Electronics sector seeks 10% CIT

The electronics manufacturing sector, the country’s biggest dollar earner, has proposed for a 10 percent corporate income tax (CIT), inclusive of the Local Business Tax (LBT) and the Real Property Tax (RPT), in lieu of the planned removal of the perpetual 5 percent tax on gross income earned (GIE) currently enjoyed by companies inside the country’s export processing zones.

The Semiconductor Electronics Industry of the Philippines Institute (SEIPI), which groups the electronics companies in the country, made this recommendation as input to the proposed Tax Reform Reduced Corporate Income Tax and Rationalization of Fiscal Incentives of the Department of Finance, which calls for the abolition of the 5 percent GIE. In lieu of that, the government may reduce the current CIT of 30 percent to 15 percent.

Under the DOF’s tax reform package, the 2 percent in the 5 percent gross income earned remitted to the Local Government Unit (LGU) by ecozone locators will now be assessed based on the local government code.

But SEIPI said this scheme will only expose the industry to inconsistencies in the Local Government Units, which are highly political and severely unstandardized.

To avoid this situation and ensure that investors still enjoy non-interference from LGUs, SEIPI has proposed for a 10 percent CIT inclusive of the LBT.

SEIPI also wants the RPT to be covered by the 10 percent CIT otherwise, the group will move also for the removal of any form of real property tax.

But the group would like the government to clarify the computation of the RPT, if it were to be based on each equipment and its current book value noting that manufacturing is equipment-intensive and some of the assets are consigned or leased from the headquarters.

Notably, SEIPI’s proposed 10 percent CIT inclusive of LBT and RPT is more generous than the current proposal of 15-20 percent.

According to SEIP, a 15 percent CIT may be revenue-generating, but there will be a huge impact on operational cost. It said that Vietnam’s zero-rent for 50 years and Thailand’s 15-year income tax holiday will be hard to compete against if all

other components of operating costs — power, labor, logistics — are higher in the Philippines.

SEIPI also strongly opposed the planned imposition of the 12 percent VAT on indirect exporters (suppliers and importers).

According to SEIPI, removal of this privilege goes counter to the parts localization initiative of the industry. “Manufacturers will opt to import because it will be cheaper,” the position paper stated.

SEIPI further called to exempt exporters from the VAT refund process, since the 90-day refund mechanism is not realistic given the current processes of the collecting agency. BIR requires an audit before any refund is granted. Audits alone will take more than 90 days. Additionally, it will compel companies to hire the services of external consultants, whose fees will depend on the disallowances. The VAT Refund System will only incur administrative work for both the BIR and the companies.

SEIPI said it supports the DOF’s objective to make incentives performance-based, targeted, time-bound, transparent, and measurable.

But it also requested for a clear set of metrics and guidelines be provided to ensure our industry’s performance will be fairly measured. The group said that its presence in host localities accounts for the transformation of cities and towns in various manufacturing clusters across the country.

The group also requested for a clear definition of “new technology” noting that in the electronics industry, where product life cycles are short, new product — which may seemingly look the same — are made with new technology, processes and even equipment.

The industry roadmap, which is articulated in the Products and Technology Holistic Strategy (PATHS), identifies products and technologies the Philippines should be focusing on and the ideal conditions (country factors) that will support this environment.

In pushing for these recommendations on incentives, SEIPI said that investors also look at the stability of fiscal policies.

“It will be hurtful for the industry if the terms of incentives were changed after they have made their decision to invest in the Philippines,” said SEIPI.

SEIPI has also warned against abrupt changes in fiscal policies as this will bring uncertainty in the country’s investment climate.