THE government is losing an estimated P43 billion a year in tax leakages to firms that are possibly exploiting the country’s convoluted corporate income tax (CIT) system and are abusing transfer-pricing schemes, the Department of Finance (DOF) has reported.
According to Finance Undersecretary Karl Kendrick T. Chua, such projected tax losses are on top of the estimated P301 billion in foregone revenues in 2015 alone as a result of the surfeit of fiscal incentives given out by the government to big companies, with many of them on the elite list of top 1,000 corporations.
Briefing Finance Secretary Carlos G. Dominguez III on this issue during a recent DOF Executive Committee (Execom) meeting, 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.
Transfer-pricing abuse is explained as 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 in special economic zones covered by tax perks.
Chua pointed out that the abuse of transfer-pricing schemes by certain firms is among the reasons the DOF is pushing for the congressional approval of CIT reforms, which aim to gradually reduce the CIT rate from 30 to 20 percent over a certain period while reorienting the government’s incentives system for businesses.
In 2016 a total 3,102 corporations were granted income-tax incentives, of which 2,358 firms paid the special rate of 5-percent tax on gross income earned.
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 enterprises.
The DOF pointed out that there are three possible types of transfer pricing abused by some corporations, namely, international transfer pricing, in which profits are shifted from high-tax areas to low-tax jurisdictions; domestic transfer pricing, in which firms shift profits to related companies in economic zones or to related parties enjoying tax incentives; and intra-firm transfer pricing or misallocation of profits and costs, which happens when a company with activities in different tax regimes manipulates revenues and costs to minimize their tax obligations.
DOF and Bureau of Internal Revenue (BIR) estimates of tax leakages arising from transfer-pricing schemes from 2011 to 2015 show that the government lost some P25.9 billion in 2011. This rose to P36.5 billion in 2012, and slightly fell to P35.1 billion in 2013, but again grew to P40 billion in 2014 and to P42.7 billion in 2015, according to Chua.
The DOF-BIR analysis of such tax leakages covered 1,318 firms in 2011, of which 206 were possibly engaged in abusive transfer pricing. For 2015 the analysis covered 5,155 firms, of which 558 possibly abused the transfer-pricing scheme to manipulate tax payments.
Earlier, the DOF estimated that the government gave away about P301 billion in revenues in 2015 alone as a result of tax incentives and other perks granted to only 2,844 firms. Of this amount, foregone revenues were from the nonpayment of income tax totaling P86.3 billion, customs duty incentives which account for P18.1 billion, and the gross amount of the import and local value-added tax of P196.8 billion.
Image credits: Toto Lozano / Presidential Photo