality has provided legal cover for abusive transfer pricing through undue manipulation of a firm’s cost structure to minimize tax payments–the net taxable income for most corporations including small and medium enterprises that pay the regular corporate income tax rate of 30 percent, and the firms that enjoy the special 5% GIE rate which enables them to shift income, costs, and expenses to reduce their tax payments,” Salceda pointed out.

The GIE tax base is the gross income, while the tax base for the regular rate is net taxable income, which is gross income minus indirect costs. The difference in tax regimes opens the tax system for abusive transfer pricing, which results in billions of corporate income tax leakages.

Salceda said removing the GIE is an “essential and inseparable part” of CITIRA, aimed to help improve the efficiency of the deductions-based incentives that encourage job creation, infrastructure, research and development, workers’ training, use of domestic products; and corrects abusive transfer pricing, improves fairness especially for service-oriented firms.

“The GIE unfairly favors certain industries over others. It is unfavorable to those with high gross margins, such as service-oriented firms with virtually no cost of goods sold, and whose main revenue source is job-creation — such as voice business process outsourcing companies,” he said. This undeniable inequity disincentivizes job creation,” he stressed.