With the “return to office” or “back to office” mandate in the Philippines affecting information technology and business process outsourcing (IT-BPO) firms, particularly those located in ecozones administered by the Philippine Economic Zone Authority (PEZA), what appeared to be a contentious issue moving forward was the balance between keeping fiscal incentives and sustaining work-from-home (WFH) or work-from-anywhere (WFX) for BPO workers. Then again, what kind of incentives exactly do these companies have to consider in their future policies?
Among the most cited laws governing the framework for BPO firms operating in PEZA would be Republic Act No. 7844 (Export Development Act), Republic Act No. 7916 (Special Economic Zone Act), and Republic Act No. 11534 (CREATE Act). The following would attempt to summarize some of the incentives BPOs may have to let go if they choose to move away from ecozones.
Table of Contents
Income tax holiday (ITH)
An income tax holiday refers to a period of time when companies are either exempted or would pay less taxes. Formerly ranging from four years (for non-pioneer firms) to six years (for pioneer firms) in accordance to Executive Order No. 226, s. 1987 (Omnibus Investments Code), which defines the income tax holiday as “full exemption” from income taxes, the CREATE Act has updated this classification for export enterprises as follows:
- Four years ITH for those located in the National Capital Region
- Five years ITH in metropolitan areas or those contiguous to Metro Manila
- Six years ITH in all other areas
As per PEZA Deputy Director General for Policy and Planning Tereso Panga, BPOs are considered to be under Tier I classification. This is defined by the CREATE Act as activities that have high potential for job creation, take place in sectors with market failures, generate value creation through innovation, provide essential support to those critical to industrial development, or an emerging industry owing to potential comparative advantage. Tier II and III industries, on the other hand, would be able to avail up to seven years of income tax holiday.
The longer income tax holiday permitted for firms located outside metropolitan areas, meanwhile, is meant to promote economic development for the rest of the country. Added to this was Administrative Order No. 18, s. 2019, which placed a moratorium on BPO applications to be located in Metro Manila. To date, this remains in effect despite appeals to lift the moratorium.
Special Corporate Income Tax (SCIT)
For export enterprises, a tax rate equivalent to 5 percent effective July 1, 2020 based on gross income earned would be paid in lieu of all national and local taxes. With Tier I industries like BPOs, they have 10 years to avail the SCIT. This is the difference under the CREATE era, for the 5 percent tax rate did not have a sunset provision in the earlier Special Economic Zone Act. Also prior to CREATE, the corporate income tax (CIT) in the Philippines was at 30 percent, regarded as the highest in Southeast Asia. One could only imagine the disparity between the unlimited SCIT rate of 5 percent, as enjoyed by BPOs, and the regular 30 percent CIT under the previous legal framework.
Enhanced Deductions (ED)
The following enhanced deductions may also be allowed for export enterprises like BPOs for the first 10 years.
- Depreciation allowance of the assets acquired for the entity’s production of goods and services
- Additional 10 percent for buildings
- Additional 20 percent for machineries and equipment
- Additional deduction on the labor expense incurred in the taxable year (50 percent)
- Additional deduction on research and development (R&D) expense incurred in the taxable year (100 percent)
- Additional deduction on training expense incurred in the taxable year (100 percent)
- Additional deduction on domestic input expense incurred in the taxable year (50 percent)
- Additional deduction on power expense incurred in the taxable year (50 percent)
For those involved in manufacturing, a deduction for reinvestment allowance shall be allowed to a maximum of 50 percent within five years from the time of reinvestment.
Importation incentives
Duty exemption on importation of capital equipment, raw materials, spare parts, or accessories may also apply. In addition, there may be value added tax (VAT) exemption on importation and VAT zero-rating in local purchases, provided they are used in registered activities or projects. Otherwise, all applicable duties as defined by Republic Act No. 10863 (Customs Modernization and Tariff Act) shall take effect.
Conclusion
How much do these incentives amount overall? From 2016 to 2019, Department of Finance (DOF) Assistant Secretary Paola Alvarez noted that IT-BPO firms have enjoyed an average of PHP 26.30 billion in total tax incentives. PEZA has 1,274 IT locator companies operating in 297 IT centers/parks as of December 2021. They reportedly provided 1,017,559 jobs nationwide with exports amounting to USD 15.797 billion.
Then again, owing to the concise nature of this article, evaluating the effects of the new tax regime for export enterprises such as BPOs and whether they outweigh the costs of transitioning their staff from hybrid work schemes may be left for another time. What could be a significant takeaway, nonetheless, would be the changes brought by the Comprehensive Tax Reform Program (CTRP), of which CREATE is part of (as Package 2). Moving forward, we have the opportunity to further examine how our current fiscal regime could be modified to better prepare for the future our post-pandemic economy.
