TO prepare for the consequences of the imposition of the global minimum corporate tax, the House Committee on Ways and Means approved last Tuesday several proposals aimed at enhancing Republic Act (RA) 11534 or the “Create” law.
Albay Rep. Joey Sarte Salceda said his committee put forward the unnumbered substitute bill or the proposed “Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (“Create More”) law. This as Salceda urged Manila to prepare for the potential impacts of the tax agreement by members of the Organization for Economic Cooperation and Development (OECD).
The agreement on a fundamental reform of the international tax architecture among nearly 140 countries in October 2021 may require multinationals currently in the Philippines to pay a top-up tax in their countries of origin.
“We need to prepare for when countries accede to this regime,” Salceda said. He added that the OECD’s “Inclusive Framework on Base Erosion and Profit Shifting,” introduces a 15-percent global tax for multinational companies with minimum annual revenues of EUR 750 million.
HIGHLIGHTING that key Philippine trade partners, such as Japan and Korea, have already approved legislation on the matter, Salceda stressed that the Philippines needs to be proactive in adapting to these changes.
“Major Philippine trade partners like Japan and Korea have already approved their legislation on the matter. So, it will already definitely affect us. Among all Asean-6 economies, only the Philippines has not made significant progress in implementing the rules,” the lawmaker said. “But it will come; and when it does, it could affect our tax incentives system.”
According to Salceda, those who are under an income tax holiday or a special corporate income tax regime of 5 percent might be required to pay a top-up tax in their home countries.
“When that happens, our tax breaks will be quite ineffective in promoting foreign investments,” he explained. “So, we have to imagine new non-tax incentives such as infrastructure and market promotion that make doing business here easier and more profitable.”
Thus, Salceda said, amendments to RA 11534 should consider how to evolve a tax-incentive regime that complies with the global minimum tax but still attracts foreign investors.
The lawmaker said he is “personally thinking of a tax regime where we impose a 15-percent corporate income tax rate, plus enhanced deductions for 25 years.”
THE bill approved by the House Committee on Ways and Means last Tuesday seeks to establish a more streamlined value-added tax (VAT) refund system for registered business enterprises (RBEs). This proposed change is intended to offer businesses a more efficient and predictable process for claiming refunds.
Acknowledging the challenges and opportunities for improvement that have arisen during the implementation of the Create law, Salceda emphasized the original goals of the legislation.
The lawmaker said RA 11534 was designed to address tax uncertainty, provide relief to businesses impacted by the Covid-19 pandemic and simplify the country’s intricate tax incentives system.
Salceda openly admitted that despite the initial success of the Create law—the Philippines saw foreign direct investment (FDI) hit $10.5 billion—challenges emerged. The global economic downturn, coupled with a significant interest rate hike by the US Federal Reserve, led to a 23-percent year-on-year decline in the Philippines’s FDI performance, bringing it down to $9.2 billion, according to Salceda.
Highlighting the role of uncertainty in the implementation of VAT and tax administration provisions, the lawmaker noted the dampening effect on investor sentiment and added complexity to doing business.
Among the specific challenges associated with RA 11534, Salceda emphasized the need to address issues related to the implementation of VAT and tax administration provisions.
IN response to these challenges, the “Create More” proposal aims to institutionalize risk-based audits conducted by the Commission on Audit (COA) for tax refunds.
Moreover, the bill provides various conditions regarding VAT for the sale of goods and services, depending on the nature of the transaction.
Some of the conditions outlined in the proposed measure includes imposing a 12-percent VAT on the sale of goods and/or services by unregistered and registered domestic market enterprises to another unregistered and registered domestic market enterprise. Such rate is also sought to be applied to the sale of goods and/or services to a non-registered export enterprise.
Meanwhile, the sale of goods and/or services by a VAT-registered seller to registered export enterprises, regardless of location, shall be subject to 0-percent VAT.
The sale of goods and/or services by a registered export enterprise to another export enterprise shall be subject to specific rules. One rule is applying a zero-percent VAT on the sale of goods and/or services to another export enterprise if the seller is VAT-registered and enjoying an income tax holiday.
The second rule is, if the seller is enjoying the 5 percent special corporate income tax incentive, the sale of goods and/or services shall be VAT-exempt.
THE proposal also provides clear guidelines for the sale, transfer, or disposal of previously VAT-exempt imported capital equipment, raw materials, spare parts, and accessories.
If the purchaser is a registered export enterprise, regardless of location, the transaction shall be subject to zero-percent VAT. If the seller is a registered domestic market enterprise, regardless of location, the transaction shall be subject to 12-percent VAT based on the net book value of the capital equipment, raw materials, spare parts, or accessories, unless the purchaser is a registered export enterprise.
In such cases, the transaction shall be subject to zero-percent VAT.
The proposal also provides special consideration for large domestic market enterprises (DMEs).
Under the bill, DMEs with an investment capital of at least $500 million or its equivalent in Philippine pesos, which are import-substituting or cater to non-residents, may avail of zero-percent VAT on local purchases and VAT exemption on importation of capital equipment, raw materials, spare parts, or accessories.
However, this must be approved by the Fiscal Incentives Review Board during the availment period.
Also, during the period of availment of the income tax holiday and the enhanced deduction regime, the registered-business enterprise local tax shall be imposed, according to the “Create More” measure.
RECOGNIZING the importance of population as a key factor in determining the impact of enterprises on local communities, the bill proposes that the remaining 50 percent of revenues be apportioned based on the population of each local government unit (LGU). This ensures that areas with larger populations and potentially higher service demands receive a proportionate share of the revenue.
Acknowledging the diverse economic landscapes and unique challenges faced by LGUs, the proposed bill grants flexibility to these entities. It allows LGUs to reduce or waive the rate of tax, or their share thereof, when collaborating with other local units covering the same enterprise. This flexibility allows LGUs to tailor their approach to the specific needs and circumstances of their communities.
To ensure efficient and simplified compliance with tax rules and regulations, a separate service or unit within the Bureau of Internal Revenue would be created for RBEs. The commissioner will prescribe the manner and place of filing returns and payments of taxes by RBEs through this specialized service or unit, the proposal read.
MEANWHILE, Salceda invited the Department of Finance (DOF) and other stakeholders to contribute their suggestions for amendments to the Create Law, ensuring compliance with the global minimum tax scheme.
He emphasized the urgency of the matter, stating that President Ferdinand R. Marcos Jr. has instructed the committee to complete the approval process by the end of the month.
Salceda said he has instructed the DOF and other stakeholders “to propose these enhancements so we can discuss them on the floor.”
However, he said he moved to approve the bill last Tuesday “so we make progress already on the issues already resolved.”
“For today, I beg the indulgence of the stakeholders that we approve a bill so that we have something to discuss on the House floor,” Salceda said on November 21. “The President has instructed us to get this done, and the leadership is trying to approve it by the end of this month.”