A little competition helps

With the accelerated shift of the Philippines towards a digital economy and the spread of business and investment ideas globally, the country finally took a step forward in promoting fair and free competition in trade and industry as well as an efficient shipping system through the passage of the Republic Act No. (RA) 10667 (Philippine Competition Act) and the amendment of RA 10668 (Cabotage Law).

The passage of RA 10667 paves the way for a level playing field for businesses. The law penalizes anti-competitive agreements, abuse of dominant positions and prohibited mergers. Being the first of its kind in the country and after 20 years in the making, this is the key to addressing the increasing complexities of the global economy.

The Philippine Competition Act encourages healthier competition by setting forth a national policy prohibiting acts that restrain trade and thwart competition. In addition to its business development decisions, management will now have to ensure that the company is not engaging in the prohibited acts enumerated in the law. Moreover, in cases of mergers and acquisitions when the value of the transaction exceeds P1 billion, parties to such mergers are required to inform the Philippine Competition Commission (PCC) -- an independent quasi-judicial body charged with implementing the law and reviewing such transactions. Being a lengthy process, it involves a great deal of careful consideration on the part of businesses.

On the other hand, the amendments to the Cabotage Law allow foreign vessels to load and unload their cargoes in any port in the country. Consequently this significantly reduces the cost of transporting goods into and out of the country. Take for instance the approximate shipping cost from Cagayan de Oro (CDO) to Hong Kong amounting to $1,200 -- 75% of this amount is the cost of shipment from CDO to Manila. With the amendment of the Cabotage Law, it will now cost only half of the said price to transport goods from these two points.

The Cabotage Law is expected to have a positive impact on the economy as it will boost domestic manufacturing and enhance regional dispersal of manufacturing activities. With the reduction in the cost of transport and shipping, our export products will be less costly, making them even more competitive relative to products of other countries. However, the threat of increased import consumption is also perceived along with the resulting lower cost of importation in regions that can now receive direct shipments without passing through the ports of Manila.

The above laws are a welcome change for businesses, big and small alike. Their common ground is healthy competition. Healthy competition results in fairer and healthier prices of quality goods and services, with the prospect of stimulating economic activity. However, our government is charged with the tedious task of implementing the law to its fullest extent so that businesses can benefit from it. Passing comprehensive laws is one thing, implementing them effectively is another.

Since the above laws will benefit the economic aspect of the country, the question is, how will this affect taxation? Is the system of taxation in our country compromised?

Taxation is the lifeblood of a country. Our government depends on the revenue raised through taxation. The power of taxation is inherent in a state and even without the Constitution expressly conferring it the state cannot be deprived of its right to collect taxes for its sustenance. Hence, even with the enactment of the Competition Act, the collection of taxes largely depends upon the outcome of the business activities of an enterprise.

Big business will surely pay a big portion of the taxes, while smaller businesses are not exempt from such exercise of the state’s power. This will be a game-changing era for new businesses. For those who may be hesitant to invest, this should not be a hindrance since there are avenues provided by the government wherein tax exemptions may be granted.

There are certain laws providing fiscal and non-fiscal incentives, to wit: the Omnibus Investment Code, the Bases Conversion and Development Act, the Special Economic Zone Act of 1995, among others. Generally, all investors may avail of the incentives provided the project or activity is among those registered and allowed by the agencies granting the incentives.

At some point, Philippine Economic Zone Authority (PEZA) will determine that incentives are not enough. Due to the high cost of doing business in the Philippines, the incentives provided are losing their effectiveness. According to PEZA, there was a slowdown in foreign direct investment last year due to port congestion, which is less likely to happen if international shipping lines can dock in other ports. The passage of the Anti-Competition Law will also lessen, if not eliminate, the reluctance of businesses to invest in the country.

As for the Cabotage Law, one potential negative impact is the reduced activities of local shipping lines. The sector must adjust to recover the domestic business that will be lost. Domestic shipping corporations are taxed 30% of their net income. Reduced income from domestic shipping companies would mean reduced corporate income tax. On the other hand, international shipping companies are taxed 2.5% of their Gross Philippine Billings (GPB) which now cover the domestic transport portion of their voyages.

