The Philippines needs to sharpen its competitive edge if it wants to remain a contender as an investment destination. One of the country’s main selling points is its ongoing reforms, but these reforms need to be targeted and strategic. Meaning, these ongoing reforms should be used to address the existing concerns of potential investors.
The Asian Consulting Group’s International Tax and Investment Roadshow created a platform for potential investors to learn more about investing in the Philippines and, more importantly, to air their concerns. During the first half of the year, the Roadshow has been held in East Asia, the United States, and Europe, and was attended by representatives from multinational corporations, fintech companies, and other foreign investors.
There are certain recurring issues that have been pointed out by these potential investors.
Improving the VAT refund process
One of the more consistently mentioned concerns is the issue of VAT refund. Simply put, the process is cumbersome and there is no reassurance that the claims would be approved even though these applicants for refund have already paid the input VAT.
When ordinary corporations apply their output VAT to their input VAT, they do not need to undergo a separate process. When it comes to zero-rated corporations, such as exporters, they need to apply for VAT refund, an entirely separate process which ends up being too stringent. The BIR has a tendency to be strict with refunds because its mandate is to collect taxes. If it wrongly approves a refund claim, then it will be held at fault.
One solution to this problem is the establishment of a separate VAT refund center, which is specifically tasked with processing refund claims. This agency would have the specialized skills to process VAT refunds. Fortunately, the latest version of the CREATE More Bill appears to be headed toward this direction, since the bill appears to include the establishment of a VAT refund center within the Department of Finance’s Revenue Operations Group.
Another solution is the implementation of electronic processing of VAT refunds. By using electronic processing for VAT refund applications, the BIR would be able to rely on third-party information. Through the use of this data, the BIR will be able to identify discrepancies between the sales declared by suppliers and the purchases declared by buyers, and it is only when there is a discrepancy that the BIR should conduct a VAT audit.
Electronic processing of VAT refunds is already being done in some countries in the European Union, such as France, Spain, and Italy, and also in South Korea.
Implementing Risk-Based Audit
In line with the necessary reforms to the VAT refund process, it is also necessary to overhaul the way BIR Audit is being conducted. The current system of random audit needs to be abandoned in favor of a risk-based audit system which would not only be targeted and strategic, but also fairer and less prone to abuse. Under the current system, BIR Audit is conducted on a random basis, which means that it is possible for the same companies to be audited over and over again. It grants revenue officers unbridled discretion on who to audit.
The classifications introduced by the Ease of Paying Taxes Law, which classified VAT refund applications in terms of low-risk, medium-risk, and high-risk, could be extended to taxpayers in general. Taxpayers paying a certain amount below the industry threshold could be categorized as medium-risk or high-risk, while compliant taxpayers could be classified as low-risk. Limiting BIR Audit to taxpayers that are deemed high-risk would allow the BIR to be able to focus its efforts by auditing only those that are high-risk, and it would prevent taxpayers identified as low-risk or medium-risk from feeling harassed.
Introducing Global Minimum Tax
The Philippines would also benefit from implementing a Qualified Domestic Minimum Top-Up Tax (QDMTT) pursuant to the OECD’s Two-Pillar Solution. The Two-Pillar Solution seeks to address excessive tax avoidance by multinational corporations who take advantage of tax havens to hide away their income. The QDMTT is one such solution that is intended to address that very problem. A QDMTT is a minimum top-up tax which calculates the excess profits located in the jurisdiction and increases the domestic tax liability with respect to excess profits to the minimum rate for the jurisdiction.
Introducing the QDMTT in our jurisdiction would allow the collection of the difference between the Global Minimum Tax and the Income Tax Holiday (ITH) or Special Corporate Income Tax (SCIT).
In line with the OECD proposal is the adoption of Income Inclusion Rules (IIR), which would ensure the collection of revenues from the subsidiaries of Philippine entities operating in tax havens or low tax jurisdictions. Income Inclusion Rules have been implemented in countries such as Japan, South Korea, and Vietnam.
Restoring the Authority to Administer Incentives in favor of Investment Promotion Agencies (IPAs)
Another main reason investors consider investing in the Philippines is its incentives. However, it can become cumbersome for certain incentive applications. While CREATE Law is certainly admirable for its push for rationalization of incentives, it unwittingly added an additional layer of bureaucracy.
Under the current system, investments falling within the jurisdiction of the Fiscal Incentives Review Board (FIRB) have to be endorsed and approved by the FIRB even though IPAs, such as Philippine Economic Zone Authority (PEZA), have already examined the necessary documentary requirements for these applications. The end result is delay in the start of the commercial operations of affected business enterprises.
According to PEZA, the process would be expedited if the authority of IPAs to administer incentives would be restored. IPAs are also in a position to directly pinpoint the interests of Registered Business Enterprises (RBEs) and thus be able to forward recommendations that address their concerns. One of their most recent recommendations is exempting RBEs from local business taxes. Another is allowing RBEs the option to directly avail the Special Corporate Income Tax (SCIT) instead of having to first avail the Income Tax Holiday before being allowed to avail the SCIT incentive.
Final Note
All these issues are major concerns not only for foreign corporations, but also for local businesses. Addressing them by implementing key tax policy reforms and catching up the Philippines with international standards is a must if we want the country to remain competitive as an investment destination, be it from foreign businesses or overseas Filipinos.
The country’s ongoing tax reforms will only be a competitive edge if we maximize it by showing potential investors that we are willing to listen to their concerns and address investors’ issues. The International Tax and Investment Roadshow continues to serve as a platform for airing out investor concerns. After its run in Oceania, ACG is set to hold the Investment and Tax Briefing in Prague and Milan in August. It will resume in Vietnam, the Middle East, Canada, and once again in London by October. For more details, you can reach out to consult@acg.ph.
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