Taxwise Or Otherwise
By Abigael Demdam
While queuing for more than an hour just to catch a ride home, I noticed commuters in front of me giggling while staring at their smartphones with earphones on. I subtly leaned in to find out what was stirring their interest. On the screen, I saw the familiar faces of Korean actors of a prime time soap opera. I realized that the benefit of foreign telenovelas among Filipinos is that it helps to keep them calm and entertained, especially city commuters who endure hours of standing in line.
With the robust expansion of foreign influences into mainstream media as seen in drama series, K-pop songs and matinee idols (i.e., boy bands), we also see the enhancement of foreign relations between the Philippines, South Korea and the global community at large.
On the economic side, the Philippine government has incessantly endeavored to introduce measures that will increase foreign investment such as providing various fiscal and non-fiscal incentives to foreign investors. One example of these incentives is that specifically provided to regional operating headquarters (ROHQs).
As defined, an ROHQ is a resident foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific region and in other foreign markets. Its operations are limited in the sense that it is merely allowed to perform the qualifying services enumerated in the Omnibus Investments Code of 1987, and only for its affiliates. Violation of these rules may result in the revocation of the ROHQ’s license or registration, and effectively, its tax exemptions and incentives.
WHAT EXACTLY ARE THE INCENTIVES PROVIDED BY OUR GOVERNMENT TO THESE ROHQS?
Generally, resident foreign corporations are subject to the 30% corporate income tax. However, as provided in the Tax Code, an ROHQ is liable to income tax at the special rate of 10% based on its taxable income. In addition, an ROHQ is also exempted from the payment of all kinds of local taxes, fees, or charges imposed by the local government, except real property tax on land improvements and equipment. Likewise, it is entitled to a tax and duty-free importation of equipment and materials used for training and conferences.
Moreover, several incentives are also given to expatriate employees of an ROHQ. These include the grant of a multiple entry visa for the expatriate employee including his spouse and unmarried children below the age of 21, tax and duty-free importation of personal and household effects, and travel tax exemption. Most importantly, a preferential tax rate of 15% applies on the salaries, annuities, and all other compensation of expatriates occupying managerial and technical positions exclusively working for the ROHQ and earning a gross annual taxable compensation of at least P975,000. The same treatment applies to Filipinos employed and occupying the same position as those aliens employed by the ROHQ.
Given the huge tax savings and various non-pecuniary benefits profusely provided by the Philippine government, many foreign corporations opted to establish their ROHQs in the Philippines resulting in a boost to foreign investment. This further translated to a rise in job opportunities for highly skilled workers, enticement for highly desirable employees, and a reduction in the risk of brain drain, among others.
A significant change in the incentives provided to ROHQs is being proposed in the Tax Reform for Acceleration and Inclusion (TRAIN) Bill passed by the House on May 31. Section 7 of the TRAIN Bill amends Section 25 of the National Internal Revenue Code of 1997. Specifically, the Bill deletes the 15% preferential tax rate provided to ROHQ employees occupying managerial and technical positions.
WHAT DOES THE REMOVAL OF THIS PREFERENTIAL TAX RATE MEAN FOR ROHQ EMPLOYEES?
Evidently, the ROHQ employees’ taxable income will then be subject to the normal graduated income tax rates of 0% to 35% applicable to all employees, as proposed by the TRAIN Bill. Those previously enjoying the preferential income tax rate of 15%, given the gross annual income of at least P975,000, will most likely qualify for the 30% to 35% income tax rates. The effective tax rate would, of course, be lower than 30% to 35%, but it would definitely be more than the current 15% rate. Consequently, this would result in reduced take-home pay for such employees if there is no augmentation in their gross compensation.
It is also worth noting that the TRAIN Bill is just the first part of the Tax Reform Program of the Philippine government. The second package intends to review and amend the income taxes on corporations, among others. Thus, it is possible that the 10% special income tax rate provided to ROHQs may also be amended or totally removed.
Some may argue that these reforms will produce unfavorable outcomes for the Philippine economy. Nonetheless, we must always bear in mind that the power of taxation is solely vested in the legislature. It is only Congress, as delegates of the people, which has the inherent power not only to select the subjects of taxation but to grant incentives and exemptions. Given the power to grant, it also has the inherent power to take away. We just have to trust that this move is consistent with the goal of the Tax Reform Program of achieving “efficiency, equity and simplicity” in our tax system and eventually benefit the entire population in the near future.
The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
Abigael Demdam is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. Readers may call +63 (2) 845-2728 or e-mail the author at firstname.lastname@example.org for questions or feedback.