RESTRICTED
WORLD TRADE G/SCM/Q2/PHL/5
16September 1996
ORGANIZATION(96-3586)
Original: English Committee onSubsidies andCountervailing Measures
SUBSIDIES
Replies toQuestions from theEUROPEAN COMMUNITY1Regarding theNew
andFullNotification ofthePHILIPPINES2
Thefollowing communication, dated 23August 1996, hasbeenreceived fromthePermanent
Mission ofthePhilippines.
_______________
Introduction
Theindustrial promotion policy ofthePhilippines isessentially fleshed outintheOmnibus
Investment Code of1987, which wehavenotified totheCommittee. Aswehavesaidinournotification,
thePhilippines isoftheviewthattheOICdoesnotfallunder thecontext ofArticles 1.1and2ofthe
Agreement, butwasnonetheless notified theOICforpurposes oftransparency.
TheOICisgenerally available astheeligibility criteria areflexible enough toqualify practically
anyapplicant. Itisalsoheavily biased infavour ofmoving industry andother economic activities
outofMetro Manila, which isalready congested, intothecountryside, where poverty and
underdevelopment pervades. Recent estimates putpoverty incidence inthePhilippines atleastat40per
centofthepopulation.
Asacash-strapped nation, thePhilippines haspromoted industrial development through the
useoffiscal incentives and,toamore limited extent, lending operations. Wedonot-forwecannot
afford to-provide subsidies.
Asoflate,another scheme wasformulated toaugment existing efforts topromote industrial
development. ThisistheExport Development ActorEDA, towhich some Members haveaddressed
questions. Thelawisonlypartially being implemented andthose provisions being implemented are
thesameasthose intheOIC, which explains whytheEDA hasnotyetbeennotified. Butnevertheless,
today, weshalltrytoanswer thequestions ontheEDA fortransparency purposes.
Other programmes, which wedidnotnotify, havealsobeenaddressed byatleastoneMember.
They werenotnotified because some haveceased tooperate; some arewholly designed forregional
development andpoverty alleviation falling under thecontext ofArticle 8;afewobviously areconnected
withthedelivery ofbasic social services tothepopulation; others aresocial amelioration programmes
1G/SCM/Q2/PHL/3.
2G/SCM/N/3/PHL.G/SCM/Q2/PHL/5
Page2
toimprove thelivelihood ofindividuals andmicro enterprises withnotrade effect; andothers, which
involve lending operations, arebased ontheallocation ofloanable funds atprevailing interest rates.
While economic policy hasevolved through time, thetaxation system hasremained rigid, and
isthusfarfrombeing efficient. ThePhilippines isnowintheprocess ofreforming thetaxandtariff
system toridthem ofsomany exemptions andreductions, toalign ourincentives withthose ofother
countries, andtominimize ifnotremove theiroutput-restraining effects. Wewillproceed todothis
mindful ofourrights andobligations under theAgreement, including theflexibilities allowed under
Article 27.
Letmeconclude myopening statement bystating thattheprovisions ofArticle 3onprohibited
subsidies arenotapplicable tousatpresent. Withrespect toother so-called incentives, itisourview
thatthere isnospecificity insuch grant. They areprincipally aimed atpoverty alleviation in
disadvantaged regions outside Metro Manila whose percapita GDPranges from41percentto76per
centofthenational average, which iswellbelow the85percentbenchmark intheSubsidies Agreement.
Such assistance tothedisadvantaged cannot cause serious prejudice totheinterest ofanother WTO
Member.
I. NOTIFIED SUBSIDY PROGRAMMES
TheOmnibus Investments Code (OIC)
(a) General questions
1. Thestated aimoftheOICistoencourage private domestic andforeign investments toprovide
employment andexport opportunities fortheeconomy. Towhatextent isexport performance ofeligible
companies taken intoaccount when granting thesubsidies andareanyofthesubsidies contingent upon
local content?
Answer:
Inasmuch asthePhilippines aspires toprovide fullemployment andincrease export revenues
tofinance inpartitsdevelopment objectives, activities thatenhance exports andwhich promote the
development oflocal production capability areencouraged. Export performance andlocalcontent,
however, arenotmandatory requirements toavailofincentives under theOIC.
