The Department of Finance (DoF) on Friday gave its assurance that the business process outsourcing (BPO) sector will keep its global competitiveness in the export market despite the implementation of a progressive tax reform program.
Contrary to apprehensions expressed by certain industry stakeholders, BPO companies’ foreign services in special economic zones (SEZs) in the country will remain exempted from the value-added tax (VAT), while those outside SEZs, including those registered under the Board of Investments (BOI) will retain their zero-rated status, the agency said in a statement.
Finance Undersecretary Karl Kendrick Chua said the aim of the proposed Tax Reform for Acceleration and Inclusion Act (Train), the first package of the Duterte administration’s comprehensive tax reform program (CTRP), is to limit the zero-VAT rating to exporters and remove such a preferential treatment similarly accorded to suppliers of exporters, or what are referred to as “indirect exporters.”
“The fear that the Philippine BPO industry will lose its competitiveness because of the proposed tax reform has no basis. Certain industry stakeholders are likely misinterpreting the provisions of the bill. There is no change in tax policy here for exporters,” he said.
Chua explained that receipts from domestic services are already subject to 12 percent VAT, and will remain so with the proposed tax reform.
“This has already been the case even before we proposed the Train bill,” he pointed out.
The DoF official explained that receipts from foreign services within the SEZs of the Philippine Economic Zone Authority (PEZA) will remain VAT-exempt, as is the case now, because they are outside customs territory by legal fiction, or zero-rated if the exporters are outside the special economic zone, including those that are Board of Investments-registered.
As for exporters outside SEZs, they are zero-rated on VAT payments and are entitled to get back their VAT payments once they apply for such refunds under the proposed 90-day refund system, while all other taxpayers, including suppliers to exporters will have to pay the VAT, he said.
However, Chua made it clear that the proposed Train, as outlined under House Bill 5636, explicitly provides that the zero-rated VAT privilege of indirect exporters will be removed only “if and when a credible and enhanced system is put in place” that will allow affected companies to get cash refunds of their VAT payments within 90 days after their filing of VAT refund applications with the Bureau of Internal Revenue.
“The concerns raised by the BPO sector against tax reform appear to be misplaced. They will remain competitive as demand for their services are driven by the high quality of service and talent they offer. The tax policy in the BPO sector will remain the same even after Train,” he noted.