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