Taxwise Or Otherwise
By Gabriel Eroy
(Second of two parts)
In last week’s article, I touched on the basic features and provisions of Republic Act No. 11523, also known as the Financial Institutions Strategic Transfer (FIST) Act. The FIST Act aims to buoy struggling economy by increasing liquidity in the financial system. The law will serve as a catalyst for more efficient and less costly transfers of non-performing assets (NPAs), from the custody of the financial institutions (FIs) to FIST corporations (FISTCs), and ultimately to end-users, by granting certain tax and fee privileges on such transactions.
Unquestionably, the concept and spirit of the law is going to be a boon for the ailing economy. Now, the ball is in the court of the regulators who need to draft implementing rules and regulations, to ensure that the vision of the law is fully actualized. These are the factors they need to be considered.
The law introduces a special type of corporation called FISTCs, which will serve as the main channel for transferring NPAs, in the process allowing banks to free up capital that can be reinjected into the financial system. However, in the Philippine context, the added compliance requirements are often burdensome. Entities entitled to privileges granted by the government are generally subject to more stringent, voluminous, and confusing registration processes, and periodic compliance requirements. While we can lean on the Ease of Doing Business and Efficient Government Service Delivery Act of 2018, there are still gaps, which will produce bottlenecks at various government agencies.
To maximize economic opportunity and to ensure that challenges are dealt with in a timely manner, re-infusion of funds into the financial system must happen as early and as seamlessly as possible. This can be achieved if the guidelines to be issued by regulators are as clear as possible as to the following, among others: (1) what is required of FISTC incorporators; and (2) the roles and responsibilities of government agencies.
Since the Philippines is still not COVID-free, it is key for the government to establish an online portal and/or one-stop shops specializing in the processing of FISTC applications.
PERIODIC COMPLIANCE REQUIREMENTS AND TAXATION
Another area that may need to be clarified is the periodic compliance requirements. Among the issues are:
1. Will FISTCs be required to submit an inventory list to the Bureau of Internal Revenue (BIR)? If yes, how and in what form?
2. Are there any additional financial statement disclosure requirements for FISTCs and the FIs transacting with them?
3. What are the additional reportorial requirements, if any, for FISTCs and/or FIs as the regulators strive to monitor potential abuses in the grant of privileges?
It would also be beneficial if the BIR were to issue comprehensive rules and regulations clarifying the taxation of FISTCs and the transactions covered by the FIST Act. Taking a step further — will FISTCs be subject to value-added tax (VAT) or gross receipts tax (GRT) for any income derived from transactions not covered by the tax privileges and those earned after the lapse of the tax privilege period?
AN OPEN MARKET ENABLES A STRONG FOOTHOLD IN THE ASEAN REGION
In last week’s article, I mentioned that another key to the success of the FIST Act is participation from the global market. Inflows of foreign capital will inevitably raise the liquidity level of our financial system. However, there are potential deterrents that may pose hurdles to attracting foreign investments.
Consistent with our Constitution, the law provides that if the FISTC acquires land, at least 60% of its outstanding capital must be owned by Philippine nationals. This limitation may hinder potential foreign investment since there are markets in the ASEAN region that are more open to foreign participation.
For instance, Singapore generally has fewer restrictions when it comes to acquiring commercial and residential property. There are certain approvals required for acquisitions made by foreigners under Singapore’s Residential Property Act but no outright prohibition. It is likely that ASEAN governments are drafting laws and stimulus packages similar to the FIST Act, as they endeavor to ensure economic recovery, growth and stability during the pandemic and beyond. Should they espouse less restrictive measures, the Philippines may be at a disadvantage when it comes to attracting foreign investment.
It may just be a coincidence but brewing talk about easing the Constitutional limits on foreign ownership may be vital in strengthening the Philippines’ viability in attracting foreign investment in ASEAN. The Philippines has consistently been lagging neighbors like Malaysia and Vietnam in generating foreign direct investment (FDI).
COLLABORATIVE EFFORT FROM ALL STAKEHOLDERS IS KEY
Enacting the FIST law is a major milestone that gives hope for reviving the Philippine economy in the wake of the pandemic. The foregoing issues are just some of the many that need to be addressed to fully actualize the vision of the FIST Act. Foremost is the need for open dialogue between regulators and the business sector as the former draft a comprehensive set of rules and regulations. Such dialogue will aid in stabilizing the financial system and make it more agile in responding to opportunities and seeing off threats in the years to come.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.
Gabriel Eroy is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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