BPO sector seeks 10-yr transition to ‘Trabaho’ tax regime

Fearing a business slowdown, the business process outsourcing (BPO) industry is seeking a 10-year transition to a new tax regime under the “Trabaho” bill.

The shift is seen to make doing business here three times more expensive than current levels.

This is according to Rey Untal, president of the Information Technology and Business Process Association of the Philippines (IBPAP).

The Tax Reform for Attracting Better and High-quality Opportunities (Trabaho) bill, the second tax reform package of the Duterte administration, will lower corporate income taxes while rationalizing the tax incentives offered to businesses. Under this, a crucial tax incentive given to BPOs registered with the Philippine Economic Zone Authority (Peza) will be removed.

The said incentive, which allows Peza-registered firms to pay a 5-percent gross income earned (GIE) tax in lieu of the usual local and national taxes charged on businesses, was a key consideration in many foreign investors’ decision to set up shop in the Philippines.

The GIE tax system helps companies save on costs and in making the Peza a one-stop-shop for these businesses. It is applied after the income tax holiday (ITH) granted to locators ends.

In theory, this incentive could last forever since it has no expiration date. The government wants to remove it, while giving those who are currently availing themselves of this incentive at least two years to transition.

“We are asking to let the existing ITH run out, and then go through a 10-year sunset period,” Untal told the Inquirer.

On top of this, IBPAP is asking the government for a P40-billion five-year skills upgrade program.

This, Untal said, was in a bid to “catch up” with other countries—including India—which had a head start in improving their workforce with a generous support from their governments.
The Department of Finance earlier said the government would grant the yearly P8-billion fund only if IBPAP would support the tax package.

Untal clarified, however, that the industry’s request for a skills upgrade program did not change its position against the proposed rationalization of tax incentives.

The fight so far does not speak in favor of the industry, as lawmakers in the Lower House passed a version of the bill that included provisions that were worse than what the industry was expecting.

Not only was the transition period shorter, the bill also lowered the yearly subsidy to P5 billion from P8 billion.

“They have to go hand in hand. One is about keeping our cost structure down so we could remain competitive, the other one is making sure that the talent of the future is ready for the skills of the future,” he said.

A study done by consulting firm Everest Group estimated that the industry’s growth—both in jobs and revenues—would be a lot slower if it the 5-percent GIE tax would be removed.

The study noted that 90 percent of industry players surveyed had said that perks were “highly important contributors to their cost competitiveness.”

While Untal called the perks under the Trabaho bill “superior,” he said the problem was that these perks apply only to new projects, barring existing businesses from availing themselves of these incentives.

This puts many existing BPOs at a disadvantage, especially since they have projects that have in existence for at least a decade now.

IBPAP commissioned the study late last year.