Taxes are integral to any economic policy. Investments flow in and out of the economy based on fiscal incentives as much as human capital. For Philippine Economic Zone Authority (PEZA) locators, investors were enticed to invest in the Philippines with tax incentives, such as the Income Tax Holiday (ITH) or 5% Gross Income Taxation (GIT), VAT zero-rated purchases, and duty-free importations. However, with major tax reforms introduced and proposed by the government, PEZA locators are facing a new business paradigm, requiring proactiveness.
With Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN), purchases by PEZA locators (i.e., those registered and operating within the PEZA zones, which are considered as separate customs territories) were expressly recognized as VAT zero-rated. TRAIN provided “(s)ale and delivery of goods to… (r)egistered enterprises within a separate customs territory as provided under special laws…” and “(s)ervices rendered to… (r)egistered enterprises within a separate customs territory as provided under special law” shall be VAT zero-rated. However, these provisions were vetoed by the President because they “go against the principle of limiting the VAT zero-rating to direct exporters (and that) (t)he proliferation of separate customs territories, which include buildings, creates significant leakages in our tax system.”
This change in the VAT treatment of purchases by PEZA locators, from 0% to 12%, created noise among PEZA-locators. To appease the investors, PEZA immediately issued Memorandum Circular No. 2018-003, providing that “the [Department of Finance] informed [PEZA] that the TRAIN law does not affect the current zero-rating of sales of goods and services to PEZA locators. Accordingly, Section 8 [of the PEZA Law], which provides that special economic zones are to be operated and managed as separate customs territory, has not been amended or repealed by the TRAIN Law.” Thus, purchase by PEZA locators remain at 0% VAT.
The status quo, however, may just be a respite. Under TRAIN, ultimately, only direct exporters shall be entitled to VAT zero-rated sales. This means that suppliers of direct exporters, being merely indirect exporters themselves, shall not be entitled to VAT zero-rated sales. Viewed from a different angle, sales to exporters, such as PEZA locators, or the purchases by these PEZA-locators shall no longer be VAT zero-rated, but subject to 12% VAT. This shall be the case upon the successful establishment and implementation of an enhanced VAT refund system. The effecting criterion requires all VAT refunds to be acted upon by the Bureau of Internal Revenue (BIR) within 90 days from application. This determination will be made by the Department of Finance (DoF), based on the success of the refund system by Dec. 31.
As such, by 2020, if the DoF determines the refund system to be successful, purchases by PEZA locators may be subject to 12% VAT. When it happens, PEZA locators have two options — they may either treat the 12% VAT as part of their cost, or claim a refund. The 12% input VAT passed on to the PEZA locators is qualified for refund, provided these are in relation to the PEZA locator’s exports (of either goods and services), which are paid for in foreign currency.
Another major shift for PEZA locators will be as introduced by the Corporate Income Tax and Incentives Rationalization Act (CITIRA), when passed into law. The CITIRA was submitted by the House of Representatives to the Senate on Sept. 16, and is currently pending review and deliberation. The certainty of CITIRA passing into law may have been sealed with the support by the PEZA Office itself, previously a staunch critic of CITIRA.
Under CITIRA, PEZA locators will lose their ITH and 5% GIT status over the course of five years; exemption from the 15% Branch Profits Remittance Tax; exemption from local business tax; and exemption from 10% Improperly Accumulated Earnings Tax. After full implementation of TRAIN and CITIRA, PEZA locators will be no different from other regular corporations (except with respect to its qualified duty-free importations, which is not expressly touched upon by TRAIN and CITIRA).
Hence, the question, is there still any economic benefit to being a PEZA locator? And more importantly, how should a PEZA locator prepare for these changes?
It seems there are no more significant tax benefits to being a PEZA locator (except, as noted before, with respect to its qualified duty-free importations). While the answer is negative to the first question, the answer to the second is hopeful, with some pro-activeness.
With respect to the 12% VAT on its purchases upon full implementation of TRAIN, a PEZA locator should already prepare its processes for VAT refund applications. It should make sure its suppliers provide all the necessary information (including proper name of the PEZA locator, its TIN, the VAT breakdown, etc.) in the VAT invoices and official receipts. For its export sales to be zero-rated, the PEZA locator should also make sure that its own VAT invoices and official receipts are marked as VAT zero-rated, the sale is in foreign currency, and that there is proof of remittance. If the PEZA locator is able to establish its process, then the 12% VAT passed on to it by its suppliers will not materially affect the bottomline.
With respect to the removal of the incentives under CITIRA, PEZA locators may opt to cancel their PEZA registration and apply for registration under the Strategic Investment Priority Plan (SIPP) with the Fiscal Incentives Review Board (FIRB). The SIPP shall be as formulated by the Board of Investments. Under the CITIRA, SIPP-qualified entities shall be entitled to ITH for two to six years, depending on location; reduced corporate income tax rate after its ITH, and in lieu of local business tax; duty-free importation on capital equipment and raw materials directly and exclusively used for its registered activity; if at least 90% of sales are export sales, its purchases shall be VAT zero-rated (i.e., the SIPP entity does not have to file for a VAT refund); and enhanced deduction for capital assets and labor. As such, PEZA locators qualified for SIPP have a lot of fiscal incentives still going for them, as long as they are aligned with the government’s investment policy.
While the business outlook for PEZA locators may seem tough, truly tough businesses know how to make good of the bad. As when the paradigm is shifting, only the truly enterprising can ride and prosper. Nothing is perpetually stable in business. It should be business as usual, but with heaps of foresight.
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes, and not offered as, and does not constitute, legal advice or legal opinion.
Karen Andrea D. Torres is a Senior Associate of the Tax Department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).