CITIRA set to replace outdated tax scheme

Finally, the outdated and “dysfunctional” tax regime based on gross income earned is now about to end with the expected enactment into law of the new Corporate Income Tax and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 versus eight against and six abstentions. 

Albay Rep. Joey Sarte Salceda, House Ways and Means Committee chair and one the principal authors of CITIRA, said “the GIE is the mother of abusive transfer pricing, which resulted in P296 billion in taxes lost to abusive firms,” the reason why GIE is a central feature of the proposed CITIRA (HB 4157). 

“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 said.

CITIRA is the center piece and second package of the Comprehensive Tax Reform Program of the adminitration. President Duterte 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 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 must relinquish their incentives, including the 5 percent 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 percent GIE rate which enables them to shift income, costs, and expenses to reduce their tax payments,” he said.