AFTER MONTHS of spirited opposition to a push by both the Executive and Congress to overhaul tax incentives for investors, arguing that this move risked pushing such businesses away, the Philippine Economic Zone Authority (PEZA) management on Wednesday agreed to help craft a new package after a meeting called by Trade and Industry Secretary Ramon M. Lopez, according to official statements.
“I called a special Board meeting of the Philippine Economic Zone Authority this morning to emphasize the importance of the tax and incentives reform that we are pushing for, which has the mandate from our President and was approved by the Cabinet,” Mr. Lopez, PEZA chairman, said in a press statement.
“We had to explain fully that there are ongoing refinements in certain provisions of the bill to address the serious concerns of the stakeholders, especially the existing PEZA locators, and a number of senators who are equally concerned on minimizing any possible repercussion on jobs if some firms leave the country.”
PEZA has warned that the proposed Corporate Income Tax and Incentives Rationalization Act (CITIRA) — which will cut the corporate income tax rate gradually to 20% by 2029 from 30% currently, the highest in Southeast Asia, as well as make fiscal incentives more time-bound and tied to benefits to the overall economy — now making its way through the Senate could put jobs at risk (about 700,000 according to foreign chamber estimates) by pushing away those already operating here. The Finance department has questioned the basis of that estimate.
PEZA Director General Charito B. Plaza, vice-chairman of the Board and chief executive officer, had pushed for exemption of the agency’s locators from the overhauled tax incentives.
“To have a smoother transition, current discussions are on the number of years in the sunset provision for existing locators, as well as extra years of income tax holiday (ITH) and lower tax rates for new projects in strategic, high-technology industries with preference on locating in least developed areas,” Mr. Lopez said, adding that “[i]t was emphasized that the concerns of the stakeholders are being addressed.”
“With these adjustments, the PEZA Board together with its management, led by the Director General, has officially aligned its position to give strong support to the Corporate Income Tax and Incentives Rationalization Act and its parameters of having longer performance-based, time-bound, focused and transparent set of incentives,” he added.
“The PEZA DG will no longer ask for status quo or exemption from CITIRA.”
In a separate statement, also on Wednesday, Ms. Plaza said the PEZA management has “reached a reconciliation” with the Department of Trade and Industry “and both agreed to cooperate in fine-tuning CITIRA to consider concerns of PEZA and its industries”.
“PEZA is 100% supportive of the CITIRA bill’s objectives and goals and wants to contribute to its enhancement and final version to ensure that it will remove the fear of its existing locators that it’s not a major tax revamp, but an enhanced one and it will continuously attract more investors to the country…”
Perks now offered to economic zone locators consist of a four- to eight-year ITH; a special tax rate of five percent on gross income earned (GIE) after the ITH period expires; tax- and duty-free importation of capital equipment, spare parts and supplies; exemption from wharfage dues as well as export tax, duty, impost and fees; and eased restrictions on employment of foreign nationals.
PEZA said it is pushing for, among others, an increase in the GIE rate to seven percent in lieu of the higher CITIRA rate, a fixed 10- to 15-year transition period for locators on a per-project basis, continued tax- and duty-free importation of production-related materials and setting an investment threshold amount for big-ticket projects, among others.
“PEZA wants to end the agony of waiting and uncertainty caused by pending tax reform that has affected new investments and expansion projects of current PEZA-registered industries,” Ms. Plaza said in the statement.
Asked for comment on this development, Semiconductors and Electronics Industries of the Philippines, Inc. President Dan C. Lachica said that his group “supports the reduction of corporate income tax, but is very concerned about the inventive rationalization,” while American Chamber of Commerce of the Philippines, Inc. Senior Adviser John D. Forbes said: “We strongly welcome the statement of PEZA DG Plaza and look forward to the comments of DTI and DoF.”
“Investors are waiting and eager to get the CITIRA issue resolved in an investor-friendly way and get back to promoting inbound foreign investment to support higher economic growth and job creation.”
The impending overhaul of tax incentives has been blamed — together with trying global trade conditions in the face of an escalating Sino-US trade war — for lackluster foreign direct investment (FDI) inflows.
Latest available central bank data show actual FDI net inflows at $3.576 billion last semester, 38.8% less than the $5.842 billion in last year’s first half. FDI net inflows dipped 4.4% to $9.802 billion last year from a record-high $10.256 billion in 2017. The BSP had said it expects such inflows to hit $10.2 billion this year.
Separate Philippine Statistics Authority data — covering committed projects approved by investment promotion agencies — showed PEZA with the second-biggest amount at P23.485 billion last semester, accounting for 24.577% of the P95.56 billion total but 14.2% down from the year-ago P27.37 billion. Total FDI commitments, however, were more than double the P45.154 billion pledged in 2018’s first semester. — Jenina P. Ibañez