Over a third of big businesses pay minimum 2% income tax

MANILA, Philippines – More than a third of the country’s largest corporations are paying only two percent in income tax every year despite high profits, a practice traced from a “control” measure in the two-decade-old tax law.

A total 518 or 35 percent of 1,477 taxpayers under the Bureau of Internal Revenue’s (BIR) Large Taxpayers Service paid only the minimum corporate income tax (MICT) of two percent, according to the National Tax Research Center (NTRC).

This resulted into P3.3 billion taxes collected from them in 2014, the study titled “Revenue Performance of the BIR Large Taxpayers Service: 2006-2015” said. Among others, LTS includes those with annual gross sales of P1 million and net worth of at least P300 million.

“A number of (large taxpayers) despite being classified as such reported net losses caused by their declared (cost of sales) that almost eat up their entire net sales/revenues leaving almost nil gross income,” the study said.

“With a very low tax base (i.e. gross income), the computed tax is likewise low.

Under the National Internal Revenue Code, the two-percent MICT is paid by corporations which have recorded zero or negative taxable income beginning from their fourth year of operations in the country.

This is way below the regular corporate income tax of 30 percent. 

“It was meant to ensure that corporations contribute to the government since it was said that they are benefiting despite operating at a loss,” said Lina Figueroa, tax principal at auditing firm Punongbayan and Araullo.

“There was an observation back before the 1997 tax reform that corporations who have been at a loss still continue to operate anyway,” she said in a phone interview.

Of the 518 LTS members, NTRC said 452 incurred zero or negative taxable income in 2014, while only 66 registered positive net income.

This was computed after all deductions were made, which the study showed 87.5 percent or 1,292 companies availed.

Of that figure, 80 declared 100 percent of their net income as cost-of-sales, leaving none for tax base, while 510 others deducted 80 to 99 percent “leaving very minimal gross income.”

Most deductions came from salaries and allowances, cornering 19 percent, followed by advertising and promotions (10.5 percent), interest (7.3 percent) and rental costs (6.5 percent). 

“In this regard, benchmark ratios by industry may be developed such that any taxpayer exceeding said industry benchmark may be subject to stricter audit,” NTRC said.

Commenting on the study, Figueroa said there is nothing wrong with the figures. “Corporations usually earn passive income, which are charged with final, not income, tax,” she said.

“This is not unique in the Philippines. Other countries also have this,” Figueroa said.

Lowering of regular corporate income tax to 25 from 30 percent is part of the Duterte administration tax reform package.

It will be part of the second package to be submitted to Congress early next year, which will also include rationalizing fiscal incentives availed by companies.

“This is the opportune time to increase the number of large taxpayers as proposed by Secretary of Finance Carlos Dominguez III...,” NTRC said.