Electronics sector at risk from fiscal rationalization

MANILA, Philippines -  The electronics industry, the country’s top export sector, is at risk of short-circuiting if certain fiscal rationalization schemes under the first package of the tax reform program are implemented, the Semiconductor and Electronics Industries in the Philippines Foundation Inc. (SEIPI) said.

In an interview, SEIPI president Dan Lachica told The STAR the group is concerned over two specific provisions under the first package of the tax reform program.

“One is putting the value-added tax (VAT) on our indirect exporters. The second thing is the proposed transition because as PEZA (Philippine Economic Zone Authority) locators, there is an income tax holiday. But when that expires, locators go to a five percent of gross income regime. And there’s a proposal to switch that to 15 percent of net income. And when we  crunched the numbers, it’s going to be like a 40 percent increase in costs, so additional costs,” Lachica said.

Of the two, however, Lachica said the proposal to lift the zero VAT exemption to indirect exporters poses a much bigger problem.

The Department of Finance has proposed to retain the zero rating only for direct exporters. Indirect exporters refer to those who supply materials or services to direct exporters.

“On the indirect exporters, we’re going to be affected drastically. Here we are trying to promote small and medium enterprises and developing the local supply chain. So it’s going to be a damper,” Lachica said.

“What that means is the local suppliers outside PEZA zones, they will be asked to pay VAT. That will drive up the prices and while the government says there is a VAT refund process, it takes at least 20 to 30 years, at least the way it is being done now. And what will happen is it will be cheaper for companies to import. The problem with that is you’re going to kill the local suppliers. The MSME development program will not materialize because it’s going to be cheaper to import,” he added.

After finishing flat in 2016, SEIPI is projecting Philippine electronics exports will regain its form this year and bounce back with a growth of as much as six percent.

The group is forecasting a five to six percent growth for 2017 “fueled by the digital economy’s need for electronics products.”

In 2016, total outbound shipment of electronics slightly dipped 0.1 percent to $28.6 billion from $28.9 billion the previous year.

Despite the slowdown, however, electronic products remained the country’s top export, accounting for 50.3 percent of total exports revenue in December 2016.