Interview: Marivic C Españo
How would you rate the fiscal burden for corporation in the Philippines? What changes to the fiscal code would help private sector companies?
MARIVIC C ESPAÑO: The fiscal burden for corporations varies depending on their business activities and registration. For instance, the Philippines’ very generous incentives for firms engaged in preferred areas of investment make the country a viable option, because of the relatively low fiscal burden being imposed upon them. Export-oriented companies can register with any of the special economic zones throughout the country and access the preferential tax regime, enjoy an income tax holiday for four to six years and, thereafter, be subject to a 5% tax on gross income in lieu of all taxes including value-added tax (VAT), import duties, local business taxes and real property tax. Qualified activities include manufacturing for the export market, business process outsourcing and other IT services for foreign clients. The income tax holiday, as well as the VAT and import duty exemptions, are also available to firms registering with the Board of Investments and engaging in activities listed in the annual Investment Priorities Plan. A special tax regime is also offered to multinational firms setting up their regional headquarters in the country.
The current income tax rate for companies subject to the regular tax regime is relatively high. Nonetheless, reforms are under way to reduce taxes for both corporate and individual taxpayers. Lower tax rates and exemptions are also available under double taxation agreements with 39 treaty countries.
The tax bureau is aggressively shifting to online for tax registration, filing and payment, and other reporting and compliance requirements. This should significantly ease taxpayers’ compliance. Upcoming reforms should be directed toward more liberal net loss carry forward and carry back provisions. A simplification of the withholding tax system to a single or dual rate would definitely be a welcome development, and the crediting of improperly accumulated taxes against future dividends tax payable will also be a positive move.
How can the Philippine tax regime stimulate sunrise industries and economic diversification?
ESPAÑO: The success of the Philippine Economic Zone Authority in encouraging investments in export-oriented activities is a concrete example of how desired businesses can be promoted and protected. Sunrise industries and other desired activities should be identified and incentives – tax and non-tax – should be provided. It is important to maintain focused and sustained effort on ensuring that industry is receiving support and incentives that drive desired activities.
In the implementation of incentives, compliance requirements could be streamlined to ensure revenue generation and encourage business. Transparency and consistency should also be maintained during implementation. Research and development (R&D) is crucial to innovation and growth; its taxation, therefore, should be structured so as to encourage risk-taking. Without an incentive to take risk, R&D will be limited to activities with guaranteed commercial gains.
What tax regime could enhance tax planning and prepare the country for international trade risks?
ESPAÑO: Tax rules on cross border transactions should be clarified and reformed to address the emerging structures and transactions resulting from enhanced cross border trade and developments in technology. Tax treatment of internet transactions should be established to avoid being subject to unwarranted changes in interpretation. Conditions on the application of provisions of international tax treaties and other agreements should be harmonised with those being imposed by treaty partners. For investor firms, it is important that tax rules are transparent and stable. It is time for the Philippines to focus on ensuring the allocation of profits to the Philippine operations of multinational groups. Transfer pricing guidelines have been issued for both taxpayers and tax authorities, and for firms that need certainty on the tax treatment of their cross border transactions, advanced pricing rules will soon be issued.
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