Tax incentive compliance report

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DANILO NAVARRO

DANILO NAVARRO

The Philippines is one of the largest outsourcing destinations in the world. One of the reasons for the sector’s rapid growth is government support in the form of regulations and incentives. Most BPO companies in the country are registered with the special economic zones that offer benefits relating to capital, operation, and taxation.

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Companies registered with the Philippine Economic Zone Authority (PEZA) will enjoy income tax holiday, normally four years for non-pioneer projects and six years for pioneer projects but extendable up to eight years. At the end of the tax holiday, the company is liable to pay a tax, which is computed as 5% of the gross income. In addition, PEZA-registered enterprises are exempted from all duties and tax on equipment and parts imported as well as wharfage on such imports. They also need not pay value-added tax (VAT) in the case of local purchases of goods and services, and expanded withholding tax.

Before President Benigno S. Aquino signed the Tax Incentives Management and Transparency Act on December 8 2015, the government had no system to account for the tax incentives granted to companies enjoying such benefits. That piece of legislation was enacted to promote fiscal accountability and transparency in granting tax incentives and how they are managed. Thus, the government’s fiscal exposure in these grants can be measured and the government can analyze and review their economic impact for optimizing the social benefits of the incentives.

In connection with this, the secretaries of the Department of Finance (DOF) and the Department of Trade and Industry (DTI), in coordination with the director general of the National Economic Development Authority (NEDA), commissioners of the Bureau of Internal Revenue (BIR) and Bureau of Customs (BoC), and heads of concerned investment promotions agencies, promulgated the implementing rules and regulations through the Joint Administrative Order No. 1-2016. The salient provisions of the implementing rules and regulations include compliance requirements, incentives monitoring mechanism, conduct of cost-benefit analysis on investment incentives, promotion and regulation of investments and administration of incentives, penalty for non-compliance with the filing, and reportorial requirements.

An Investment Promotion Agency (IPA) refers to government entities created by law, executive order, decree or other issuance, in charge of promoting investments, administering tax and non-tax incentives, and/or overseeing the operations of different economic zones and free ports in accordance with their respective charters. These include the Board of Investments (BOI), PEZA, Bases Conversion and Development Authority (BCDA), Subic Bay Metropolitan Authority (SBMA), Clark Development Corporation (CDC), John Hay Management Corporation (JHMC), Poro Point Management Corporation (PPMC), Bataan Technology Park, Inc. (BTPI), Cagayan Economic Zone Authority (CEZA), Zamboanga City Special Economic Zone Authority (ZCSEZA), Phividec Industrial Authority (PIA), Aurora Pacific Economic Zone and Freeport Authority (APECO), Authority of the Freeport Area of Bataan (AFAB), Tourism Infrastructure and Enterprise Zone Authority (TIEZA), and all other similar authorities that may be created by law in the future.

All business entities registered with an IPA required to file returns and pay the tax through BIR’s electronic system for filing and paying taxes, by the deadline provided under the revised National Internal Revenue Code.

Registered business entities availing of the incentives administered by the IPA shall file with their respective IPAs an annual tax incentives report within 30 days from the statutory deadline for filing of the final adjustment return for income tax and payment of tax due thereon, if any. However, since the Tax Incentives Management and Transparency Act was already in effect in 2015 but the implementing rules and regulations was signed only in June this year, the companies can submit the first report on by 15 September this year for both income-based tax incentives covering taxable year 2015 and VAT and duty exemptions covering calendar year 2015.

In the event that the BIR’s electronic system for filing and payment of taxes is unavailable BIR will allow companies to file returns and pay taxes manually but within the stipulated deadline. In such a situation, IPAs will accept the tax returns that BIR has stamped. However, when the electronic filing system is back in action, the BIR will notify business entities in writing and they are then required to file electronically within 15 days the returns they had earlier filed manually.

Note that the IRR shall not be construed as a means to diminish or limit, in whatever manner, the amount of incentives that IPAs may grant according to their charters and existing laws; or prevent, deter, or delay the promotion and regulation of investments, processing of applications for registrations, and evaluation of entitlement of incentives by IPAs. Business entities availing incentives shall comply with the incentives validation requirements of their respective IPAs. IPAs may exercise their authority to evaluate or validate any application for availment of the tax holiday and/or other income-based tax incentives and to endorse the result of the same to other agencies as necessary.

Any business entity that fails to comply with the filing and reportorial requirements with the appropriate IPAs and/or fails to show proof of filing of tax returns to IPAs using the BIR’s electronic system for filing and payment of taxes shall incur the following penalties: For the first violation, a fine of P100,000; and for the second violation, a fine of P500,000. In the event of a third violation, the business entity’s registration will be cancelled. However, if such failure is not the fault of the RBE, it will not be grounds for the suspension of the income tax holday and/or other income-based tax incentives.

In addition, on this August 4, PEZA issued the memorandum order No. 2016-003 to all PEZA-registered enterprises and developers/operators that are entitled to PEZA incentives emphasizing the submission of annual incentives report of business entities including the transition deadline (September 15, 2016). Business entities can obtain from PEZA the required forms in Excel worksheets.

Apart from promoting transparency, the Tax Incentives Management and Transparency Act also provides policymakers the data and information on tax incentives that will be useful when evaluating the efficacy of existing tax incentives and the proper design of tax incentives framework in line with the move to rationalize the grant of tax perks for businesses operating in the Philippines.

The author is a Senior Manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd., a member firm of Deloitte Touche Tohmatsu Limited —comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

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