Regional HQs fleeing Phl as tax perks scrapped

MANILA, Philippines — As many as 15 multinational companies with regional headquarters (RHQ) or regional operating headquarters (ROHQ) in the country have left following the removal of the special tax rate they enjoy, the Philippine Association of Multinational Companies Regional Headquarters Inc. (PAMURI) said.

“What is important to note is the closures happened after the passage of TRAIN (Tax Reform for Acceleration and Inclusion) 1,” PAMURI director Celeste Ilagan told reporters yesterday on the sidelines of the Joint Foreign Chambers (JFC) of the Philippines’ Arangkada forum.

TRAIN 1, or the first package of the government’s tax reform program which took effect on Jan.1 last year, reduced personal income tax rates and slapped higher taxes on fuel, cars, tobacco and sugar beverages.

While the law was approved, President Duterte vetoed the provision granting a special tax rate of 15 percent on the gross income of employees of RHQs, ROHQs, offshore banking units, and petroleum service contractors and subcontractors.

The provision was seen to violate the equal protection clause under Section 1, Article III of the 1987 Constitution, as well as the rule of equity and uniformity in the application of the burden of taxation.

Following the veto of that provision, the Bureau of Internal Revenue issued a tax advisory  which subjected employees of RHQs and ROHQs to regular income tax rates.

“There are companies who hire very specialized skilled workers and therefore, if these workers lose the advantage of staying with ROHQ and that is preferential tax rate, then, the company will find it difficult to support whatever type of operation they are doing in the Philippines,” Ilagan said.

She said firms set up ROHQs in locations seen best to support the needs of global operations.

She added the preferential tax rate is among the considerations for firms in evaluating the Philippines.

Apart from the 15 percent tax on gross income of employees, ROHQs also enjoy payment of lower corporate income tax (CIT) rate of 10 percent, as well as exemption from local business taxes.

As the second package of the government’s tax reform program or the Comprehensive Income Tax and Incentives Rationalization Act (CITIRA) which seeks to bring down the CIT rate gradually to 20 percent from 30 percent and change the incentives system is being discussed at the Senate, RHQs or ROHQs are again at the risk of losing their other perks.

If the CITIRA would be approved in its current form, Ilagan said the RHQs or ROHQs would have to pay the higher CIT rate of around 28 percent, and would no longer enjoy the local business tax exemption after the two-year sunset period.

“Our position is to retain local business taxes and to retain [current] CIT rate,” she said.

In addition, she said PAMURI would want a longer sunset period of 10 years.

Meanwhile, American Chamber of Commerce of the Philippines executive director Ebb Hinchliffe said they are open to a compromise in the proposed CITIRA, noting that the passage of the bill in its current form would be detrimental to current investment climate as well as future investors.

Among the changes in the CITIRA bill is the removal of the five percent tax on gross income earned (GIE) paid by firms registered with the Philippine Economic Zone Authority in lieu of all national and local taxes after using up income tax holidays.

“If we can get DOF (Department of Finance) to meet us halfway, my proposal from the AmCham standpoint is seven percent GIE (gross income earned). Anything greater than seven percent is not acceptable, but seven percent is the perfect number that we could compromise on,” Hinchliffe said.

He said foreign businesses would want to see clarity in the final form of the CITIRA to put an end on uncertainties affecting investment decisions.

“Every day of delay is a day of lack of investments. The longer it goes on, then it benefits other Asean (Association of Southeast Asian Nations) instead of the Philippines,” he said.

Apart from clarity in the CITIRA bill, the JFC also wants to see timely passage of the budget for next year to be able to fund infrastructure projects which are among the considerations of investing firms.

“Delay in passing 2019 budget has taken hefty toll on BBB (Build Build Build) program…So, our recommendation is for 2020, to make sure the budget is passed on time,” European Chamber of Commerce of the Philippines president Nabil Francis said.

JFC is a coalition of the American, Australian-New Zealand, Canadian, European, Japanese, Korean chambers and PAMURI.

The chambers represent over 3,000 member companies engaged in over $100 billion worth of trade and some $30 billion worth of investments in the Philippines.