An outlook on IPAs: Proposal and reforms

Over the years, the Philippines’ national economy has been developing progressively. Its impact may be unnoticeable to some, but studies show that Filipino lives have improved compared to the past. According to a report by the International Monetary Fund Asia and Pacific Department in November 2017, the “Philippine economy has performed well and is in a favorable position to address its socioeconomic challenges. Sound policies have delivered solid growth, low inflation, financial stability, and external and fiscal buffers”. Though the path to development hasn’t been easy, this would not have happened were it not for the help of investment schemes employed by the government to help increase national revenue and improve the country’s Gross Domestic Product (GDP).

One scheme adopted by the government proven to be effective not only for the national economy, but for Filipino employment as well, is the creation of “Investment Promotion Agencies” (IPAs). This refers to government entities created by law, executive order, decree, or other issuance, in charge of promoting investment, administering tax and non-tax incentives, and/or overseeing the operations of the different economic zones and free ports in accordance with their respective charters.

In a survey conducted by the Department of Trade and Industry, the total IPA-approved investments in 2017 amounted to P911.29 billion, higher by 32.9 percent from the P686.95 billion approved in the previous year (2016). Foreign investment commitment for manufacturing was the largest at 52.1 percent. Real estate activities came in second at 21.2 percent, followed by administrative and support service activities at 13.2 percent, electricity, gas, steam and air conditioning supply at 4.9 percent, and information and communication at 2.6 percent.

Currently, there are 14 IPAs authorized to grant tax incentives under their own charters. These tax incentives were imposed to encourage investments both in the local and foreign markets. Common among these IPA charters are provisions on income tax holidays, duty exemptions on imported equipment and materials, tax credits, preferential taxes on gross income, as well as local tax exemptions. Ideally, this would entice investors to create and develop their businesses under the IPAs. However, the different tax incentives for each IPA may create problems. There may be difficulty monitoring the tax incentives granted by each IPA and instead of stabilizing or improving Philippine revenue, it may cause undocumented and unwanted loss on the government’s part.

Consequently, through the government’s Comprehensive Tax Reform Program (CTRP), Package 1 was introduced, amending certain provisions on individual income tax. Congress is now working on Package 2 as complement for Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law. The proposed House Bill No. 7214 (HB No. 7214) seeks to lower the corporate income tax rate, reform the corporate income tax system, and broaden the tax base by modernizing investment tax incentives to enhance fairness, improve competitiveness, plug tax leakages, and achieve fiscal sustainability.

The proposed reform now seeks to replace the five percent gross income earned tax in lieu of all taxes with a reduced corporate income tax rate of 15 percent, and remove VAT and local tax incentives. Under the proposed HB No. 7214, the incentives shall be granted only to investments which are generally performance-based, time-bound, cover both foreign and domestic firms, and both exports and domestic markets.

HB No. 7214, suggests the formulation of a Strategic Investments Priority Plan (SIPP), which is a list of registered economic activities or investments that shall be eligible for the grant of tax incentives. These economic activities will come from the BOI, in coordination with the Office of the President, concerned IPAs and other government agencies and the private sector, and shall be in effect only once approved by the president through an issuance of an executive order. The activities set forth in the SIPP shall be evaluated by a Fiscal Incentives Review Board (FIRB), valid for three years and subject to review and amendments when the need arises.

Under the same proposed HB, the following shall be the reformed income tax incentives:

Further, under the proposed HB, existing registered activities granted the ITH shall be allowed to continue with the availment of the said incentive for the remaining period of the ITH or for a period of five years only, whichever comes first. Further, the five percent special rate on gross income earned shall be allowed to continue for two years for activities that have received the tax incentive for more than 10 years, three years if tax incentive has been received between five to 10 years, and five years when the tax incentive has been received for a period below five years, prior to the effectivity of the proposed bill.

Taking in consideration such proposed amendments, there may be a possibility that only new investments or activities shall be granted income tax incentives. Existing corporations enjoying present tax incentives may be charged with the regular corporate income tax after the lapse of the period indicated above.

Gregg G. Gamad is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.