Breaking the perks standoff

By Elijah Felice Rosales, Business Mirror, 12 Oct 2019

The refueling and logistics oiler USNS John Ericsson leaves Subic Bay, in the Subic Bay Freeport Zone.

The Department of Trade and Industry (DTI) will be asking lawmakers to put up a cash fund that will be used to provide monthly allowance to workers that economic zone firms will lay off to manage the removal of their fiscal incentives.

Trade Secretary Ramon M. Lopez said he is in favor of including a safety net in the Corporate Income Tax and Incentives Rationalization Act (Citira) bill. This will come in the form of monthly allowance to be allocated for workers who might end up jobless as a consequence of investors leaving the Philippines upon lifting of tax perks.

“If a safety net is placed [in the Citira bill], it will not go to the firms, but to the affected workers. If a worker is able to prove he lost work because of the measure, the government can use the cash fund to subsidize the worker until he gets hired. The allowance can last maybe from three months to six months,” Lopez told the BusinessMirror.

“The allowance should be enough to get the worker and his family going for a few months—if at all there is a safety net, which I find reasonable. It should be inserted in the Citira bill, just to be safe should there really be job losses,” he added.

Lopez said economic offices, including the DTI, could do the computation on how much the cash fund should be, as well as the amount of the monthly allowance.

Transition scenario

Estimates by the Joint Foreign Chambers of the Philippines (JFC) put job losses at above 700,000 if the Citira bill is passed into law as proposed by the House of Representatives. These job losses will come as casualties of the Citira bill’s component on rationalization of incentives granted to firms operating in economic zones. The Department of Finance (DOF) disputes this number.

Locators, mostly multinationals, warned they would be compelled to pack up operations here and relocate to another Southeast Asian country if their incentives, particularly the 5-percent tax on gross income earned (GIE) that is paid in lieu of all local and national taxes, are stripped away.

If the government can no longer shoulder another cash transfer program, then senators should really consider extending the period by which existing locators need to give up their incentives, Lopez argued. With a longer sunset period—at present two years to five years—locators will be given enough elbow room to transition to the fiscal regime proposed under the Citira bill, he added.

Under the House version, economic zone firms are provided up to five years to surrender their tax perks before they shift to paying corporate income tax (CIT).

“If the transition is longer, the risk [of capital flight] will be minimized. That will probably affect fewer workers then. As it is now, if the transition period is two years [at the minimum], firms will really think about leaving the Philippines for good. We need to adjust the transition period to a more realistic one,” the trade chief said.

Lopez has been asking lawmakers to consider extending the transition period to a maximum of 10 years, but senators, he disclosed, are amenable to just seven years.

On the other hand, Charito B. Plaza, director general of the Philippine Economic Zone Authority (Peza), is seeking up to 15 years of transition period. She is also pushing for the continuation of duty-free importation of capital gear and equipment for Peza locators.

Turnaround

Plaza used to be the strongest critic of the Citira bill, but on Wednesday reversed her stand on the measure, supporting it on the condition the government will introduce changes to the much debated bill and will be transparent in its legislation.

The Peza chief’s change in position was welcomed by some private-sector figures, but industry leaders said she might have been forced by Lopez to support the Citira bill. Danilo C. Lachica, president of the Semiconductor and Electronics Industries in the Philippines Foundation Inc., said the group is still “very concerned about the incentives rationalization.”

On the other hand, John D. Forbes, senior advisor of the American Chamber of Commerce of the Philippines, said Plaza’s decision to cooperate with the DTI and the Department of Finance (DOF) should resolve the issue on the Citira bill and end the uncertainties it is bringing.

“We strongly welcome the statement of Peza DG [director general] Plaza and look forward to the comments of DTI and DOF. Investors are waiting and eager to get the Citira issue resolved in an investor-friendly way and get back to promoting inbound foreign investment to support higher economic growth and job creation,” Forbes said in a text message.

The Citira bill, which hurdled the House in September, will reduce the CIT rate to 20 percent by 2029, from 30 percent at present—it’s the highest in the region—in exchange of an overhaul in the menu of incentives granted to economic zone firms.

Consequence

Under the version approved by the House, the Citira bill capped the period for enjoying income tax holiday (ITH) at three years and additional incentives at five years. This is contrary to the existing setup under which economic zone firms are allowed to enjoy ITH for up to six years for pioneer activities and four years for nonpioneer activities.

Upon the expiry of their ITH, they will perpetually pay 5 percent tax on GIE, be exempted from all local and national taxes, enjoy duty-free importation of raw materials, capital gear and spare parts, among others.

The uncertainties brought about by the government’s decision to rationalize tax perks resulted in a 12.71-percent decline in investments registered with the Peza last year, to P68.32 billion, from P78.27 billion in 2017, according to data from the Philippine Statistics Authority (PSA). Industry groups and government agencies alike are expecting a rebound once discussions on the Citira bill are concluded.