In lieu of all taxes may no longer be available

Barely a few months from passage of the Tax Reform for Acceleration and Inclusion (TRAIN) into law, the second package of tax reforms is already filed with Congress for consideration. Leading such versions of proposed tax reforms is House Bill 7214 containing the second package of the Comprehensive Tax Reform Package (CTRP) envisioned by the administration of President Duterte. The same was filed with the House of Representatives last Feb. 20. A perusal of the bill would reveal that one of its main features is the lowering of the corporate income tax rate from 30 percent down to just 25 percent. This possible decrease in tax rates will result in lost revenues, which the bill intends compensate for by putting up measures to ensure the fiscal sustainability of such decrease.

One of the measures that the bill intends to put up is the rationalization of tax incentives. The bill notes that investment arrangements currently available in the Philippines cost the government around P301 billion in foregone income, value added (gross of refund), and customs taxes and duties. This amount does not even consider the foregone income from local business taxes. Thus, although the bill looks to reduce the tax rates imposed on corporate entities, it intends to make up for lost revenue by broadening the tax base and rationalizing investment incentives granted by investment promotion agencies.

In this connection, proponents of the bill are looking at the possible removal of the “in lieu of all taxes” incentive. This phrase will impact about 51 incentive provisions, and affect quite a number of industries and businesses.

An example of such possible casualty is the Philippine Amusement and Gaming Corp. (PAGCOR) and the incentive it enjoys under Section 13 of its charter. Particularly, Section 13 of Presidential Decree (PD) 1869 provides that the corporation will only be liable for a franchise tax of five percent of the gross revenue or earnings derived from its operation under the franchise. Such tax shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial, or national government authority. The said exemptions granted to the corporation shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this franchise and to those receiving compensation or other remuneration from the corporation or operator as a result of essential facilities furnished and/or technical services rendered to the corporation or operator.

If you will recall, there was a time when the said section was put at risk. When Republic Act (RA) 9337 became law, PAGCOR was removed from the list of tax-exempt GOCCs and thus subject to income tax as a regular corporation. Following the Supreme Court’s declaration that RA 9337 is constitutional (see G.R. 172087), the BIR proceeded to issue Revenue Memorandum Circular (RMC) 33-2013, which declared that PAGCOR is subject to five percent franchise tax on its gross revenue as well as 30 percent corporate income tax. The said RMC also provides that PAGCOR’s contractees and licensees, being entities duly authorized and licensed by PAGCOR, are likewise subject to income tax under the NIRC, as amended.

Naturally, both PAGCOR and its licensees challenged the implementation of the RMC. Thus, the Supreme Court, in its clarificatory ruling dated Dec. 10, 2014 (G.R. 215427), declared that PAGCOR became subject to 30 percent corporate income tax with respect to its income from related services, but not its gaming operations. Pursuant to its charter, PAGCOR’s income and revenue from gaming operations conducted under its franchise remain subject to five percent franchise tax, in lieu of all taxes. The said income should not be simultaneously subject to 30 percent corporate income tax.

Dovetailing this to the amendment proposed by House Bill 7214 to Congress, the incentive enjoyed by PAGCOR and its licensees may once again be subject to all applicable taxes under the Tax Code, even with respect to income generated from gaming operations conducted under its franchise.

Placed in a similarly precarious situation are air transportation companies (ATCs). Currently, ATCs are liable to pay a franchise tax, in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency.

However, House Bill 7214 intends to delete such provision and subject the ATCs to all applicable taxes under the Tax Code. Pessimistically, this may result to an increase in airfare brought about by the increase in the taxes that will soon be incurred by these companies. Unless these companies will be willing to bear the burden of paying additional taxes, we may soon be saying goodbye to our budget fares, favorite travel quotes, and hashtags.

Nevertheless, House Bill 7214 is still far from becoming a law. We may not know how this House bill will turn out — it can emerge to be a completely different law in the end. However, we all hope that our legislators prudently consider the pros and cons of their proposed amendments. At the end of the day, we hope to see results that strike a balance between easing the tax burden of our taxpayers and achieving over-all economic growth.

Rolan L. Bentulan 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.