PEZA, industries call for two separate regimes of tax incentive for export and for domestic businesses amidst pandemic and CREATE bill passage

October 12, 2020

PEZA, industries call for two separate regimes of tax incentive for export and for domestic businesses amidst pandemic and CREATE bill passage

12 October 2020 (Monday)

Pasay City – As the Philippines ranked first in ASEAN in most COVID-19 cases since August despite seven months of lockdowns and the economy grapples with job losses and tough competition for investments in the pandemic, the Philippine Economic Zone Authority calls on the Senate to consider instead two separate regimes of tax incentives for export and for domestic market enterprises.

“The Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill which aims to rationalize fiscal incentives for both export and domestic companies should instead be focused on applying only to domestic market,” said PEZA Director General Charito “Ching” Plaza on Monday as Senate deliberates the bill as a top agenda.

Plaza said that “We are still in the state of calamity. Philippine economy is suffering with uncertainties that are created by the COVID-19 global crisis and the uncertainties of the CREATE bill. Passage of CREATE bill is in bad timing. Its passage is insensitive with the companies struggling to operate, keep jobs, and that contribute to keep the economy afloat. Also it will badly affect competition for new investments in our export industry.”

The PEZA Chief explained that “It is detrimental strategy to apply new tax incentives regime to export-based companies when in fact PEZA’s tax incentives is globally-competitive, tried, and tested for attracting investments that other countries try to compete with.”

“Moreover, as shown in the recent NEDA’s initial key findings from cost benefit analysis (CBA) on tax incentives from 2016 to 2018, PEZA is vindicated with the finding that its tax incentives indeed generate more investments and contribution to the economy,” she added.

CREATE bill aims to rationalize fiscal incentives uniformly both to export and domestic markets. Meanwhile, aggressively competing ASEAN neighbors had been adjusting both their fiscal and non-fiscal incentives to attract transferring companies and keep existing investors amidst the pandemic where operations of companies are volatile.

Why CREATE bill must apply only to domestic market

The PEZA Chief underlined that “Exporters should not be equated with domestic companies that only produce for the local market. The two are different in context. The exporters compete in a global market and face tougher competition from international competitors, while domestic market only focus on local consumers and few competitor.”

“In terms of tax incentives, it is a crucial factor for export-based investors as part of ease and cost of doing business. Investors compare tax incentives in different countries. However, PEZA’s incentives and brand of service in one-stop-shop and non-stop shop are internationally renowned already and globally-competitive. Hence, there is no need to tinker with it. When we tinker with PEZA’s tried and tested incentives that keep our investors, it threatens companies that can opt to transfer their investments abroad. They can leave and it means job losses for Filipinos,” said Plaza.

“On the other hand, domestic market is the one that needs to experience tax incentives and be incentivized with their market. In addition, establishing or changing their tax incentives won’t be large threat to the economy because they don’t necessarily leave the country and transfer capital,” explained Plaza.

The country needs export income as part of its Gross Domestic Product (GDP) and to generate investments and jobs.

Exporters need separate fiscal incentives

Further explaining the special context for ecozones, the PEZA Chief said that “Ecozone investors under PEZA, Subic, Clark, AFAB and other IPAs are export-oriented and therefore must be provided special fiscal and investment incentives as they compete in the international market.”

“As efficiency-seeking investors, they consider incentives as compelling factor in their decision to locate in a certain country including cost of doing business and labor productivity. Ecozone locators in particular rely on fiscal incentives to compensate for high cost of doing business and weak supply chain in the Philippines, and so they can be viable with their export operations in the country,” she added.

“CREATE bill is more advantageous to domestic enterprises with their market or resource-seeking investments, but the bill will be detrimental to export enterprises given their efficiency-seeking investments,” Plaza said.

At the global context, ecozones and freeports worldwide compete to offer the best fiscal incentives to be able to attract FDI and generate export revenues for their government. “We are not the only game in town as we vie for FDI against our ASEAN neighbors, and where ecozones as a development strategy continue to be the trend worldwide particularly in Asia,” the PEZA Chief said.

In terms of Income Tax Holiday (ITH) alone as a common fiscal incentive for FDI attraction, the Philippines has the shortest term of 4- 8 years ITH compared to the 5- 15 years ITH among ASEAN top five countries. Vietnam can offer up to 40 years of ITH, while Dubai's ITH period ranges from 15- 50 years.

“We have more developed ASEAN neighbors that have better quality of infrastructure, ease of doing business and overall competitiveness than the Philippines. While our incentives still keep our investors, we must realize that it becomes imperative that the government provides for a different and even enhanced incentives for export-oriented FDI in order for the country to be competitive as an investment destination in the region,” Plaza remarked.

Status quo tax incentives for exporters

The PEZA Chief also appealed that keeping the status quo of tax incentives for exporting companies is being sensitive to both investors and to Filipinos’ need for jobs and livelihood.

Meanwhile, the Information Technology and Business Process Association of the Philippines (IBPAP) in their letter dated 28 May 2020 to Senator Pia Cayetano, head of the Senate Committee on Ways and Means, requested that existing investors and locators in economic zones be given “a five (5) year deferment of any changes to current incentives to counterbalance serious uncertainties brought about by the health crisis and give ample time to recoup losses.”

IBPAP President Rey Untal described it as a much-needed deferment and after which the IT and BPO industry is open to proceed with the sunset provisions.

Senate President Pro-Tempore Ralph Recto also pointed out that even when the passage of the bill will end the agonizing uncertainty for investors, they must be very careful with its negative implications. “If we make a mistake and pass a bad law on rationalizing fiscal incentives, we will miss the boat … We might be killing the goose that lays the golden eggs as well in the process,” said Recto.

Likewise, Senator Richard Gordon called for caution in tinkering around with something that is not broken especially on rationalizing incentives given by IPAs. “It may not be the right time to do this. Let us take a step back and look at our situation because COVID is going to exacerbate it. Let us not tinker around too much with what is working because we might end up in a bigger abyss,” he said.

Export companies retain jobs amidst job losses in pandemic

According to DOLE report, close to 100,000 workers in the country were laid off in the first semester of 2020 due to the pandemic. The figure is a fraction of the 4.9 million who lost their jobs in April.

“Despite the difficult times in COVID-19 pandemic, PEZA has maintained its operations of registered-companies through its ‘balancing acts.’ We should be sensitive and support also export-companies that keep the jobs of Filipinos,” said Plaza.

“PEZA has implemented an effective ‘balancing acts’ to address both the dangers and opportunities brought by the COVID-19 crisis. Now, 80%-90% of its 4,587 locator companies in its 408 ecozones continue to operate with implementation of strict health and safety protocols, ensuring the welfare of more than one million employees still working.”

Bringing pride and hope amidst the pandemic, the PEZA Chief thanked the US Department of State for recognizing PEZA that regulates and operates special economic zones as providing a better business environment due to its regulatory transparency, no red-tape policy, and one-stop shop services for investors.

In its official 2020 Investment Climate Statements communicated through the Philippine Embassy in the US and to the Department of Trade and Industry, the US Department of State made the specific statement that the “While the Philippine bureaucracy can be slow and opaque in its processes, the business environment is notably better within the special economic zones, particularly those available for export businesses operated by the Philippine Economic Zone Authority (PEZA), known for its regulatory transparency, no red-tape policy, and one-stop shop services for investors.”