Keeping tax incentives intact
Registered business enterprises (RBEs) in the Information Technology – Business Process Management (IT-BPM) industry are swiftly signing up to transfer their registration to the Board of Investments (BoI) in order to continue offering work-from-home (WFH) arrangements to their workers without losing their incentives. A big thanks to our administrators for making this possible.
The BoI transfer is a welcome development for RBEs. Normally, transferring to another Investment Promotion Agency (IPA) entails the cancellation of the current registration and subsequent application for new registration with another IPA. However, deregistration is not a good option for RBEs that still have pending applications for Confirmation of Entitlement to Income Tax Holiday (ITH) which have not yet been decided upon by the IPA. Often, these applications take many years to approve due to issues like falling short of the committed investment in capital equipment or failure to substantiate ownership over the capital equipment invested in. In the absence of this confirmation, the related income from the project or activity registered prior to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act would be subject to a 5% special Gross Income Tax instead of an ITH, in accordance with the RBE’s Registration Agreement with the IPA.
Unlike the projects and activities registered prior to CREATE where the timeline for submission of compliance requirements such as for the ITH confirmation application was accorded more leniency, new projects and activities registered under CREATE require more strict monitoring from the IPAs as to compliance with the terms and conditions imposed for registration and availment of tax incentives. IPAs are given 90 to 180 days after the statutory deadline for filing the annual income tax return of RBEs to submit the compliance report to the Fiscal Incentives Review Board (FIRB).
Given the limited timeline, how should RBEs prepare for this to avoid cancellation, suspension or withdrawal of their tax incentives?
One important point is the compliance with the target performance matrix specified under the terms and conditions of the registration of a registered project of activity. During the registration stage, applicants are required to prepare a project brief or feasibility report that contains projected financial statements of the project to be registered. This document should be carefully crafted as this will be the basis of the IPA in setting out the conditions, particularly on the investment requirement and metrics, under the Registration Agreement.
The preparers of the project brief may look at this from the point of view of the IPA or FIRB auditors. As a guide, the investment commitment in machinery and equipment is expected to be reported as part of the machinery and equipment in the RBE’s audited financial statements, and to be duly supported by invoices, entry permits and lists duly attested to by the IPA. Hence, the accounting policies on threshold amount for asset recognition, proper account classification of the project cost, and contracts to be entered into regarding the acquisition of equipment should be taken into consideration before finalizing the project brief. These preparations will help the company with issues like investment shortfalls, which will have to be justified with the IPA. If these were not considered beforehand, the RBE may conduct advance internal checks to compare the projected and actual performance and identify the reason for any variance.
Another point to consider is the requirement for transparency and all that are associated with it. RBEs should ensure the submission or implementation of the following:
1. Complete Annual Income Tax Incentives Report of the RBE’s income-based tax incentives, VAT exemptions and zero rating, customs duty exemptions, deductions, credits or exclusions from the income tax base, and exemption from local taxes;
2. Complete annual benefits report which shall include data such as the approved and actual amount of investments; approved actual employment level and job creation, including information on the quality of jobs and hiring of foreign and local workers; approved and actual exports and imports; domestic purchases; profits and dividends payout; and all taxes paid, withheld and foregone;
3. Annual reports of beneficial ownership of the organization and related parties;
4. Installation of an adequate accounting system that will identify the investments, revenues, costs and profits or losses of each registered project or activity undertaken by the enterprise; and
5. Compliance with the e-receipting and e-sales requirement, conditioned upon the operationalization of the Bureau of Internal Revenue’s (BIR) e-receipt system. This requires prior registration of a computerized accounting system with the BIR.
Further, before the start of the project or activity, including the procurement of materials, the RBE should ensure that its Registration Agreement with the IPA, Certificate of Entitlement to Tax Incentives, including its supplier’s VAT Zero Rating Certificates, are in order. This is to ensure that the appropriate incentives are available before proceeding with any transaction that might be impacted.
Note that the signing of the Registration Agreement does not vest all the rights to the RBE in claiming incentives. Monitoring and timely compliance with the requirements under the terms and conditions of its registration are necessary.
Finally, an RBE should also be aware of certain clawback provisions in relation to its availment of incentives. This means that the RBE may be required to return the monetary value of benefits that it has previously enjoyed. For example, the sale, transfer or disposition of capital equipment within five years from the date of importation generally triggers the payment of duties and taxes based on the value of equipment. In addition, cancellation of registration with the IPA may give rise to the payment of duties and taxes or VAT on all equipment, fit-outs and assets to be retained or to be disposed of from the registered facility.
The more the investor knows its duties to the government and complies in a timely manner, the smoother the claiming of tax incentives will go.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Delila L. Dayag is an assistant manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.