PH barely makes it out of ‘uncooperative tax haven’ list
MANILA, Philippines—The Philippines likely avoided inclusion on the so-called “grey list” of “uncooperative tax havens” after it scrapped, although later than its commitment, the fiscal perks extended to multinational corporations’ (MNCs) regional operating headquarters (ROHQs).
At the launch on Monday (May 3) of the Asian Development Bank’s (ADB) Asia-Pacific Tax Hub, Finance Undersecretary Antonette Tionko said last week’s review by the Organization for Economic Cooperation and Development’s (OECD) Forum on Harmful Tax Practices (FHTP) showed that the ROHQ tax regime in the Philippines was “potentially harmful but not actually harmful” even before it is abolished effective on Jan. 1, 2022.
While the OECD/G20’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) was expected to make public its findings by June, Paul Hondius, head of the harmful tax practices unit at the OECD’s Center for Tax Policy and Administration, confirmed to the Inquirer that the FHTP “concluded last week that the ROHQ regime is ‘potentially harmful, but not actually harmful’ until its abolition on Dec. 31, 2021.”
“The conclusion entails that the regime is not found actually harmful from an FHTP perspective. The conclusion was reached in light of the fast-declining number of taxpayers and income benefitting from the regime,” Hondius said in an e-mail Monday night.
As the Inquirer reported last week, the OECD-FHTP’s review in October 2018 concluded that the Philippines’ tax regime for ROHQs had two harmful features—it gave tax advantages to foreign taxpayers not available to locals and it did not require taxpayers benefiting from the regime to have “adequate substance for the activities carried out.”
Some MNCs in the Philippines had established ROHQs and regional headquarters (RHQs) to cater to their affiliates, subsidiaries or branches in the global market.
The Philippines, through the Department of Finance (DOF), had committed to abolish its ROHQ regime by end-2019 while also ensuring that existing taxpayers could not benefit from it from June 30, 2021 onwards.
The DOF had included the removal of ROHQ incentives in the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act signed by President Rodrigo Duterte in March.
The CREATE law will slap a regular corporate income tax rate on ROHQs — similar to all other firms — effective Jan. 1, 2022, removing the previous preferential levy of only 10 percent.
Hondius earlier told the Inquirer that the FHTP noticed that these changes in the ROHQ regime will be later than the Philippines’ committed timetable, which required a check if the delay had given rise to harmful conclusions pending full abolition.
But ROHQs had been fleeing the country since 2018, after the Tax Reform for Acceleration and Inclusion (TRAIN) Act removed the personal income tax rate of 15 percent previously enjoyed by employees of MNCs’ regional headquarters.
While critics had deemed the preferential tax rate as unfair, industry group Philippine Association of Multinational Companies Regional Headquarters Inc. (PAMURI) had said it enticed top Filipino talents to join the industry and earn as much as professionals abroad.
PAMURI in 2019 said up to 15 regional headquarters of MNCs pulled out of the Philippines after the TRAIN law took effect.
The OECD’s FHTP temporarily deferred reviews last year amid the COVID-19 pandemic even as the Philippines was supposed to be re-assessed in 2020 due to its 2019 commitment.
Hondius noted that while “the OECD itself does not maintain a grey list in relation to FHTP regimes, other international bodies that do so would generally list only those jurisdictions that have actually harmful regimes.”
