The provisions in the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act eliminating the preferential tax rates given to regional operating headquarters (ROHQs) of multinational corporations (MNCs) has cleared the way to the Philippines’ removal by January 2022 from an international list of “harmful” tax regimes, the Department of Finance (DOF) has said.

Through the initiative of the DOF led by Undersecretary Antonette Tionko, the Organisation for Economic Co-operation and Development (OECD)’s Forum on Harmful Tax Practices (FHTP) granted the Philippines’ appeal to assess its ROHQ regime as “potentially harmful but not actually harmful” until Dec. 3, 2021, and then have the country’s ROHQ regime status declared as “abolished” by Jan. 1, 2022.

The FHTP considers as “harmful tax features” the special tax rates given to ROHQs because these gave undue tax advantages to foreign taxpayers and discriminates against local taxpayers; and recipients were not required to show “adequate substance for the activities carried out.”

Tionko said in her report to Finance Secretary Carlos Dominguez III that the FHTP had initially recommended that the Philippines’ ROHQ regime be assessed as “harmful” until December 31 this year, but the DOF’s Revenue Operations Group (ROG) successfully appealed that this be changed to “potentially harmful but not actually harmful” owing to the enactment of an existing law—CREATE—which removes the tax perks given to ROHQs beginning Jan. 1, 2022.

From the previous preferential rate of 10 percent, ROHQs will be taxed the general corporate income tax (CIT) rate as those imposed on other companies by Jan. 1, 2022 under CREATE.

The DOF-ROG, which Tionko heads, also pointed out before the FHTP that the abolition of the ROHQ regime does not allow grandfathering (a transition period in which the concerned taxpayers can continue benefiting for a specific number of years from a regime that may have harmful features).

It also informed the FHTP that economic data from the Bureau of Internal Revenue (BIR) show that “there has been a decreasing number of availers of the ROHQ regime since 2018, with only one new entrant in 2019,” Tionko said.

“As a result, the status of the ROHQ regime of the Philippines is ‘potentially harmful; but not actually harmful” until 31 Dec. 2021, and ‘abolished’ from 1 January 2022,” Tionko said in her report.

In her presentation during the webinar on the launch of the Asian Development Bank (ADB)’s Asia-Pacific Tax Hub, Tionko informed the panel of the Philippines’ progress of removing the preferential tax rates on ROHQs.

Tionko said this positive development reflects the significant efforts by the Philippines to assess its readiness to join the Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

The OECD defines BEPS as those referring to “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.”

Tionko noted that the ADB and the World Bank (WB) have both extended technical assistance to the Philippines in its efforts to meet the minimum standards required to join the BEPS Inclusive Framework.

Joining the BEPS Inclusive Framework provides countries the necessary domestic and international tools to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.

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