Philippine Tax Policy through the eyes of Foreign Investors

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here’s an article on how the Philippine’s Tax policy is seen through the eyes of a Foreign Investor, an article written by Olivier D. Aznar for Business World.  Definitely another reason why our Foreign Direct Investment is one of the lowest in the Asean Region ….

IN THE RECENT Asia-Pacific Economic Cooperation Summit, President Benigno S. C. Aquino III told chief executives: “There is no better time to invest in the Philippines than now.” The president cited the steady growth of the country’s gross domestic product over the last four years, averaging 6.3%, as compared to 4.3% from 2006 to 2009. He said this growth partly due to increased investment and trade.

The president’s invitation implies many promises that need to be backed up, and one of the areas of interest for foreign investors is tax policy.

It is not difficult to find feedback from foreign investors on the tax regime, with the value-added tax (VAT) refund process a particular sticking point. The refund on VAT inputs attributable to VAT zero-rated sales is controversial because of the Bureau of Internal Revenue’s (BIR) “deemed denial” rule, in which the absence of a BIR ruling on a refund application within 120 days is deemed to constitute denial of the claim.

Considering the BIR’s past performance, the 120-day rule does not give foreign investors the confidence that a reasonable decision will be forthcoming within the given period. We have heard of decisions taking two years… three years… four years… or forever in the worst case.

The 120-day deemed denial rule should worry foreign investors because it suggests a tendency on the part of the bureau not to rule on claims. In any event, after 120 days, the claim is deemed denied. This will necessarily result in having to go to the courts, which will permit businesses to claim their refunds only years late — and even then, only, if the claim is granted.

Another observation from foreign investors is the difficulty in securing the importer’s accreditation pursuant to the new rules issued this year. Although there was a subsequent modification of the rule wherein a provisional accreditation could be issued, this is effective only for six months.

According to news reports, as of Oct. 14, the BIR received 14,820 applications for clearance from importers and customs brokers, and only about 2,000 were issued regular Importer Clearance Certificates (ICC). Foreign investors with international operations would definitely need their regular ICCs to operate their business as usual.

Thus, imagine what will happen if the applications are not promptly acted upon, leading to import disruptions that ultimately dampen economic growth. The the response would not be encouraging.

Another tax issue that was decided last year by the Supreme Court (SC) involved applications for a tax treaty relief ruling. In 2000, the BIR issued a Revenue Memorandum Order which requires that, before a tax treaty incentive can be availed of, an application for a ruling must first be made to the BIR within a certain period.

According to the SC, the period of application for tax treaties should not operate to divest entitlement to the tax treaty relief. The SC said the BIR must not impose additional requirements that would negate access to relief as provided under international agreements.

It is therefore surprising to see particular assessment cases which still hinge on the mere absence of an application for a tax treaty relief ruling, even though the conditions in the corresponding tax treaties are clearly met.

Some examiners say that the SC ruling applies only to tax refund cases and not to assessment cases. Ooops… Would such argument be appealing to foreign investors?

There are also a number of negative reactions to the current tax assessment process, in which BIR examiners are required to issue a Final Assessment Notice (FAN) within 15 days from receipt of the taxpayers’ reply to the Preliminary Assessment Notice (PAN).

Taxpayers, including foreign investors, are asking — Can the BIR really review the letter-reply within 15 days? Do they mean “thorough” review?

The fear is that, the FAN will just be a copy paste of the PAN, only with updated interest charges. Added to this is the impression of taxpayers that the PAN findings of some examiners contain various items which were the result of mere comparisons of identified balances without first fully checking the accuracy of the comparisons.

It might enough to drive foreign investors to ask — “Does the BIR really want us to do business in the Philippines or do they want us to close down rather than pay unreasonable tax assessment findings?

In fairness to our government, we believe that it is well-intentioned in imposing certain tax policies. However, perhaps the means of implementing such policies could be aligned with what foreign investors expect when they come to the Philippines.

Indeed, the current administration has made a lot of progress in various aspects of governance. This should undoubtedly attract foreign investment. But it might be better to establish tax policy reforms that encourage, rather than deter, foreign investment.

Olivier D. Aznar is a partner with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
have a great day !

Robert G. Sarmiento Properties
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Real Estate Broker’s Association of the Philippines
President, Greenhills Chapter 2008-2009
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