Tax implications of the Tourism Act of 2004

RECOGNIZING that tourism is one of the largest industries in the world that can bring in the much-needed dollars to fuel our economy, Senator Richard Gordon filed Senate Bill No. 1834, titled "The Tourism Act of 2004." This bill is pending in Congress but has already gone through several technical committee hearings.

The bill has three major objectives: (i) the reorganization of the Department of Tourism (DoT); (ii) the establishment of the Tourism Economic Zone Authority (TEZA) and tourism enterprise zones (TEZs); and (iii) the establishment of Tourism Philippines, which will merge the Philippine Tourism Authority (PTA) and the Philippine Convention and Visitors Corp. (PCVC) into one body. The proposed establishment of the TEZA and TEZs carries with it the proposed grant of tax incentives.

Income tax holidays

Similar to locators in special economic zones established under the Philippine Economic Zone Authority (PEZA), the Subic Bay Metropolitan Authority (SBMA) and the Clark Development Authority (CDA), investors in TEZs will be entitled to several tax incentives.

Section 51 of SB 1834 proposes to grant TEZ-registered enterprises an income tax holiday (ITH) of five years from the start of operations, extendible for another five years provided the TEZ-registered enterprises undertake a major expansion or upgrade of their facilities. The additional period will be computed in the proportion that the cost of the expansion or upgrade bears to the total assets of the TEZ-registered enterprise.

As the name implies, the income tax holiday will exempt the TEZ-registered enterprise only from the payment of income tax. Hence, such enterprise will not be exempt from the payment of other taxes, like value-added tax (VAT), documentary stamp tax (DST), excise tax, and other national internal revenue taxes.

Under existing laws, the income tax holiday granted by the Board of Investments (BoI) or the PEZA is either four or six years, depending on whether the enterprise is pioneer or non-pioneer, extendible for another two years for pioneer enterprises, depending on several factors such as ratio of capital equipment to labor, foreign exchange earnings or savings, or the use of indigenous raw materials. Investors registering with the BoI or the PEZA may avail of the above-mentioned ITH, including investors in tourism activities.

With the passage of the Tourism Act of 2004, the TEZA will now administer the ITH incentive for investors in tourism activities that locate in TEZs.

Preferential tax regime

Under SB 1834, after the ITH of the TEZ-registered enterprise expires, it shall be entitled to a preferential tax rate of 2-3 percent on gross income, in lieu of all national and local taxes, depending on the amount of investment and the number of persons employed. The secretary of tourism and the Bureau of Internal Revenue (BIR) are to prepare the implementing rules of this provision.

Unlike the ITH, the preferential tax regime will exempt the TEZ-registered enterprise from all national and local taxes including, but not limited to, VAT, DST, excise tax, local business tax and real property tax. This is similar to the PEZA incentives. However, under the RA 8748 amendment to the PEZA Law, the exemption from real property tax was removed since most local governments rely heavily on the same for their revenue sources. As currently worded, SB 1834 exempts the TEZ locators from the payment of real property tax.

The 2-3 percent tax on gross income shall be shared as follows: 1/3 to the local government unit concerned; 1/6 to Tourism Philippines; 1/6 to the TEZA; 1/6 to the national government; and 1/6 to a special fund for preservation of local culture, heritage sites and environment in and around the TEZs. Again, the rules governing this provision shall be drafted by the DoT and the BIR.

Exemption from customs duties/taxes

Unlike the special economic zones under the PEZA or the free ports created by law, like Subic Bay Freeport Zone, Zamboanga Freeport and Cagayan Freeport, the TEZ is not proposed to be treated as a separate customs territory but merely as a special designated area. As such, Section 51 of SB 1834 proposes to exempt all importations of capital goods into a TEZ for use by a TEZ-registered enterprise from the payment of customs duties and taxes. This means such importations will be exempted not only from customs duties, but also from VAT on importations.

However, this exemption applies only to capital goods, i.e. equipment, machinery, materials, and not to finished consumer products that are allowed to be imported by those located in the legislated free ports cited above.

Other tax incentives

TEZ-registered enterprises shall likewise be entitled to incentives provided for in other incentives laws, provided there is no conflict and double enjoyment.

If there is an overlapping of incentives, the TEZ-registered enterprise must choose only one incentive regime. This merely means that if the TEZ-registered enterprise desires to avail of incentives that are available under the PEZA or the BoI, but are not available under the draft bill, it may so avail of the same.

However, should there be an overlapping of the incentives being availed of, the TEZ-registered enterprise may only choose one incentive regime with respect to that incentive being sought.

In addition to these tax incentives, Section 54 of the bill allows TEZ-registered enterprises that shoulder the cost of restoring material cultural heritage within a TEZ in accordance with the rules and regulations issued by the National Historical Institute, to fully deduct said costs for income tax purposes.

Moreover, income derived by construction firms from such restoration works shall be exempt from tax.

Other tax implications

In connection with the proposed establishment of Tourism Philippines, SB 1834 proposes (i) to allow hotels and other accommodation establishments full deductibility from gross income of the cost of major expansions, renovations and upgrading of facilities, and (ii) a hospitality tax of 5-10 percent on the lease of rooms by accommodation establishments not located in TEZs.

While hotels and accommodation establishments welcome the deductibility of the cost of major expansions, renovations and upgrading of facilities from their gross income, they have expressed reservations about the hospitality tax, which they claim will drive up the cost of the rooms. There is light at the end of the tunnel, however, in that the bill's sponsor has expressed openness to a fee of $1 to $5 per head in lieu of this hospitality tax. The reaction of hotels and accommodation establishments to this possible change has not yet been elicited or discussed in any formal hearing. It would therefore be interesting to know their position given that the intent of the bill is to channel this tax, along with proceeds collected from travel taxes and operations of Duty Free Philippines, to Tourism Philippines.

SB 1834 clearly intends to harmonize and rationalize the tourism efforts of this country to spur economic growth. Given that tourism is the world's largest industry in terms of dollar earning capacity, and the recent events (albeit unfortunate) that have befallen our neighbors in the region, focus on tourism as the engine of growth is indeed timely.

The grant of tax incentives specifically for tourism-related investments may serve as the impetus to attract the much-needed capital to establish new tourist sites, enhance historical and cultural attractions, and improve existing accommodation establishments and basic tourism services. If the desired integration and rationalization of the tourism industry through the reorganization of the DoT, as well as the establishment of the TEZA, TEZs, and Tourism Philippines, comes to fruition, we may yet see, in the not too distant future, the kind of tourist visits that Malaysia (15 million tourists per year) and Thailand (12 million) are currently enjoying.

Finally, SB 1834 should be considered in the light of HB 3295, or the Omnibus Incentives Bill, which was filed in Congress by the Department of Trade and Industry to harmonize all incentives schemes currently in place