Keeping tax incentives intact

Registered business enterprises (RBEs) in the Information Technology – Business Process Management (IT-BPM) industry are swiftly signing up to transfer their registration to the Board of Investments (BoI) in order to continue offering work-from-home (WFH) arrangements to their workers without losing their incentives. A big thanks to our administrators for making this possible.

The BoI transfer is a welcome development for RBEs. Normally, transferring to another Investment Promotion Agency (IPA) entails the cancellation of the current registration and subsequent application for new registration with another IPA. However, deregistration is not a good option for RBEs that still have pending applications for Confirmation of Entitlement to Income Tax Holiday (ITH) which have not yet been decided upon by the IPA. Often, these applications take many years to approve due to issues like falling short of the committed investment in capital equipment or failure to substantiate ownership over the capital equipment invested in. In the absence of this confirmation, the related income from the project or activity registered prior to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act would be subject to a 5% special Gross Income Tax instead of an ITH, in accordance with the RBE’s Registration Agreement with the IPA.

Unlike the projects and activities registered prior to CREATE where the timeline for submission of compliance requirements such as for the ITH confirmation application was accorded more leniency, new projects and activities registered under CREATE require more strict monitoring from the IPAs as to compliance with the terms and conditions imposed for registration and availment of tax incentives. IPAs are given 90 to 180 days after the statutory deadline for filing the annual income tax return of RBEs to submit the compliance report to the Fiscal Incentives Review Board (FIRB).

Given the limited timeline, how should RBEs prepare for this to avoid cancellation, suspension or withdrawal of their tax incentives?

One important point is the compliance with the target performance matrix specified under the terms and conditions of the registration of a registered project of activity. During the registration stage, applicants are required to prepare a project brief or feasibility report that contains projected financial statements of the project to be registered. This document should be carefully crafted as this will be the basis of the IPA in setting out the conditions, particularly on the investment requirement and metrics, under the Registration Agreement.

The preparers of the project brief may look at this from the point of view of the IPA or FIRB auditors. As a guide, the investment commitment in machinery and equipment is expected to be reported as part of the machinery and equipment in the RBE’s audited financial statements, and to be duly supported by invoices, entry permits and lists duly attested to by the IPA.

It is only until the issue has been decided by the courts with finality that a MAP request is no longer allowed.

RR No. 10-2022 makes it clear that the resolution of a MAP request takes time — it provides an average of 24 months’ processing time, depending on the complexity of the issue and cooperation of the parties involved.

The discussions between the Competent Authorities are confidential until such time that a resolution is reached. The taxpayer’s visibility into the process is limited — participation is only to the extent of providing the needed information and its position thereon. It is generally only at the time that an outcome is reached that a taxpayer is notified. At this point, the MAP rules mention several possible outcomes which include: an agreement to remove the double taxation, a grant of unilateral relief to the taxpayer, or a finding that there is no double taxation contrary to the DTA. The Competent Authorities may also end up agreeing to disagree, perhaps in deadlocked cases.

Interestingly, RR No. 10-2022 points out that a MAP case cannot simultaneously proceed with judicial or administrative appeals. It appears then that a taxpayer has the option of suspending either the MAP process or the relevant judicial or administrative proceedings. In case the MAP is chosen, the taxpayer must submit proof of the judicial or administrative suspension to the Competent Authority. This may be a duly issued BIR order or court resolution. For tax assessments, a taxpayer may also seek the suspension of tax collection until the MAP request is resolved. It is not yet clear, however, how documentation of such suspension can be secured and how the suspension will affect the prescribed statutory deadlines at the administrative and judicial level.

While it is still in its early stages, the MAP Guidelines are a welcome development. At a time where cross-border transactions continually become more sophisticated, they give taxpayers a clearer way of settling issues which may not have been squarely covered in the tax treaties. It demonstrates our commitment to our obligations with regard to international tax agreements and our intention to resolve any conflicts which may arise therefrom. True to its acronym, the MAP might just show us the way to go.