Let's Talk Tax

APEC and Philippine taxes for investors by Butch P. Ambatali

We have been expecting for a couple of months now the Asia-Pacific Economic Cooperation (APEC) meeting which shall be held tomorrow. The government has been prepping more than ever. It is all over the news how the authorities plan the use of the streets to pave the way for the arrival of guests. New bollards have been installed in our main thoroughfares, not to mention the closure of some roads and re-routing. And of course there is the creation of Mabuhay Lane and APEC lane. Passing through EDSA every day and being caught up in the various dry runs, I can make out this event to be a really big deal.

 During one of the dry runs, I was caught in terrible traffic and almost missed one of my important appointments. Of course, I blamed it on the summit. What’s behind this event? Well, as the name suggests, it is a meeting of heads of economies within the Asia-Pacific Region for the purpose of uplifting the economic welfare among members. This also means that APEC leaders will help determine policies and agreements that will promote progression of free trade and cross border investments among the members. Every economy is interconnected and there are no more hermits.

 A couple of ads on a global news channel promote more investment in the Philippines. The tagline of the ad is “Your investment, our people”. Truly, the Philippine’s most promising asset is its people. Our country boasts a wide range of skilled and professional workers with high levels of technical knowledge and English proficiency.

 For more than two decades, our government has constantly improved the investment environment to entice both foreign and local investors. Among the more prominent measures are the creation of economic zones and the liberalization of trade. We know that more investment will bring more jobs. More job means more taxes, which in the end will make it truly more fun in the Philippines.

 WHAT CAN AN INVESTOR EXPECT WHEN PUTTING MONEY INTO THE PHILIPPINES?

 Foreign Investors. On the tax side, when a foreign investor sets up a corporation, it is by default exposed to the regular corporate tax rate of 30%. Aside from which, a corporation is also required to withhold taxes for certain income payments. It can also be required to remit 12% value-added tax (VAT) on its sale of goods and services in the Philippines.

 Depending on the type of activity, foreign-owned enterprises may register with the Philippine Economic Zone Authority (PEZA) or Board of Investments (BoI). The government awards both fiscal and non-fiscal incentives to these entities.

 Among the fiscal incentives that can be granted to a PEZA- or BoI-registered enterprise is the income tax holiday (ITH) for the first four years of operation. This means that the entity is exempt from paying income tax on its registered activities. For a PEZA-registered enterprise, after operating for four years under the ITH regime, the registered entity may transition to a special tax incentive of 5% gross income tax (GIT) in lieu of national and local taxes.

 In general, PEZA entities are subjected to 0% VAT on its sales and purchases. BoI enterprises which are engaged primarily in export are likewise entitled to 0% VAT on the sale of exported goods or services. However, for purchases of local goods or services of BoI entities, the rate is 12% VAT. Input VAT attributable to VAT zero-rated sales may be refunded or claimed as a tax credit certificate (TCC), but the claimant must be warned that the refund or credit process involves significant documentary and technical hurdles.

 Other fiscal incentives for both PEZA and BoI enterprises may include, subject to certain conditions, exemption from taxes and duties on importation of raw materials, capital equipment, machinery and spare parts; and exemption from wharfage dues and export tax, duty, impos t and fees.

 The above discussion merely provides a glimpse of what a foreign investor can expect when doing business in the Philippines. It would be best to ask experts or consultants for a more detailed discussion on the prospective investment.

 Local Investors. Local investors benefit as well from liberalized trade between APEC nations. From the tax perspective, local investors engaging in the export of goods or services may also opt to become a PEZA- or BoI-registered entity, and be entitled also to tax incentives granted by those agencies.

 Nonetheless, even if an enterprise is not registered with the incentive-granting agencies, export sales may still be subject to 0% VAT. Note again that the excess or unutilized input VAT attributable to VAT zero-rated sales can be refunded or claimed as a tax credit, subject to documentary and technical requirements, as previously mentioned.

 With the upcoming APEC event, we expect our President to lay on the table the many advantages of investing in the Philippines. We are expecting as well that by enticing investors to fund enterprises, our State, through our regulators, will consistently abide to its promises by making regulatory processes less complicated and more efficient.

 The Philippines has posted rapid economic growth in recent years and it is not going to slow anytime soon. It is true that the Philippines has a lot to improve in terms of economic policy, infrastructure and processes to facilitate seamless trade. We struggle every day to do so, even in terms of traffic flow in the streets. Nevertheless, with conviction, I strongly believe that the Philippines is investment worthy, as we have excellent individuals working hard to get things done. And that’s one sure thing an investor can count on.

 Eliezer P. Ambatali is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.