There may be little impact on Value-Added Tax (VAT) revenue. If a domestic shipping company transports cargo from a domestic port to Manila for an international shipper, VAT is 0%. On the other hand, international shipping companies are already paying the tax on their GPB and the common carrier’s tax on the full billing including the cost of transport from the local port to Manila.

Overall, the above laws are expected to have a positive effect on the economy in terms of enhanced business activity, higher income and more tax revenues. This will most likely accelerate economic growth, thus representing a step up for the Philippines.

Flourence Kathrine Enriquez

Let’s Talk Tax

Punongbayan and Araullo

RE Developers: Protecting the Environment with Tax Issues

Sadly, it is typhoon and habagat (monsoon) season again. It is usually at this season that our country suffers the brunt of some of the strongest typhoons to make landfall. Typhoons, according to the experts, are getting stronger as a result of climate change. Thus, in an effort to reduce the effects of climate change, renewable energy (RE) sources are highly encouraged by the government. Currently, RE sources available in the Philippines include hydro power, ocean energy, geothermal, wind, solar, and biomass, such as bagasse and palay husk.

  

More than six years from the issuance of the Renewable Energy Act of 2008 and its implementing rules and regulations (IRR), the Department of Energy (DoE) has already awarded a total of 664 renewable energy contracts, as of the end of April 2015. Some 240 contracts are still pending approval by the department.

Aside from the business potential of RE sources, most companies are also entering into RE development due to the fiscal/tax incentives available under the RE Law. Under the IRR of the said law, the Bureau of Internal Revenue (BIR) shall, in coordination with DoE, Department of Finance, Bureau of Customs, BOI and other concerned government agencies, promulgate revenue regulations governing the grant of fiscal incentives. Unfortunately, several years from the issuance of the IRR, the BIR has yet to issue the guidelines for the implementation of the tax incentives under said Act. Thus, with the rising number of RE contracts being awarded, the government must look into the long overdue revenue regulations implementing the fiscal incentives.

Among other things, implementation of the following tax incentives available to RE developer must be clarified in the said revenue regulations:

Income Tax Holiday (ITH) incentive on additional investment. Under the law, new investments in RE project shall be entitled to seven years ITH from start of commercial operation. Additional investment shall be entitled to not more than three times the period of initial availment. The ITH for additional investments in an existing RE project shall be applied only to the income attributable to the additional investment, which may or may not result in increased capacity.

Thus, the revenue regulations must provide the formula to compute that income attributable to the additional investment. For increased capacity, how should the base figure be computed? Is it based on the highest sales in the last three years, or just based on the last year’s capacity? For additional investments that do not result in increased capacity, how should the income attributable to that investment be computed? Should it be based on increase in net income?

Corporate Tax Rate of 10%. After the allowed period of availment of the ITH, the registered RE developer shall pay a corporate tax of 10% on its net taxable income, as defined in the National Internal Revenue Code (Tax Code) of 1997, as amended by Republic Act No. 9337. However, the said RE developer shall pass on the savings to end users in the form of lower power rates, pursuant to a technical study by the DoE.

Yet no results of any technical study to determine the extent of savings and how the pass-on mechanism would work has been presented by the DoE. Since there may be RE developers whose ITH incentive period has or shall already expire, mechanisms or guidelines on how to implement this incentive should already be in place. Among other things, the mechanism must provide the basis for the lower power rates. Should it be determined based on the current period’s rates? Or should it be based on previous period rates charged to end users?

Tax credit on domestic capital equipment and services related to the installation of equipment and machinery. Subject to certain conditions, a tax credit equivalent to 100% of the value of the value-added tax (VAT) and customs duties that would have been paid on imported RE machinery, equipment, materials, and parts shall be given to a registered RE developer who purchases these from a domestic manufacturer, fabricator or supplier.

As provided in the IRR, the BIR shall promulgate a revenue regulation governing the granting of tax credit on domestic capital equipment. But again, no issuance has been issued yet. Thus, issues on how and where the application shall be made -- can this be utilized against any tax due? -- among other things are not clear yet.

