The Department of Trade and Industry (DTI) is hoping to reach a compromise with the Department of Finance (DoF) on provisions of the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) Bill, which seeks to rationalize investment incentives.

A document obtained by reporters last week represented the minutes of an Oct. 18 meeting of the DTI’s Board of Investments (BoI) with the DoF.

One of the adjustments DTI offered for the proposed legislation was lengthening the domestic input expense incentive to five years after the expiry of income tax holiday, as a sweetener for exporters sourcing their raw materials locally.

“Currently, many of our industries are performing low-value, back-end processes in the value chain (for instance, legacy products and activities like assembly, process, test in electronics) and to be able to upgrade and move up in the value chain, we need to grow our domestic supply of raw materials, parts, and components similar to what successful manufacturing countries like Thailand and China, and now Vietnam (which has already overtaken the Philippines) have done,” it said.

The minutes indicate that a lack of raw materials and intermediate parts and components represents “a major gap” for most industries and incentives “have an important part to play in addressing the issue of missing markets.”

“Without addressing the market failure, the Philippines might not be able to grow and develop new and high value-added exports which put the country at risk of incurring higher trade deficits in the near future,” it added.

According to the Philippine Statistics Authority, the trade deficit in the first eight months widened to $26 billion from $15.79 billion a year earlier.

This surpasses 2016’s full-year trade deficit of $24.521 billion and is approaching 2017’s $29.608 billion.

Other tweaks sought by the DTI to strengthen the value chain include the maintenance of value-added zero-rating for indirect and constructive exporters regardless of location; the reduction of the threshold to exempt an exporter from VAT to 70% exports from the proposed 90%; and the exemption of ecozone-registered projects from import duties similar to the arrangements at freeports.

Other incentive-focused proposals include stretching the income tax holiday to five years from the current proposal of three years.

“This is to make our income tax-based incentives competitive with other ASEAN countries,” it said.

It also suggested deleting the references on research and development; deduction on additional labor expense; and domestic input expenses.

Asked to verify the contents of the document, Trade Secretary Ramon M. Lopez said the points are “not exactly” what was discussed.

However, the official confirmed that there are negotiations on the transition period of existing locators into the new regime and “performance-based incentive or support,” among others.

Sought for specifics, Mr. Lopez said in a mobile message: “Let’s keep it broad bec [the points are] under negotiation.”

He added that the negotiations with the DoF hope to yield a “common position” when both departments present to the Senate.

The minutes of the meeting between the DTI and the DoF also indicate that the former sought to retain the arrangement for direct remittances to local government units (LGUs) of corporate income tax to maintain the “one stop” nature of ecozones, whose locators value the relative lack of dealings with other government agencies. However, there was no mention of the exact share that LGUs should be given from the CIT.

At present, 2% of the 5% gross income earned (GIE) tax incentive enjoyed by locators of the Philippine Economic Zone Authority is channeled to LGUs.

The BoI also sought the removal of the provision that gives the DoF the sole power to interpret the provision of the proposed bill.

The DTI is also pushing for registered enterprises to be entitled to income tax holidays as agreed under their certificates of registration, including those under the GIE regime.

The DTI also wants to give locators an option to be governed by the provisions of the proposed law once it takes effect in two years, “provided it is in good standing and qualified for registration thereunder.”

The options will accommodate foreign investors who signed up under the terms of bilateral investment treaties.

“Limiting and/or reducing the granted incentives under their Certificates of Registration may constitute a contractual breach that may be elevated as a treaty breach under the aforecited protection provisions,” it added.

DIVERSIFYING EXPORTS
The DTI also noted how exports “have largely been concentrated” in electronic products, machinery and transport equipment, and other electronics. These three items accounted for 65% of outbound shipments last year.

“To reduce the trade imbalance, we need to expand and diversify our exports by growing and developing our materials, intermediate parts and supplies sector; we need to prioritize the manufacture of selected strategic parts that are heavily imported as well as link manufacturers operating in economic zones with SMEs (small and medium enterprises) and large companies in the domestic economy,” the report said, noting this linkage is a priority in its inclusive innovation industrial strategy.

“The success of the industry will depend on a more consistent implementation of an effective incentive mechanism,” it added. — Janina C. Lim