By Chino S. Leyco
The national government is losing billions of pesos in tax leakages to firms that possibly exploit the country’s convoluted corporate income tax (COT) system and abuse transfer pricing schemes, the Department of Finance (DOF) said yesterday.
Finance Undersecretary Karl Kendrick Chua said that corporate abuses under the present tax regime may have resulted in P43 billion in foregone revenues annually, which are on top of the P301 billion losses from the government’s fiscal incentive schemes.
Chua said that aside from taking advantage of the incentives given to them by 14 investment promotion agencies (IPAs), certain companies abuse the practice of transfer pricing to avoid paying the correct amount of taxes to the government.
Transfer pricing abuse refers to the corporate practice of shifting profits from high-tax jurisdictions in particular countries to tax havens in other places where they get to pay lower taxes or from certain corporations to their related businesses in the same country that are located in special economic zones (SEZs) that grant tax perks.
“Transfer pricing” can also happen when firms shift profits and costs between projects or activities within the same firm to cut their tax payments.
Chua explained that the abuse of transfer pricing schemes by certain firms is among the reasons the DOF is pushing for the approval of CIT reforms, which aim to gradually reduce the rate from 30 percent to 20 percent over a certain period while reorienting and fixing the government’s intricate incentives system for businesses.
In 2016, there were 3,102 corporations that were granted income tax incentives, of which 2,358 firms paid the special rate of 5 percent tax on gross income earned (GIE).
Because of the differentiated rate, these firms are able to pay a tax rate of just around 6 percent to 13 percent depending on the sectors they belong to, as opposed to regular corporations that paid the 30 percent tax rate, of which about 90,000 are small and medium enterpris