EXPORTERS WARN AGAINST BASING INCENTIVES ON PERFORMANCE

PHILEXPORT asks Congress not to lump zero input value-added tax and VAT refunds with tax incentives in the draft Corporate Income Tax and Incentives Reform Act Exporters’ group also cautions in its position paper on House Bill 7458 that performance-based

Exporters welcomed the initiative to reduce corporate income tax in House Bill 7458, but opposed some provisions regarding company incentives, especially those on a performance-based reward system.

In a position paper, Oscar Barrera, chairman of the legislative committee of the Export Development Council, said that timebound incentives will spur development of micro, small, and medium enterprise (MSME) exporters, but performance-based ones will only discriminate against MSMEs. He is also a trustee of the Philippine Exporters Confederation (PHILEXPORT).

“The proposal of having any track record/performance (such as three years) is anti-development and anti-MSMEs, as it rewards those that are already successful to grow even bigger, exacerbating the growing gap between rich and poor sectors of the economy,” the paper said.

It pointed out that basing incentives on export performance effectively disqualifies startups, in particular, from availing themselves of badly needed tax and customs incentives. Instead, incentives must be time-bound in order to give MSMEs and startups greater chances of success, the association said.

PHILEXPORT believes that “incentives should be provided on such need basis to help improve performance rather than as a reward for already good performance.”

It also asked that zero input value-added tax (VAT) and VAT refunds should not be lumped with tax incentives.

VAT refunds, said Barrera, are not fiscal incentives but a necessary part of the internationally recognized cross-border doctrine that states, “No VAT shall form part of the cost of goods and services destined for consumption outside of the territorial border of the taxing authority.”

Other Southeast Asian economies adhere to this cross-border doctrine, which would make their export prices, with no input taxes, cheaper than Philippine exports, if the Philippines decides to classify VAT refunds as tax incentives.

“Thus we maintain our position that any and all exports are to be given zero VAT exemption on their export products and services, and be given input VAT refunds,” said the paper.

PHILEXPORT also opposes an export performance threshold— like 90 percent of total annual production should be exported—as among the criteria for a VAT refund. It noted that this deviates from the policy generally adopted among countries in the European Union and Association of Southeast Asian Nations (ASEAN), which implement VAT zero rating and have no performance requirements.

Competitive benchmarks

“It is important to benchmark with these economies since they are our market as well as competitors for certain products,” said Barrera.

“Otherwise, this will further erode our competitiveness against Malaysia, Indonesia, Singapore and Vietnam, our major competitors in ASEAN, which do not have such performance requirement.”

Meanwhile, to address reported leakages in the implementation of VAT refunds that lead to numerous VAT exemptions, PHILEXPORT is pushing to amend the definition of “export enterprise” to make it clear who may and who may not qualify for incentives.

Under its proposal, not considered as export enterprises are “those engaged in customs brokerage, trucking or forwarding services, parcel services, janitorial services, security services, insurance and/or banking, or other financial services, consumers’ cooperatives, credit unions, consultancy services, retail business, restaurants, or such other services, within the Freeport and/or special economic zone.”

It recommends adopting automation or electronic reporting to further stem leakages and “expedite processing time and help promote efficiency and transparency.”

On customs duty incentives, PHILEXPORT’s stand is that input VAT refund should be provided for inputs or expenses related to the production and processing of export products, and that packaging and other materials and utilities such as fuel, water, chemicals, molds should also be regarded as part of processing and production.

Refunds, reviews

These inputs “are necessary for the production of the product and should be allowed for input VAT refund,” noted Barrera.

As for the Fiscal Incentives Review Board (FIRB), which will have overall governance of all investment tax incentives and investment promotion agencies in the Philippines, the director general of the National Economic and Development Authority (NEDA) should serve as FIRB chairman.

The paper said designation of the NEDA secretary, who is responsible for the country’s overall economic development and planning, will put a balance between development and tax revenues, and make short-term goals consistent with long-term goals.

It also suggests that a provision on appeals be inserted to allow an enterprise a means to ask for a review of the suspension of its incentives.

PHILEXPORT submitted the position paper and met with Rep. Dakila Cua, chairman of the House committee on ways and means and co-author of HB 7458 or the draft Corporate Income Tax and Incentives Reform Act.