How the recent tax reforms will impact the Philippines' BPO and creative industries

After nearly eight months of deliberations in Congress, the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill was approved by lawmakers in September 2018. The government’s Comprehensive Tax Reform Programme seeks to reduce the corporate income tax (CIT) rate starting in 2021 from the current 30% to 20% by 2029. This would bring the Philippines in line with its ASEAN counterparts, while rationalising the fiscal incentive regime and creating more job opportunities. According to the Department of Finance, the TRABAHO bill is expected to generate 1.4m jobs over 10 years once enacted into law.

Incentives

The IT-business process outsourcing (BPO) industry claims that certain changes to tax incentives given to foreign investment could lead to a loss of jobs, especially in the BPO sector. Under the current regime, foreign firms in special economic zones are granted an income tax holiday (ITH) of up to four years for regular businesses and up to seven years for those in pioneering industries as determined by the Board of Investments. The TRABAHO bill proposes phasing out the ITH as well as scrapping a special dispensation that allows foreign entities to pay a 5% tax on gross income earned in lieu of the usual local and national business taxes. Some BPO businesses fear that the changes will result in the flight of both capital and employment.

Rey Untal, president and CEO of the IT and Business Process Association of the Philippines (IBPAP), told the Philippine Daily Inquirer in October 2018 that rationalising incentives would make the Philippines more expensive. Dan Reyes, CEO of US BPO firm Genpact, agrees that TRABAHO’s new tax framework may have a negative impact on the industry. “The Philippines will remain competitive thanks to its English-speaking population, its service-oriented attitude and its beneficial cultural proximity to the West,” he told OBG. “However, the most advanced BPO services are at risk of being relocated, as other countries are willing to offer incentives to develop these specific initiatives.”

Rising Competition

Such concerns reflect the rising competitiveness of the environment for BPO investment in Asian countries such as Vietnam that benefit from lower labour costs and specialise in document-processing services for multiple-language markets. Similarly, the Digital India Programme, launched in 2015, targets the promotion of IT-enabled BPO services, while destinations such as the Caribbean and Latin America are increasingly attractive to US investors seeking closer alternatives to the Philippines.

In place of the current incentives, the TRABAHO bill proposes a three-year ITH, while allowing for deductions for up to five years of labour costs, training, infrastructure building, and research and development expenditure. Businesses have the option to apply for a special CIT rate of 18% in 2021, which will fall to 13% in 2029, once the ITH expires. Tax holidays will be granted by the Fiscal Incentives Review Board based on criteria issued under the Strategic Investment Priority Plan.

Changes Ahead

With the TRABAHO bill expected to be a priority for the government when the 18th Congress opens in July 2019, interest groups are pressing for BPO incentives to be initiated. Mar Roxas, when running for the Senate in May 2019, suggested that additional tax incentives be linked to firms’ willingness to invest in technology and offer workers digital skills training.

TRABAHO currently grants a 100% tax exemption for R&D expenses and includes a provision that offers the BPO industry P25bn ($465m) over five years to upskill its employees, although the latter falls short of the P40bn ($744m) that was requested by IBPAP. The industry is asking that existing ITHs be allowed to run their course, which would enable BPO businesses to take advantage of a sunset period of up to a decade before fully converting to the new regime. “The issue of staggering TRABAHO implementation and the withdrawal of incentives remains on the table,” Maria Cristina Coronel, president of Manila-based health care BPO firm Pointwest Technologies, told OBG in 2019.