THE Philippines is bound to lose its aerospace parts manufacturing, aircraft maintenance repair and overhaul (MRO) industry, projected to pump close to $3 billion in exports by 2022, if the Corporate Income Tax and Incentives Rationalization Act (Citira) bill is passed as is, an industry player has said.
Lufthansa Technik Philippines President and CEO Elmar Lutter said MRO firms will relocate to another Southeast Asian country if their fiscal incentives are stripped from them. He argued that the industry depends on the exemptions from paying import duties for capital gear and spare parts, and VAT for local purchases granted by the Philippine Economic Zone Authority (Peza) to its locators under the existing incentives setup.
“The MRO industry is not properly represented in the [Citira] bill. We are normally treated as an export manufacturer because planes leave again. Manufacturers are exempted for duties for their raw materials and, in similar provision, [for their] spare parts, which is currently given in Peza zones,” Lutter said in an interview with reporters last week.
“With the new Citira [bill], there’s no special representation for MRO companies. We consider that a technicality, but if you don’t solve that, we cannot survive,” he warned.
$2.57-B export receipts
Under the road map, the MRO industry is estimated to bring in $2.57 billion in export receipts and employ 14,900 workers by 2022, which should make the Philippines a major manufacturer of aircraft parts and provider of allied services for aerospace players globally.
This potential is put at risk by the legislation of the Citira bill, as the measure will rationalize the menu of incentives granted to Peza locators. Describing it as “catastrophic” in its current form, the Citira bill will raise the cost of doing business in the Philippines, Lutter claimed, due in large to the termination of tax perks MRO firms want to keep.
“Much higher taxes will reduce our ability to invest. The [exemptions] on spare parts, customs duties and VAT, these are very special provisions which have to be inserted for MRO industries. Otherwise, the whole industry cannot survive,” Lutter explained.
“In short, if it [Citira bill] is passed in the current form, we cannot survive at all. We have to have those provisions for MRO companies because we are [engaged in] an export business, not just manufacturing,” the local Lufthansa chief added.
Citing the case of Lufthansa Technik Philippines, Lutter disclosed the firm will close down all of its facilities in the country, including its headquarters in Pasay City—employing over 3,000 workers nationwid—if the Citira bill is passed into law without the vital tweaks they have flagged.
He said it should be easy for the MRO firm to transfer its operations to another country in the region, as it has manufacturing bases in Shenzhen and Beijing in China and in Kuala Lumpur in Malaysia. The firm is also moving to increase its production capacity in Asia, that’s why it is planning to expand in either Malaysia, Indonesia, Vietnam or Thailand, but highly unlikely in the Philippines.
Asian expansion
“We are in the process of sorting out a new base in Asian production because we don’t have a big Asian base so far,” Lutter said. “We are contemplating to increase our production base and that’s where we do site selection at the moment. Several countries participated [in that] and the Philippines is also there, but it is not on top.”
In July, the Department of Trade and Industry (DTI) announced Lufthansa Technik Philippines plans to invest an additional $40 million in the country. Lutter said that expansion is put on hold since then and its realization will depend on the outcome of Citira bill discussions.
In the 2019 Aerospace Manufacturing Attractiveness Rankings, Manila placed 39th among 209 economies in terms of competitiveness for MRO players, obtaining the highest rating in labor (first) but getting average scores in infrastructure (71st) and tax policy (94th).
Some of its manufacturing rivals in the region, however, secured better positions in the survey. The Philippines lagged behind Singapore at third, Malaysia at 22nd, Thailand at 30th, Indonesia at 36th, but led Vietnam at 48th, Cambodia at 108th, Brunei Darussalam at 112th, Lao PDR at 123rd and Myanmar at 154th.
The Citira bill will bring down corporate income tax rate to 20 percent by 2029, from 30 percent at present—the highest in the region—but in exchange will overhaul incentives granted to firms operating in economic zones.