Philippines to exit OECD watch list for ‘harmful’ tax policy

Philippines to exit OECD watch list for ‘harmful’ tax policy

THE PHILIPPINES will exit a watch list maintained by developed countries next year which had flagged its preferential tax scheme for regional operating headquarters (ROHQs) of multinational companies, the Department of Finance (DoF) said.

The country will be removed from the list of “harmful tax regimes” by the Organisation for Economic Co-operation and Development (OECD) starting next year, the DoF said.

In a statement issued Thursday, Undersecretary Antonette C. Tionko said the OECD agreed to a Philippine appeal to characterize the scheme as “potentially harmful but not actually harmful” until the end of 2021.

The recently-signed Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act will effectively remove the 10% preferential tax rate next year, which persuaded the OECD to remove it from the classification, known as the Forum on Harmful Tax Practices (FHTP), beginning Jan. 1, Ms. Tionko said.

The FHTP was created in 1998 to assess preferential tax schemes and identify those that could be harmful.

The Philippines was flagged for the ROHQ preferential tax, which the OECD said gives foreign companies an advantage over domestic taxpayers. Those benefitting from the perk are not also required to provide evidence of how they are performing.

The CREATE law will require ROHQs to pay the regular 25% corporate income tax rate starting next year, in the absence of a grandfather clause.

The Bureau of Internal Revenue estimates that the number of entities availing of the ROHQ regime has been on the downtrend since 2018, with only one new applicant in 2019, she said.

Ms. Tionko said this development will contribute to the Philippines’ readiness to join the Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

“(BEPS identifies) tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity,” she said.

She added that the Asian Development Bank and the World Bank have granted technical assistance to help the Philippines meet the minimum requirements to join the BEPS. — Beatrice M. Laforga

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