OECD downgrades ‘harmful’ tax status on regional HQ in Philippines

MANILA, Philippines — The Philippines has evaded being flagged as a “harmful” tax economy by a global policy forum for enacting a law that eliminates preferential rates on regional operating headquarters (ROHQs).

The Department of Finance (DOF) yesterday said the Philippines would be removed from an Organization for Economic Cooperation and Development (OECD) list of economies that extend discounted taxes to ROHQs.

The OECD’s Forum on Harmful Tax Practices (FHTP) granted the DOF’s request to change the country’s ROHQ assessment to reflect amendments on the fiscal regime brought about by the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.

Finance Undersecretary Antonette Tionko said the ROHQ regime would now be labeled as “potentially harmful but not actually harmful” until Dec. 31, and declared “abolished” by Jan. 1 next year.

The FHTP views the provision of preferential taxes to ROHQs as a “harmful” feature to the fiscal structure of any economy. Under such a setup, tax benefits are awarded to foreign firms, which the FHTP finds disadvantageous to local investors.

In a report issued in November last year, the FHTP assessed the Philippine ROHQ regime as “in the process of being eliminated” wherein “potentially harmful features will be addressed.”

The FHTP was planning to give the country an ROHQ assessment of “harmful” until Dec. 31, but the DOF appealed that this evaluation be adjusted to take into consideration the reforms under the CREATE Act.

The law lifts the 10 percent special corporate income tax (CIT) rate extended to ROHQs, forcing them to pay starting next year the 25 percent CIT rate imposed on domestic firms.

Tionko also informed the FHTP that the government prohibited grandfathering in the CREATE Act. If grandfathering was allowed, ROHQs would be permitted to keep their fiscal incentives for a certain number of years before they shift to the new tax structure under the law.

He told the FHTP that the number of foreign investors availing themselves of the ROHQ incentives has declined since legislative discussions on the lifting of tax incentives began in 2018. Based on data from the Bureau of Internal Revenue, only one firm applied for ROHQ perks in 2019.

In March, President Duterte signed the CREATE Act that brings down the CIT rate to 25 percent, from 30 percent – the highest among Southeast Asian countries – in an effort to encourage firms to improve their local operations.

The measure, however, lifted incentives like the five percent tax on gross income paid in lieu of local and national taxes enjoyed by exporters in economic zones.