Inanyevent, theAgreement permits thePhilippines toavail ofthetime-bound flexibilities
withrespect toexport performance andlocalcontent.
2. Several programmes differentiate between Metro Manila andtherestofthecountry asregards
eligibility. Onwhat basis isthisdistinction made, andwhat aretherelative levels ofdevelopment
ofthese tworegions?
Answer:
ThePhilippines iscomposed of13regions, withMetro Manila astheNational Capital Region.
When compared toMetro Manila, development across theother regions haslargely beenuneven and
accentuated bydisparate income distribution. Poverty alleviation inthose regions istherefore aprime
objective.
Atthesametime, Metro Manila, withalandareaofonly636square kilometres andapopulation
ofatleast13million (or19percentoftotalpopulation) iscongested andpresents aformidable challengeG/SCM/Q2/PHL/5
Page3
tourban authorities. There isaneedtodecongest Metro Manila through, among others, thedispersal
ofindustries tothecountryside.
Under thecriteria usedindrawing thisdistinction intheprovisions oftheOICof1987, the
regions must have:
- lowpercapita gross domestic products;
- lowlevelofinvestments;
- highrateofunemployment and/or unemployment; and
- lowlevelofinfrastructure development including itsaccessibility todeveloped
urban centres.
Fortheadditional information oftheCommittee, based on1990 data,Metro Manila hadapercapita
gross domestic product of$1,735, while thenational average was$694. Thepercapita income of
the12other regions asapercentage ofMetro Manila 'sandthenational average were:
Metro Manila National
Ilocos 23.5% 58.8%
Cagayan Valley 20.6 51.6
Central Luzon 35.3 88.4
Southern Tagalog 42.0 105.0
Bicol 16.2 40.6
Western Visayas 30.6 76.6
Central Visayas 35.1 87.9
Eastern Visayas 19.5 48.9
Western Mindanao 22.8 57.1
Northern Mindanao 35.3 88.4
Southern Mindanao 41.6 104.1
Central Mindanao 30.5 76.2
While notthesoleindicator ofwell-being, theGDP isafairly good indicator oftherelative
disadvantage oftheregions vis-à-vis Metro Manila.
3. Since theOICclearly involves afinancial contribution fromtheGovernment, whydoesthe
Philippines consider thatitdoesnotfallwithin Article 1.1oftheSubsidies Agreement?
Answer:
Thefiscal incentives under theOICaregenerally available andaremeant fordisadvantaged
regimes which areallowed under theSubsidies Agreement. Thetaxcredits forexports donotconstitute
subsidies fromtheGovernment insofar astheyareremission ofduties andtaxes which donotexceed
thatwhich haveaccrued.
4. Since theInvestment Priorities Planof1995explicitly limits theeligible industries (paragraph 6)
andprovides direct incentives toexporters, howcanitbeargued thatthesubsidies arenon-specific?
Answer:
The1995Investment Priorities Planlistsindustries which practically cover thewhole industrial
sector and,thus, theincentives canbeviewed asgenerally available andnotspecific. Thedirect or
additional incentives toexporters arelimited totaxrebates which arealsonotdeemed tobesubsidies.G/SCM/Q2/PHL/5
Page4
(b) Questions onindividual incentives
1. Income TaxHoliday (ITH)
Thisincentive entitles enterprises registered withtheBoard ofInvestments (BOI) toanexemption
ofupto100percentofincome taxes. What exactly aretheconditions tobemettobeeligible for
taxexemption andalsohowistherateofexemption determined? Does theexport ofgoods confer
ahigher rateofexemption onacompany?
Answer:
Toavailoftheincome taxholiday, enterprises -whether theyarefortheexport ordomestic
market orboth-must either putupanewoperation orexpand itsexisting operation.
Therateofexemption isequivalent tothetaxrateof35percentofnettaxable income, as
provided under theNational Internal Revenue Code ofthePhilippines. Theexport ofgoods doesnot
confer ahigher rateofexemption onacompany.
2. Additional deduction forlabour expense (ADLE)
What arethespecial conditions applying toeligibility tobenefit fromthisscheme?
