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Philippines BPO Industry Shaken by Potential Loss of PEZA Tax Breaks

BPO firms and call centers operating in special economic zones in the Philippines have long enjoyed hefty tax-breaks, but that tax holiday could be coming to an end.

The Philippine Economic Zone Authority (PEZA) currently provides a 12% tax exemption to call centers in the Philippines that employ over 1 million agents, creating an immediate 12% cost reduction on operating in the the country.

Under the proposed Tax Reform for Acceleration and Inclusion (TRAIN) bill or House Bill 5636, this cost benefit will be removed from PEZA, as the government plans to apply a 12% VAT on revenue from service exporters.

“During the site selection process in the Philippines, a building’s PEZA certification is one of the first things you look for when trying to find a call center site,” writes King White, founder of Site Selection Group, in a blog post. “Changes to PEZA will decrease the value proposition of the Philippines.”

The call center and business process outsourcing (BPO) industry is estimated to generate US$24 billion annually in the Philippines. The government intends to raise over US$2.8 billion in tax revenue from service exporters with this tax amendment.

However, the government seems to be unaware of the potential impact this will have on the industry.

“Many companies may decide to not locate in the Philippines or relocate if they are already operating there,” White wrote. “They may choose other nearshore and offshore locations such as Latin America, the Caribbean, India, South Africa, or Eastern Europe.”

Hiring in the BPO sector has already decreased in the Philippines. Online hiring for the IT, telecommunications, and business process outsourcing (BPO) industry had decreased by 9% in the year ending June 2017, according to online job board

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Late last year, its President Rodrigo Duterte created jitters among foreign outsourcing firms, such as Teleperformance, Qualfon, and Convergys, saying that the Philippines would cut ties with the United States in exchange for a cozy relationship with China.

Narayan Ammachchi

News Editor for Nearshore Americas, Narayan Ammachchi is a career journalist with a decade of experience in politics and international business. He works out of his base in the Indian Silicon City of Bangalore.


    • Thanks for your comment, Hindra. Our sources have confirmed that the information in the story is accurate. Could you confirm where you heard this information so we can look into it? Many thanks.

      • MANILA, Philippines – The Department of Finance (DOF) has assured the business process outsourcing (BPO) sector that it will be able to sustain its competitiveness in the export market as it will not be impacted by the first package of the government’s Comprehensive Tax Reform Program (CTRP).

        In a statement, Finance Undersecretary Karl Kendrick Chua said House Bill 5636 or the Tax Reform for Acceleration and Inclusion Act (TRAIN) seeks the removal of tax perks enjoyed by suppliers of export-oriented firms, or those referred to as “indirect exporters.”

        Chua explained to exporters, including BPO firms, that they would still retain their VAT exemptions and zero-rated status.

        “The fear that the Philippine BPO industry will lose its competitiveness because of the proposed tax reform has no basis,” Chua said.

        “Certain industry stakeholders are likely misinterpreting the provisions of the bill. There is no change in tax policy here for exporters,” he added.

        According to Chua, BPO firms in special economic zones (SEZs) would continue to enjoy value-added tax (VAT) exemption, while those outside SEZs, including those registered with the Board of Investments (BOI) would retain their zero-rated status under House Bill 5636 or TRAIN.

        “Receipts from foreign services within the SEZs of the Philippine Economic Zone Authority will remain VAT-exempt, as is the case now, because they are outside customs territory by legal fiction, or zero-rated if the exporters are outside the special economic zone, including those that are BOI-registered,” Chua said.

        “As for exporters outside SEZs, they are zero-rated on VAT payments and are entitled to get back their VAT payments once they apply for such refunds under the proposed 90-day refund system, while all other taxpayers, including suppliers to exporters will have to pay the VAT,” he added.

        However, Chua assured that the zero-rated VAT privilege of indirect exporters would be removed only if and when a credible and enhanced system VAT refund system is in place.

        The system, he said, would allow companies to claim cash refunds for their VAT payments within 90 days after the filing of VAT refund applications with the Bureau of Internal Revenue (BIR).

        “The concerns raised by the BPO sector against tax reform appear to be misplaced. They will remain competitive as demand for their services are driven by the high quality of service and talent they offer. The tax policy in the BPO sector will remain the same even after TRAIN,” Chua said.

        HB 5636, which contains the first package of the CTRP, aims to simplify the country’s tax system by lowering personal income tax rates and unifying estate taxes, while adjusting excise taxes on fuel, automobiles and sugar sweetened beverages.

        It also proposes to broaden the tax base by removing VAT exemptions, including those enjoyed by local suppliers of exporters.

        However, PEZA director general Charito Plaza earlier warned that an annual loss of P250 billion could be incurred by local suppliers of export-oriented firmsonce their tax perks are removed.

        Thus, PEZA is appealing to lawmakers to maintain the current set of incentives it offers to its locators, Plaza said.