‘Omission’ on incentives list dims Lufthansa’s hopes of survival in PH

The country’s largest aircraft maintenance and repair company said it might close its operations if the government decided to train its sights on taxing spare parts used to fix broken planes.

Lufthansa Technik Philippines (LTP) has been in the country for close to two decades now, with its total workforce reaching over 3,000. But the company fears it would struggle with unbearably high costs should the government slap custom duty and value-added tax (VAT) on imported spare parts.

LTP is in the business of aircraft maintenance, repair and overhaul (MRO). It serves its global clients, replacing defective parts with imported spare parts while sending the defective part back to the shop for repair.

The company, which has already invested $270 million in infrastructure and personnel training in the country since 2000, cited current restrictions in the Citira, or the Corporate Income Tax and Incentive Rationalization Act.

Citira, the latest iteration of the Duterte administration’s second tax reform package formerly know as the Trabaho (Tax Reform for Attracting Better and High-quality Opportunities) bill, will lower the corporate income tax—currently tagged the highest in Southeast Asia, while also rationalizing tax incentives.

The move to rationalize the perks has drawn a lot of opposition, with critics claiming this would increase the cost of doing business. LTP shares similar concerns with other companies that are also located in economic zones, while also pointing out the bill lacked MRO-specific provisions.

Under the tax bill, only imported raw materials are duty-free and VAT-free. LTP wants this to extend to spare parts as well.

“[There is] no special representation for MRO companies [in the Citira]. We consider that a technicality but if we don’t solve that, actually we cannot survive here,” Elmar Lutter, company president and CEO, told reporters in a chance interview last week.

“If you don’t have provisions for the importation of spare parts, you would [in effect] pay customs duties and VAT on a $20-million replacement engine [installed in just one day] while the defective engine is sent to the shop. No customer would pay millions of dollars for this transaction,” he later told the Inquirer in an email.

He said the lawmakers could just have missed this pertinent provision.

“We think this was an unintentional omission in the current draft of the bill. It can be cured relatively easily, mainly by extending the provisions for raw materials to spare parts,” he added.

This uncertainty could taint the company’s recent announcement to do a $40-million expansion of its Philippine operations, he said.

Its headquarters in Germany is also looking for an Asian production hub. Lutter said the Philippines was not top of mind, and could even be edged out by Vietnam.

In case the problem is not cured, would the firm immediately pack up?

Lutter said: “I don’t have the answer for that. I cannot imagine that.”