Taxwise Or Otherwise
Posted on December 29, 2016
The tourism sector seems to be going through an interesting phase now that it has been called on to take a bigger challenge — to be sustainable and competitive against other tourist destinations in the region. What else could possibly make it more fun in the Philippines?
In the field of taxation, the Bureau of Internal Revenue (BIR) appears to likewise recognize the urgency of effecting Republic Act (RA) No. 9593, otherwise known as the “Tourism Act of 2009,” as a roadmap to developing Tourism Enterprise Zones (TEZs) aimed at enhancing the capacity of tourist attractions and its facilities in priority destinations. Through the issuance of Revenue Regulations (RR) No. 7-2016, the BIR recently acted upon the directive to implement the rules and regulations governing the tax incentives available to Registered Tourism Enterprises (RTEs) with the Tourism Infrastructure and Enterprise Zone Authority (TIEZA). The realization of these incentives comes seven years after RA 9593 and its Implementing Rules and Regulations (IRR) were passed.
The RR provides guidelines, administrative procedures and reportorial requirements for availing of tax incentives.
Under the RR, at the discretion of the TIEZA Board, new RTEs are entitled to either: (a) an income tax holiday (ITH) of six years which may be extended for another six years by undertaking a substantial expansion; or (b) a 5% special tax on gross income, which shall be in lieu of all national internal revenue taxes, except real estate taxes and such fees as may be imposed by TIEZA. Existing RTEs, on the other hand, are only entitled to an ITH of up to six years subject to undertaking a substantial expansion.
The term “Substantial Expansion” refers to the expansion, renovation or upgrade of the physical assets of an enterprise, which is intended to extend the life of its assets or to increase the capacity or efficiency of the enterprise, resulting in a significant change in its category classification under the Department of Tourism’s accreditation system in appropriate cases, and amounting to at least 50% of the original investment.
On the other hand, for purposes of the 5% special tax, “gross income” shall refer to gross sales or gross revenue from the registered business activity within a TEZ, net of sales discounts, sales returns and allowances, and minus cost of sales or direct costs, but before any deduction is made for administrative, marketing, selling and operating expenses or incidental losses during a given taxable period.
What would then be critical under the 5% gross income tax (GIT) is the nature of direct costs, which are allowed to be deducted from gross income. An enumeration has been provided in the RR, and by the looks of it, it is no different from the list of deductions and incentives available to enterprises with similar incentives (i.e., PEZA companies).
Net operating loss of an RTE that opts to be taxed at the regular corporate tax rate (i.e., not availing of either ITH or 5% GIT), may be carried over as a deduction from gross income for the next six consecutive taxable years immediately following the year of such loss. For RTEs engaged in both TIEZA-registered and unregistered activities, the net operating loss sustained from registered activities shall not be allowed to be carried over as deduction from gross income derived from unregistered activities.
In addition to the foregoing, all RTEs shall be entitled to:
(b) VAT and excise tax exemption on importation of goods necessary to carry out TIEZA-registered activities and actually consumed in the course of carrying out services related to registered activities actually rendered within the TEZ. Input VAT credit shall only be allowed as a credit against output VAT liability, in accordance with existing rules and regulations.
(c) Additional deduction equivalent to 50% of the cost incurred directly for social responsibility causes such as environmental protection, cultural heritage preservation, sustainable livelihood program or other similar activity. The expenses claimed as deduction for this purpose shall be reported under “Other Income Tax Incentives” and shall be subject to strict scrutiny in evaluating their deductibility in the event of an audit.
RTEs are required to: (1) obtain from TIEZA, on an annual basis, a Certificate of Entitlement (CE) as proof of their eligibility; and (2) attach the CE with the TIEZA Certificate of Registration to the Income Tax Returns (ITRs) and/or the applicable tax return upon filing of the returns.
Likewise, RTEs are mandated to maintain distinct and separate books of accounts for each TIEZA-registered activity. They shall also withhold appropriate taxes on income payments based on existing rules. More importantly, they shall be made to comply with the reportorial requirements under RA 10708 (An Act Enhancing Transparency in the Management and Accounting of Tax Incentives Administered by Investment Promotion Agencies).
Although the Philippines has always been admired for the natural beauty of its archipelago and its warm Filipino hospitality, the revenue performance of its tourism sector pales in comparison with its ASEAN neighbors. Given the foregoing tax “treats” to attract investments and infrastructures, there’s renewed optimism that the advantage to compete on the global stage can be now be generated. With the needed assets, skills and resources, tourism is poised as a sunrise industry.
The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
John Robert A. Zureta is a Senior Consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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