The proposed Corporate Income Tax and Incentives Rationalization Act (CITIRA) or House Bill No. 4157, the successor to the TRABAHO bill, seeks to gradually cut the corporate income tax rate of 30% down to 20%, in exchange for the reduction of incentives granted by investment promotion agencies like the Philippine Economic Zone Authority (PEZA). CITIRA proposes to limit the perpetual grant of a preferential tax rate and to cap import duty exemptions to a maximum of five years. The House approved the bill on third and final reading in September, and when the Senate is ready with its own version, both chambers will sit down in bicameral session to harmonize both bills.
The Department of Finance is pushing for enactment by the end of the year despite appeals from PEZA and various business organizations. PEZA, in particular, has expressed opposition to the removal of tax perks. And there’s a reason for it to be worried. While it is primarily anxious about losing fiscal incentives, the limits on import duty exemptions will also hit its constituency, the locators.
According to PEZA data, 52% of its more than 3,000 registered companies are export-oriented manufacturers. These manufacturers process imported raw material with machinery sourced from overseas. Currently, all their imports are tax and duty-free, which makes customs clearance seamless — passing without detailed scrutiny on the value of goods and assignment of commodity Harmonized System (HS) codes. The faster customs clearance time allows them to operate efficiently and meet export demands expeditiously.
Apparently, things will be different once Customs starts to collect duties from them. While there can be several measures to ease the potential delays, the daunting prospect of paying customs duties remains. The Most Favored Nation (MFN) duty rates for manufacturing imports usually range from 0-30%, which impacts cash flow and profit. Because of this, it is necessary to prepare for the worst-case scenario and manage the implications of paying import duties.
To ease the impact of the anticipated legislation, allow me to share some adjustment measures that taxpayers may consider implementing.
REVIEW HS CODES AND ANALYZE DUTY EXPOSURE
First, know how much it costs to pay import taxes by identifying the duty rates of each raw material and machinery based on HS codes. If during the analysis, there are variations in HS code and duty rates used, or there are different kinds of materials falling into one HS code, the chances of misclassification are greater. The company can either be declaring a higher or lower duty rate, creating a risk of duty compliance.
HS code classification review can help to correct and ensure an accurate calculation of duty exposure. The HS code is essential not only because it determines the rate of duty but also the possible import restriction and licensing requirements, safeguard duties, and tariff concessions that affect customs cost.
Classification planning can reduce duty and risk exposure when incentives are lifted by checking for HS codes that provide a favorable duty rate. One classic example is shipping goods together to change the HS code classification. Shipping machine parts individually may result in payment of more duties as compared to sending parts that are grouped together and consequently, change HS code and duty rate. When adopting this measure, attention must be taken to ensure compliance.
LOOK FOR DUTY-SAVING OPPORTUNITIES
There are tariff concessions granted to the Philippines in several Free Trade Agreements (FTAs) through its ASEAN membership and trade agreements with Japan and the European Free Trade Association that reduce or eliminate high-duty rates for qualifying imports. For instance, a company can claim 0% tariff using the ASEAN FTA benefit for importing a particular testing instrument, instead of paying a 3% MFN duty.
To secure this benefit, a company must start to: (a) assess current suppliers to see whether they are situated in territories where the Philippines has an existing FTA; (b) check if raw materials and machinery are covered in the duty reduction list and what tariff schedule applies in the Philippines; (c) carry out a benefits comparison when there are several FTA options; and (d) communicate with suppliers to arrange for a Certificate of Origin.
If for some reason, the existing suppliers or materials can’t meet the qualifications, then restructuring of procurement sourcing, or changing the qualifying method of materials are other options to explore.
For inevitable duty payments, companies can apply for refunds to recover duties collected from the importation of raw materials. The duty drawback scheme allows exporters to claim a refund on customs duties paid on imported raw materials used as inputs to produce export goods. The requirements and processing, however, can be cumbersome as exporters or manufacturers need to make an elaborate presentation of bills of material, production data, import and export shipping documents, and evidence of customs duty and tax payments to substantiate the application. In general, the process takes 60 days at the Department of Finance and another 60 days at the Bureau of Customs.
The actual export of goods must be made within a year after the importation of raw materials, and the timing of the filing of claims must be made within six months from the date of export to ensure approval of the application for duty drawback.
Preparation for duty drawback can be efficiently performed through: (1) planning of import and export activities to match the timing requirement; (2) reviewing bill of materials to identify import components; (3) gathering and recording evidence of import payments; (4) capturing export transaction, and (5) designating a responsible person to oversee and carry out the refund process.
Managing the duty aspects of trade can be a highly technical undertaking and challenging process, but it can yield substantial returns if done efficiently and proactively. While the consolidated bill has yet to be drafted, deliberated and passed by legislators, companies that stand to be affected should begin planning their contingency measures. Regardless of CITIRA’s final version, one can never go wrong preparing for the worst though hoping for the best.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of PricewaterhouseCoopers WMS Pte. Ltd. — Philippine Branch. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Luningning M. Pizarra is a Manager at the Worldtrade Management Services of PricewaterhouseCoopers WMS Pte. Ltd. — Philippine Branch.
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