Europe-PH News

Foreign businessmen in the country continue to speak out against proposed measures to streamline the incentives granted by the investment-promotion agencies (IPAs) currently being vigorously pushed by the Department of Finance (DOF) to plug revenue leakages.

The European Chamber of Commerce of the Philippines (Eccp) echoed the call of the American Chamber of Commerce of the Philippines (AmCham) to expand the list of fiscal perks, instead of limiting them.

In particular, the ECCP supported AmCham’s proposal to include the planned reduced corporate income tax (CIT) to the existing incentives menu that includes income tax holiday (ITH) of up to eight years.

"When the idea came up of having a ’15 for 15’ reduced CIT, that can only be considered as an addition, because we have to be pragmatic to the needs of the companies," said Henry Schumacher, vice president for External Affairs of the ECCP.

The DOF has been doggedly pursuing the measure, going head to head with the Department of Trade and Industry (DTI) in the process.

The DOF views the rationalization of fiscal incentives as a way of plugging what it sees as substantial revenue drain from tax perks doled out by the numerous IPAs.

Trade Secretary Gregory L. Domingo had said he is nearing a compromise with the DOF on the move to eliminate or cut various fiscal perks granted by IPAs, such as the Board of Investments (BOI) and the Philippine Economic Zone Authority (Peza).

The two departments have already agreed to withdraw the ITH for companies that will register with the BOI. This will be replaced by a reduced CIT of 15 percent for 15 years.

For Peza, which mostly attracts foreign investments, various incentive packages are being looked at, including an option to replace the sought-after ITH with the same “15 for 15” reduced income tax.

Stakeholders in the business community have already expressed that they should have an option between the existing ITH scheme that applies for six to eight years and the 15 for 15—instead of replacing one with the other—depending on the nature of the businesses.

Industries that only begin to profit several years into their operations—like power-generating firms—stand to benefit from a drawn out incentive scheme, such as the 15 for 15.

However, for sectors that are able to realize the recovery of capital quickly—such as the information technology—business-process outsourcing (IT-BPO), the ITH scheme is still a better choice, according to businesses.

Keeping the existing incentive scheme is significant, as foreign and local business groups alike have said these serve as a crutch to compensate for the country’s many drawbacks, such as high electricity rates and relatively high labor costs.

“The option has come up for 15 for 15; that should be in addition to what we already have,” said John Forbes, senior adviser to AmCham.

The DTI has been struggling to keep the investment climate competitive by maintaining various fiscal and nonfiscal perks, while the DOF is making sure revenue collection will not continue to suffer.

The DTI, however, recently buckled. It has announced a proposal to do away with the ITH for BOI-registered firms, with the reduced CIT—from the normal 30 percent to 15 percent—for 15 years taking its place.

The BOI grants ITH of up to eight years. A registered pioneer enterprise with pioneer incentives is entitled to six years ITH and additional two-year bonus ITH. A nonpioneer enterprise is allowed up to four-year ITH and additional two-year bonus. For Peza firms, the existing scheme may be replaced with either of these two incentive packages: one inclusive of an ITH, and another without an ITH.

For the package that includes an ITH, the period would be capped from the existing six to eight years to just four, but will be paired with either a 5-percent tax on gross income earned (GIE), except value-added tax (VAT) and real-property tax (RPT) for 11 years, or 15-percent reduced CIT, in lieu of local and national taxes, except VAT and RPT for 11 years.

If the ITH is not granted, registered firms may either be allowed to pay a 5-percent tax on GIE in lieu of local and national taxes, except VAT and RPT for 15 years, or 15-percent reduced CIT, in lieu of local and national taxes, except VAT and RPT for 15 years. The AmCham previously said it prefers the reduced CIT of 15 for 15 over the limited ITH since most businesses hardly profit in the first years of operation and essentially waste tax holiday. However, it is now suggesting that the reduced CIT be made an option in addition to the current scheme. “Cutting the ITH is essentially capping job creation; [the government] should offer 15 for 15 but keep the status quo, and see what people will choose,” Forbes said. “The point of the finance department is to have more revenue, but without investments, how can you have revenue?”

Forbes said streamlining incentives by limiting the mandatory list of permanent perks given to various industries, as enshrined in over 50 laws, would be a better move for the DOF, and, yet, it has focused on dismantling the current incentive structure of IPAs.

The bills operationalizing the change in fiscal and nonfiscal perks have been languishing at the committee level in both the Senate and House of Representatives, due to the continued disagreement between the DOF and DTI. With the 2016 elections fast approaching and a consolidated bill yet to take form, it would seem the measure is already dead in the water.

This may be welcome news, however, for Peza, which has long maintained that the incentive packages should not be changed in any shape or form, or the country will risk losing the confidence of existing and incoming investors.

In a previous interview, Japanese Chamber of Commerce Vice President Nobuo Fujii also thumbed down the incentives-rationalization move, foreseeing less investments in the future from Japanese firms.