by Gregg G Gamad
Over the years, the Philippines’ national economy has been developing progressively. Its impact may be unnoticeable to some but studies show that Filipino lives have improved compared to the past. According to a report by the International Monetary Fund Asia and Pacific Department in November 2017, “Philippine economy has performed well and is in a favorable position to address its socioeconomic challenges. Sound policies have delivered solid growth, low inflation, financial stability, and external and fiscal buffers”. Though the path to development hasn’t been easy, this would not have happened were it not for the help of investments schemes employed by the government to help increase national revenue and improve the country’s Gross Domestic Product (GDP).
One scheme adopted by the government proven to be effective not only for the national economy but for Filipino employment as well, is the creation of “Investment Promotion Agencies” (IPAs). This refers to government entities created by law, executive order, decree or other issuance, in charge of promoting investment, administering tax and non-tax incentives, and/or overseeing the operations of the different economic zones and free ports in accordance with their respective charters. In a survey conducted by the Department of Trade and Industry, the total IPA-approved investments in 2017 amounted to PhP911.29 billion, higher by 32.9% from the PhP686.95 billion approved in the previous year (2016). Foreign investment commitment for manufacturing was the largest at 52.1%. Real estate activities came in second at 21.2%, followed by administrative and support service activities at 13.2%, electricity, gas steam and air conditioning supply at 4.9%, and information and communication at 2.6%.
Currently, there are 14 IPAs authorized to grant tax incentives under their own charters. These tax incentives were imposed to encourage investments both in the local and foreign markets. Common among these IPA charters are provisions on income tax holidays, duty exemptions on imported equipment and materials, tax credits, preferential taxes on gross income, as well as local tax exemptions. Ideally, this would entice investors to create and develop their businesses under the IPAs. However, the different tax incentives for each IPA may create problems. There may be difficulty monitoring the tax incentives granted by each IPA and instead of stabilizing or improving Philippine revenue, it may cause undocumented and unwanted loss on the government’s part.
Consequently, through the government’s Comprehensive Tax Reform Program (CTRP), Package 1 was introduced, amending certain provisions on individual income tax. Congress is currently working on Package 2 as complement for Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) law. The proposed House Bill No. 7214 (HB No. 7214) seeks to lower the corporate income tax rate, reform the corporate income tax system and broaden the tax base by modernizing investment tax incentives to enhance fairness, improve competitiveness, plug tax leakages and achieve fiscal sustainability.
The proposed reform now seeks to replace the 5% gross income earned tax in lieu of all taxes with a reduced corporate income tax rate of 15%, and remove of VAT and local tax incentives. Under the proposed HB No. 7214, the incentives shall be granted only to investments which are generally performance-based, time-bound, cover both foreign and domestic firms, and both exports and domestic markets.
HB No. 7214, suggests the formulation of a “Strategic Investments Priority Plan” (SIPP), which is a list of registered economic activities or investments that shall be eligible for the grant of tax incentives. These economic activities will come from the BOI, in coordination with the Office of the President, concerned IPAs and other government agencies and the private sector, and shall be in effect only once approved by the President through an issuance of an executive order. The activities set forth in the SIPP shall be evaluated by a Fiscal Incentives Review Board (FIRB), valid for three (3) years and subject to review and amendments when the need arises.
Under the same proposed HB, the following shall be the reformed income tax incentives:
|Type of Tax Incentive||Percentage Rate||Period of Availability|
A) Income Tax Incentive
Income Tax Holiday (ITH)
Not exceeding 3 years.
NB: After ITH expiration the following incentives listed under (A) may be applied for a period not exceeding 5 years INCLUDING the period of ITH availment.
|Reduced Corporate Income||15%|
|Tax Allowance for Investments||50% of the actual qualified capital expenditure||This expenditure incurred within 3 years shall be allowed as deduction from the taxable income|
|Double Deduction for Research and Development||200% of expensed incurred for research and development related to registered activities, identified and approved by the appropriate gov't agencies||Deductible in the year expenses were incurred|
|Double deduction for Training||200% expenses incurred for training given to employees by the registered enterprise for the development of their skills||Deductible in the year expenses were incurred|
|Additional Deduction for Labor Expense||50% of the wages corresponding to the increment in the number of labor||Additional deduction|
|Deduction on Infrastructure Development||100% if the acitivity shall be in an area designated in the SIPP as necessary for country-wide development subject to the condition that the title to the infrastructure works shall be transferred to the Philippine Government||Amount not deducted may be carried over for deduction for subsequent years not exceeding 5 years from commercial operation|
|Deduction for Reinvestment Allowance to Manufacturing Industry||Amount from the undistributed profits or surplus reinvested by a manufacturing registered enterprise to any acitivity in the SIPP||Within a period of 5 years from the time of reinvestment|
B) Customs Duty Incentive
Custom Duty Exemption
|Maximum of 5 years on imported capital equipment, machinery and spare parts exclusively used for capital equipment and machinery including consignment, raw materials used in manufacture and processing and importation of souce documents|
Further, under the proposed HB, existing registered activities granted the ITH shall be allowed to continue with the availment of the said incentive for the remaining period of the ITH or for a period of 5 years only, whichever comes first. Further, the 5% special rate on gross income earned shall be allowed to continue for 2 years for activities that have received the tax incentive for more than 10 years, 3 years if tax incentive has been received between 5-10 years, and 5 years when the tax incentive has been received for a period below 5 years, prior to the effectivity of the proposed bill.
Taking in consideration such proposed amendments, there may be a possibility that only new investments or activities shall be granted income tax incentives. Existing corporations enjoying present tax incentives may be charged with the regular corporate income tax after the lapse of the period indicated above.
They say that “tax incentives can be a good policy tool when applied properly”. However, one can’t help but wonder, how would such reforms maintain domestic and foreign investments? Assuming it does, how will it promote further investments under the IPAs despite the decrease of its incentives? These questions are left hanging until the proposed bill becomes a law and the proper rules and regulations are implemented. Until that time comes, corporations, existing and new, can still enjoy the tax incentives granted under the IPA charters.
Gregg G. Gamad is a Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.
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