DOF clears way for customs reform, wider capital markets

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The Department of Finance (DOF) made considerable headway in 2016 in crafting rules and regulations modernizing the country’s customs operations, as well as in resolving contentious issues that have long hobbled the implementations of laws designed to encourage broader investments in the domestic capital market.

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These laws include the Customs Modernization and Tariff Act (Republic Act 10863), the Real Estate Investment Trust (Reit) Act (RA 9856) and the Personal Equity and Retirement Account (PERA) Act (RA 9505), which Finance Secretary Dominguez III—even before assuming his Cabinet post in July, said would be given top priority by the incoming Duterte administration.

Utilizing an innovative method in ensuring the fast-track implementation of the rules and regulations (IRR) of the 200-page CMTA, the DOF under Dominguez’s stewardship set up an online microsite (www.dof.gov.ph/cmta_irr), where the public was given the opportunity to share their comments and suggestions about the provisions of the CMTA. The comments were then collated, reviewed and used in part as the basis for issuing Customs Administrative Orders (CAOs) that would set the law in motion.

This method, Dominguez said, has allowed the DOF, through the Bureau of Customs (BOC), to speed up the drafting of the IRR in stages despite the CMTA’s voluminous and complicated provisions.

Rather than adopt a protracted, tedious process of completing the IRR of the 200-page law at once, the BOC has thus far been able to complete three CAOs that were crafted based on the inputs of stakeholders who had taken part in this inventive, participatory way of drafting the CMTA’s IRR.

These CAOs pertain to the rules [1] raising the tax exempt ceiling to P150,000 for balikbayan boxes sent by qualified Filipinos abroad to the Philippines in up to three instances (CAO 05-2016) ; [2] increasing the value from P10 to P10,000 of de minimis or small importations that are exempted from taxes (CAO 02-2016); and [3] establishing an advance ruling system for valuation and rules of origin for imports and exports (CAO 03-2016).

PERA finally implemented
The PERA, meanwhile, was finally put into effect after eight years when it was formally launched on December 16 by the Bangko Sentral ng Pilipinas (BSP), which has so far accredited two major commercial banks—Banco de Oro (BDO) and the Bank of the Philippine Islands (BPI)—as PERA institutional administrators.

The law promotes capital market development and encourages Filipinos, including overseas workers, to prepare for their retirement through voluntary investments and savings instead of merely relying on social security benefits.

Unlike existing national or corporate pension schemes, PERA does not require a deduction from one’s salary to accumulate funds. Instead, it relies on an individual’s decision to invest up to P100,000 annually in up to five PERA accounts.

Overseas Filipinos workers (OFWs) are provided the additional benefit of being able to invest twice the normal limit or up to P200,000 annually.

BDO has reported that its test launch of the PERA was a success, following the issuance of the law’s rules and regulations.

To ensure that the PERA gets implemented on a wider scale next year, the Bureau of Internal Revenue (BIR) was tasked to clarify the tax-exempt status of PERA investment products and reportorial requirements and consider the imposition of flat rate for early withdrawal penalty.

BIR Commissioner Caesar Dulay has already issued Revenue Memorandum Circular 131-2016, citing the list of PERA Unit Investment Trust Funds (UITFs) and investment products accredited by the BSP and specifying the tax-exempt status of PERA investments and re-investments.

“It is emphasized that only income earned from the investments and re-investments of PERA assets in the above-enumerated PERA investment products shall be exempt from income taxes under Rule 11 of the Rules and Regulations Implementing the PERA Act of 2008,” the BIR ruling said.

The BSP and BIR-accredited PERA administrators will also conduct an end-to-end PERA system test, while PERA Administrators and other PERA market participants will work to ensure the readiness of internal systems and establish external linkages to implement the PERA.

Reit rules reviewed
The seven-year old Reit, which is envisioned to rev up the country’s fledgling capital market and make it an instrument in helping finance private infrastructure projects, was among the laws with contentious issues that Dominguez had pledged to untangle, along with the PERA, in three to six months from the time he assumed the finance portfolio in July.

Dominguez has been successful in keeping this pledge, viewing the Reit as an investment for the future rather than as a revenue-shedding measure, which was the stand taken by the previous administration, resulting in the delay in the law’s implementation.

“Apparently, the past administration [was]thinking on a very short-term basis that they would ‘lose’ revenues under the Reit. I think we have to change the thinking and say we’re not really losing revenues, we are investing towards encouraging business activity,” Dominguez said.

Reits aim to promote the development of the capital market by expanding the participation of the investing public in real estate development.

The Reit law also provides investors with the option to invest directly in finished products such as residential projects, hotels, hospitals, malls, power plants and even toll roads.

The Philippine Stock Exchange (PSE) has long been pushing for reforms in the IRR of the Reit, viewing the law as a potent tool to attract new investments from the private sector.

Setting up a Reit, which is a corporation that pools funds from investors to manage or own real estate, has discouraged investors because of the conflicting provisions between the law and its IRR, such as issues on public ownership requirements and taxation on asset transfers.

Moreover, officials of the previous administration from the DOF, BIR, and the Securities and Exchange Commission (SEC) failed to agree on certain provisions governing the Reit, particularly regarding the ownership share between real estate companies and the public.

Dominguez, upon assuming his post, directed the SEC to review the IRR of the Reit, particularly its provisions on minimum public float requirements.

The existing IRR requires Reits to have a minimum 40 percent public float for the first two years of their listing. By the third year, public investors should have already owned 67 percent of the trust’s outstanding shares.

The law, however, states that the minimum public ownership shall be limited to at least one-third of the outstanding capital stock of the Reit.

Acting on Dominguez’s order, SEC chairperson Teresita Herbosa said the Commission would start imposing a minimum 15 percent public float by January 2017 and would confer with the DOF on adjusting the public ownership requirement for Reits to 33 percent to attract property developers.

As a result of the DOF’s push for reforms in the law’s IRR, fund managers from the United States and Singapore are now expressing interest in investing in Philippine Reits.

Herbosa said foreign investors are interested in setting up Reits here after the Duterte administration had unveiled plans to revive this potentially lucrative investment option, “because the Philippines, along with Indonesia, has the best market outlook.”

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