Zero-percent VAT on sales and purchases; duty free importation. Sale of fuel from RE sources or power generated from RE, as well as local purchases needed for the development, construction, and installation of the plant facilities of RE developers, shall be subject to 0% VAT. However, for importations, the law provides that importation of machinery and equipment, and materials and parts thereof, including control and communication equipment, shall be exempt only from tariff duties within the first 10 years from the issuance of a Certificate of Registration to an RE developer. The law does not provide VAT exemption for importation.

Thus, input tax from importations of RE machinery or equipment shall be an additional cost to the RE developer. Being attributable to zero-rated sales, such shall be available as tax credit or be applied for refund. However, with the current trend now on the applications for refund, RE developers must still weigh the cost and benefit of such an application.

These are just some of the issues that the issuance of the revenue regulations can very well address. To further tap the unending potential of renewable energy sources available in our country, our government must provide clear implementing revenue regulations on the availment of tax incentives. Having this in place shall mean protecting the environment and assuring our country of additional sources of energy.

Ma. Lourdes Politado-Aclan

Let’s Talk Tax

Punongbayan and Araullo

Should we abolish the estate tax?

A few days ago, I was invited to discuss estate taxes. One of the questions proferred by viewers was whether the Philippines should repeal estate taxes. The viewer probably thought that imposing estate tax on top of the various taxes that we as taxpayers have to shoulder is a huge an imposition on our overstretched budgets.

Considering that we have already paid 32% personal income tax and most probably 12% value-added tax in purchasing the property, deducting a further 20% in estate tax would increase the government’s cut on our hard-earned money to an unconscionable level.

What is estate tax and why do some countries such as the Philippines impose estate tax? Why are we being taxed upon death as if our death is a voluntary mode of transferring property? Aren’t we supposed to conserve our property so that we can pass on our legacy and the fruits of our labor to our progeny without the government confiscating a portion thereof?

Estate tax is not a tax on property. Rather, it is a tax on the privilege of the deceased person to transmit his estate to his heirs and beneficiaries at the time of death. It is imposed on the right of transmitting property upon the death of the owner.

The Philippines is not the only country that levies estate tax. We do not even impose the highest rates on estate tax. The US, UK, Japan, South Korea and France also impose estate taxes ranging from 40% to 55%. By way of contrast, 15 of the 34 member countries of the Organization of Economic Cooperation and Development do not impose estate or inheritance tax at all.

At present, our estate tax ranges from 0% to 20%. The highest rate is imposed on the value of the net taxable estate exceeding P10 million. If we trace the history of our estate tax, the 20% rate is actually a huge improvement. From July 28, 1992 up to December 31, 1997, the top rate was at 35% on any value exceeding P10 million, while from January 1, 1973 to July 27, 1992 the top rate was a whopping 60% on any value exceeding P3 million.

Proponents of the abolition of estate tax argue that estate tax retards economic development as it depletes capital particularly those used in business. Imagine inheriting a business worth P20 million with most of the assets in real property and equipment. In order to pay for the estate tax, there might emerge a need to liquidate or sell a portion of the business. This will negatively impact on the development or growth of the business, perhaps leading to decreased production and retrenchment.

Another argument in support of repealing estate tax is that it has a narrow tax base and huge administrative cost. Simply put, the costs do not justify the expected tax revenue. For example, in 2007, there were only 29,198 estate tax returns filed, producing P649.9 million worth of estate tax collections.

The Bureau of Internal Revenue (BIR) did not provide the total number of recorded deaths for the same year but noted that the recorded deaths in the National Statistics Office are 415,271 for 2005 and 389,081 for 2006. Basing on the lower number of total deaths, less than 10% of all estates filed the corresponding tax return.

Also, total number of estate tax returns amounted to 29,863 in 2008 and 26,811 in 2009 with total estate tax collections of P854.9 million and P876.8 million, respectively.

Various other countries have acknowledged the need to remove estate taxes. From 2000 to the present, 12 countries have repealed their estate taxes. More are probably on their way to abolishing this tax.

The Philippines appears to be a long way from having an estate tax-free system. The BIR is even increasing its efforts to run after estates which did not file estate returns and pay the correct taxes.

Maybe with elections coming up in 2016, we will have a new set of leaders who will see the value of abolishing estate tax. Until then, we can only hope that our leaders become enlightened.

Atty. Eleanor L. Roque

Let’s Talk Tax

Punongbayan and Araullo