THE Department of Trade and Industry (DTI) has appealed for an extension—from three to five years—of the income tax holiday (ITH) under the Tax Reform for Attracting Better and High-quality Opportunities (Trabaho) bill, in order to keep the country’s fiscal regime on a par with Asian competitors.
A document obtained from a highly reliable source showed the DTI petitioned the Department of Finance to stretch ITH to five years from three years under House Bill 8083, or the Trabaho bill. It also moved that similar fiscal incentives be extended to five years from two years, to maintain the competitiveness of the country’s investment regime.
“[The DTI] proposed income tax holiday to be extended to five years instead of three years, and other income tax-based incentives to five years instead of two years. This is to make our income tax-based incentives competitive with other [Southeast Asian] countries, more specifically, Vietnam, Malaysia and Singapore,” the document read.
Under the Trabaho bill, the ITH shall be granted for a period not exceeding three years. ITH in Singapore can be availed of for up to 15 years; in Malaysia, for up to 10 years; in Vietnam, for up to eight years; and in Indonesia, from five to 20 years depending on the amount of investment.
The DTI also wants the domestic input expense incentive prolonged for five years after the ITH period. This is to encourage exporters to purchase their raw materials locally, which, in turn, will create a supply chain.
The domestic input expense incentive allows an enterprise up to 50-percent additional deduction for locally sourced goods used in its export activity.
“Currently, many of our industries are performing low-value, back-end processes in the value chain, and to be able to upgrade and move up the value chain, we need to grow our domestic supply of materials, parts and components, similar to what successfully manufacturing countries, like Thailand and China, and now Vietnam, have done.
“The lack of materials and intermediate parts and components is a major gap in most of our industries, and incentives have an important role to play in addressing the issue of missing markets,” the document read.
Limiting the domestic input expense incentive to less than five years could hinder the Philippines from growing and developing new and high value-added exports, which puts it at risk of incurring higher trade deficits in the future, the DTI said. The trade margin stood at $35 billion in 2017, it added.
Export threshold, import duties
THE trade department also proposed to reduce the export threshold—to 70 percent from 90 percent—that is required to qualify for VAT exemption on importation and VAT zero-rating on domestic purchases of capital equipment and raw materials. Only those whose export sales meet the 90-percent threshold can benefit from the VAT incentives under the Trabaho bill.
Moreover, the DTI argued it is but proper to perpetually exempt economic zone locators from import duties, similar to those operating in free-port areas.
“It is inherent in the export zones that duties of raw materials be exempt, as the goods will eventually be exported. Providing for only five years of this incentive to economic zones will adversely affect the price competitiveness of our exports,” the document read.
The DTI also recommended that existing investors be allowed to continue with the availment of their ITH for the remainder of the incentive, as indicated in their certificate of registration. It pointed out that limiting or reducing the incentives granted under their contracts could constitute a breach, which can later on be elevated as a treaty breach.
The one-stop-shop character of economic zones and free ports must also be maintained, the DTI argued, by providing the local government its share during the corporate income-tax (CIT) period of a registered firm. This is intended to promote ease of doing business and keep any unnecessary intervention away from the operations of an enterprise.
Last, the trade department wants to delete the provision giving the finance chief the exclusive and original jurisdiction to interpret the provisions on incentives. It explained this is counterproductive to the function of the Board of Investments to formulate the Strategic Investment Priorities Plan and the mandate of investment promotion agencies to administer incentives to qualified activities.
The controversial Trabaho bill will gradually reduce CIT down to 20 percent in 2029, from 30 percent on one hand, and rationalize incentives granted to investors on the other.