The Philippine travel and tourism industry contributed a total of P1.43 trillion to the economy in 2015, equivalent to about 10.6% of gross domestic product (GDP), according to the World Travel and Tourism Council (WTTC), a global body representing the Travel & Tourism private sector. This figure is expected to rise by 6.6% this year and is forecasted to increase further by 5.4% to P2.6 trillion by 2026.
According to WTTC, investment in Philippine travel and tourism last year reached P76 billion, or about 2.7% of total recorded investment. This figure is expected to grow by 8.3% this year and by 5.5% annually over the next 10 years to P140 billion.
In 2015, the Philippines generated P294.4 billion in visitor exports (i.e., money spent by foreign visitors), a figure expected to grow by 3.6% this year, reaching about P579.8 billion by 2026, based on 6.6% yearly growth. As for employment, the Philippine travel and tourism industry supported 1.3 million jobs in 2015. This figure is seen to rise by 3.1% in 2016 and by 2.4% a year to 1.65 million jobs by 2026.
Recognizing that the Travel & Tourism sector is a significant and resilient economic driver, the Philippine government passed the Tourism Act of 2009 which aims, among others, to develop a national tourism action plan; provide competitive investment incentives; and support the establishment of Tourism Enterprise Zones (TEZs). The Tourism Infrastructure and Enterprise Zone Authority (TIEZA), a government corporation attached to the Department of Tourism (DoT) is mandated to regulate the TEZs as well as to manage tourism infrastructure projects.
To complement the Tourism Act of 2009, the Bureau of Internal Revenue (BIR) has finally issued Revenue Regulation (RR) No. 7-2016 dated Nov. 15, 2016 providing the rules and regulations implementing the tax incentives available to Tourism Enterprises in TEZs registered with the TIEZA.
“Tourism Enterprises” shall refer to facilities, services and attractions involved in tourism, such as, but not limited to: travel and tour services; tourist transport services, whether for land, sea or air; tour guides; adventure sports services, and other sports activities of significant tourism potential; convention organizers; accommodation establishments; tourism estate management services, restaurants, shops and department stores, sports and recreational centers, spas, museums and galleries, theme parks, convention centers and zoos.
The following incentives may be granted to Registered Tourism Enterprises (RTEs) within TEZs registered with the TIEZA:
1) Income Tax Holiday (ITH). Six-year ITH from start of business operations on income from registered activities for new RTEs (not started business operations at the time of TIEZA registration) in Greenfield (new or pioneer development) and Brownfield (area with existing development) TEZs.
If the RTE undertakes Substantial Expansion prior to the expiration of the above ITH, said ITH is extendible but shall, in no case exceed a total additional six years. “Substantial Expansion” refers to an expansion, renovation, or upgrade of physical assets which is intended to extend said assets’ life or to increase the capacity/efficiency of the enterprise, resulting in a significant change in its classification under the DoT’s accreditation system, and amounting to at least 50% of its original investment.
An existing RTE (started business operations at the time of TIEZA registration) in a Brownfield TEZ shall be entitled to avail of a non-extendible ITH if it undertakes a Substantial Expansion.
2) 5% Gross Income Tax. As an alternative to the ITH, a new RTE may, in lieu of all national internal revenue taxes and local taxes, license fees and assessments, except real estate taxes and such fees as may be imposed by TIEZA, pay a tax of 5% on its gross income earned from its registered activities, which shall be remitted as follows:
- One-third (1/3) to be proportionally allocated among affected cities or municipalities based on the area of the RTE;
- One-third (1/3) to the national government; and,
- One-third (1/3) to the TIEZA.
RR No. 7-2016 also defines what constitutes “gross income” and provides for the allowable deductions to compute the 5% gross income tax (GIT) incentive.
The RR as well as the implementing rules of the Tourism Act of 2009 provide that the 5% GIT may be availed of as an alternative to the ITH. It is not clear whether or not the 5% GIT can be availed of automatically after the expiration of the ITH (or the extended ITH, as the case may be).
3) Net Loss Carry Over (NOLCO). NOLCO of an RTE incurred after TIEZA registration and start of business operations shall be carried over as deduction from gross income for six consecutive taxable years immediately following year of loss; provided, that RTEs enjoying ITH or 5% GIT shall not be allowed NOLCO deduction. In addition, NOLCO from registered activities shall not be allowed as NOLCO deduction from unregistered activities.
4) Tax and Duty Exemption on Importation of Capital Equipment. Importation of capital investment and equipment shall be exempt from taxes and duties subject to certain conditions.
5) Tax and Duty Exemption on Importation of Transportation Equipment. Importation of transportation equipment and spare parts by a new or expanding RTE shall be exempt from taxes and duties, subject to certain conditions.
6) Goods and Services Incentives. RTEs engaged in the sale of services shall be entitled to the following:
- VAT and excise tax exemption on importation of goods necessary to carry out its registered activity and are actually consumed in the course of services related to said registered activity actually rendered within the TEZ; and
- A tax credit equivalent to national taxes paid on all locally-sourced goods and services used for services pursuant to its registered activity which are actually rendered within the TEZ.
7) Social Responsibility Incentive. Subject to certain conditions, tax deduction of up to 50% of the cost of environmental protection activities (except those conducted to secure Environmental Compliance Certificate (ECC); cultural heritage preservation activities; sustainable livelihood programs; and other similar activities.
Existing accommodation establishments (including, but not limited to, hotels, tourist inns, motels, apartels, resorts, home stay operators, and pension houses) outside TEZs that will register with TIEZA shall also be entitled to a non-extendible 6-year ITH for a Substantial Expansion; tax and duty exemption on importation of capital investment and equipment necessary for Substantial Expansion; and NOLCO deduction, subject to similar conditions mentioned above.
For long-term planning, it is important to note that the BIR IRR provides that the incentives granted shall be in effect for 10 years from the effectivity of the Tourism Act of 2009, which period is subject to review by the Joint Congressional Oversight Committee on Tourism. Considering that the IRR of the Tourism Act of 2009 was published on Nov. 12, 2009 and the BIR just issued the IRR for the tax incentives in November 2016, the issue arises whether the 10-year period of availment will be extended.
In case the TIEZA registration of an RTE is downgraded, suspended, or revoked, there is a claw-back of taxes up to three years preceding the date of the order of revocation or suspension. Such back taxes may be assessed by the BIR notwithstanding the lapse of the three-year prescriptive period to assess taxes.
The tax incentives available to tourism enterprises will certainly boost investment in the travel & tourism industry which is a significant engine of socioeconomic growth. A well planned and competitive tourism industry, given its numerous backward and forward linkages, certainly has the potential to generate exponential growth that can make a serious dent in the country’s poverty alleviation goals. But tax incentives are just one of the numerous factors that are considered by investors and tourists alike. In addition to a cohesive and competitive national tourism plan, current and succeeding governments should also devote equal focus on improving the country’s airports, seaports and other tourism infrastructure; upgrading roads, highways and transportation systems that link tourist sites; lowering the cost of electricity, Internet and communication; and, most importantly, safeguarding the security and safety of local and international tourists alike.
Cristina Panlilio-Ong is a director of the Tax Advisory and Compliance Division of Punongbayan & Araullo.
As published in Business World, dated 29 November 2016