On 19 December 2017, President Rodrigo Duterte signed into law package 1 of the TRAIN bill or Republic Act No. 10963. TRAIN law aims to simplify tax law provisions in order to ensure a more efficient and just tax system. An implied purpose of the new law is to increase collection to support infrastructure drive of the current administration under the “Build, Build, Build” Program.
TRAIN 1 law contains amendments and several provisions of the National Internal Revenue Code of 1997. With special mention to Value Added Tax (VAT), companies under special law such as Philippine Economic Zone Authority (PEZA) will not be subject to VAT, added as “export sales” the sale and delivery of goods to registered enterprises within a separate customs territory as provided under special laws and within Tourism Enterprise Zones declared by Tourism Infrastructure and Enterprise Zone Authority (TIEZA). Other Zero-Rated sales in Sec. 106A is also not be subject to VAT. TRAIN 1, however, will now exclude VAT exemption for TIEZA and PEZA registered companies and will lose its leverage in attracting investors.
The change is a threat to the TIEZA and PEZA registered companies as they will be exposed to VAT. Many of these companies have limited sources of input VAT and will not be able to offset the output VAT because of the amendments in the VAT ruling. Enhanced VAT refund system is hoping to address this concern by providing a more efficient process in refunding excess VAT. However, part of the requirement for the VAT refund is a tax audit for the period covered of the claim. It is advisable to avoid BIR audit as this may expose companies to risk. In this regard, companies will be subject to VAT and will not be able to apply VAT refund. Consequently, they will have to assume the additional taxes as expense in their books. Companies that will apply for refund, must be confident to have their books audited and mitigate any tax exposure.
TRAIN 2 or Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) however, proposes to cut corporate income tax from 30 percent to 25 percent and take away fiscal incentives, including tax exemption, from hundreds of businesses in export processing zones. This will again realign the purpose of special economic zones to attract investors and businesses.
ITBPO companies are mostly operated at PEZA zones with revenues not subject to VAT and given some tax relief from income taxes up to 5 years and a preferential rate of 5% for the succeeding years. The tax changes expected in TRAIN 2 will impact the net income of ITBPO companies as it will now be subject to an income tax rate like other corporations. Implementing rules however will have to wait until the law is passed and see what benefits ITBPO companies can still get when registering with PEZA. Otherwise, the government must provide an alternative option since PEZA benefits will be vetoed unless ratification is done to TRAIN 2.