Gov’t to withdraw tax perks extended to MNCs’ operating HQs
The Philippines will do away with the tax perks given to multinational companies’ (MNCs) regional operating headquarters (ROHQ) so the country could take part in the Organization for Economic Cooperation and Development (OECD)-led initiative aimed at catching tax evaders across wider borders.
In a letter to Finance Secretary Carlos G. Dominguez III last year, the OECD’s Center for Tax Policy and Administration noted of “the Philippines’ commitment to abolish the ROHQ regime, as part of the peer review of the Action 5 standard” of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
The Philippines had been invited earlier to take part in the BEPS project, but it backed out in 2016 due to subpar compliance to international tax standards at that time.
BEPS’s Action 5 was “designed to address harmful tax practices which, if unaddressed by coordinated action, will create a risk of unfair tax competition, undermining the level playing field and risking a ‘race to the bottom,’” the OECD said, such that its Forum on Harmful Tax Practices (FHTP) conducted a recent review of nearly 300 tax incentives being given away in Asia-Pacific, including the Philippines.
“The FHTP determined that the ROHQ has potentially harmful features and did not meet the international standard. This was on the basis that the ROHQ regime partly prohibits domestic taxpayers from benefiting from the incentive (as it requires the taxpayer to have a foreign entity) and the regime does not clearly require substantial activities to be conducted by the taxpayer (such as requiring skilled employees and operating expenditure in the Philippines),” the OECD said.
In a presentation last Tuesday, the Department of Finance (DOF) said the current ROHQ regime “can risk a grey listing from the OECD-FHTP”—which meant the country may be tagged as an “uncooperative tax haven.”
For the DOF, the pending Corporate Income Tax and Incentives Reform Act (Citira) can address this risk.
“Citira provides for a sunset period to address the ‘potentially harmful tax features’ flagged by the OECD. It will also protect Filipinos from negative effects of the grey listing that we have been told is possible if we do not correct this,” DOF spokesperson and Assistant Secretary Antonio Joselito G. Lambino II told the Inquirer on Wednesday.
Citira under House Bill No. 4157 already approved by the Lower House as well as Senate Bill No. 1357 pending in the upper chamber will put in place a two-year sunset period on the incentives that ROHQs currently enjoy.
In the case of regional headquarters (RHQs), both the House and Senate versions of Citira maintained their exemption.
Finance Secretary Carlos G. Dominguez III on Wednesday reiterated the DOF’s request that the Senate leadership consider prioritizing Citira.
MNCs established ROHQs and RHQs to cater to their affiliates, subsidiaries or branches in the global market.
In 2018, the Tax Reform for Acceleration and Inclusion (TRAIN) Act already removed the preferential tax rate of 15 percent for employees of MNCs’ regional headquarters.
While critics called the preferential tax rate unfair, the industry group Philippine Association of Multinational Companies Regional Headquarters Inc. (Pamuri) had said it was a way to entice top talents to join the industry and earn as much as they would have if they worked as professionals abroad.
Last year, Pamuri said as many as 15 regional headquarters of MNCs already pulled out of the Philippines after the TRAIN Law took effect. —BEN O. DE VERA