Answer:
Forthefirstfiveyears fromregistration, aregistered enterprise shallbeallowed anadditional
deduction fromthetaxable income of50percentofthewages corresponding totheincrement inthe
number ofdirect labour forskilled andunskilled workers, provided that:
(a) Theratioofcapital equipment tothenumber ofworkers ofthefirmdoesnotexceed
US$10,000.00 perworker; and,
(b) Theregistered firmdoesnotavailofthisincentive simultaneously withtheincome
taxholiday incentive.
AsimilarincentiveisalsoprovidedintheLabourCoderegardlessofwhetherornotanenterprise
iscovered bytheOIC.
3. (a) Taxcredit ondomestic capital equipment
(b) Taxcredit ondomestic breeding stocks andgenetic materials
TheCommunity would likethePhilippines tocomment ontheextent towhich thesetwoschemes
fallwithin Article 3.1(b) oftheSubsidies Agreement. Withregard tothetaxcredit ondomestic capital
equipment, whataretheexact amounts ofcredit available andwhataretheconditions foreligibility?
Answer:
Thetwoschemes donotfallwithin Art.3.1(b) oftheSubsidies Agreement because theincentive
isnotcontingent upon theuseofdomestic overimported goods. Infact,theOIClikewise grants
incentives forimported equipment, breeding stocks andgenetic materials. These twoschemes ineffect
simply level theplaying fieldastheOICincentives havebeen criticised asunduly favouring the
importation ofcapital equipment, breeding stocks andgenetic materials.G/SCM/Q2/PHL/5
Page5
Thetaxcredit ondomestic capital equipment isequivalent to100percentofthetaxes and
duties thatwould havebeenpaidiftheequipment hadbeenimported. Thecondition foreligibility
forthisincentive isregistration oftheenterprise under theOIC.
Inanyevent,theAgreementpermitsthePhilippinestoavailofthetime-boundflexibilityprovided
inArticle 27.3.
4. (a) Taxcredit fortaxes andduties onrawmaterials
(b) Exemption fromwharfage duesandexport tax,duty, impost andfee
These twoincentives appear tobeentirely contingent upon theexport ofproducts. The
Community requests thePhilippines tocomment onwhether these incentives fallwithin Article 3.1(a)
oftheSubsidies Agreement.
Answer:
Withrespect totaxcredits fortaxes andduties onrawmaterials, these areactually taxrebates
ordrawbacks because theyarecommensurate tothetaxes andduties due.
With respect totheexemption from wharfage duesandexport taxes, thisismerely tolevel
theplaying fieldbecause itremoves thebiasagainst exports thatexport taxes naturally have. These
export taxeswereimposed bylawalmost thirty years agousing asetofoutdated criteria andmaysoon
berepealed.
Inanyevent,theAgreementpermitsthePhilippinestoavailofthetime-boundflexibilityprovided
inArticle 27.
II. ADDITIONAL PROGRAMMES NOT NOTIFIED TOTHE WTO
TheCommunity isaware ofoneprogramme (Export Development Act1994) consisting ofa
number ofincentives fromwhich onlyexporting companies maybenefit. Inaddition tothespecific
questions asked below, theCommunity would liketoclarification onwhythisprogramme, andtheothers
listed below, werenotnotified totheWTO andrequests that,ifappropriate, thePhilippines supplies
anotification under Article 25inthestandard format. Reference isalsomade tocertain OICincentives
which werenotnotified.
Answer:
While theEDA lawwaspassed in1994, anditsimplementing rules were formulated in
April 1995, onlythose provisions intheEDA which mirror those intheOICarebeing implemented.
Rules ontaxcredits -which makes theEDA different fromtheOIC-continue tohaveproblems, despite
theissuance ofsupplemental rulesinMay1996. Assoonastheseadministrative concerns areovercome,
thePhilippines willprepare thenotification ontheEDA totheCommittee. However, fortransparency
purposes, wewilltrytoanswer thequestions regarding thislaw.
(a) Export Development Act1994 (EDA)
1. General
What aretheeligibility criteria tobemetinorder tobenefit fromthevarious incentives under
thisprogramme?G/SCM/Q2/PHL/5
Page6
Please givedetails ofallincentives falling within thisAct.
Answer:
Asprovided under RuleVIISections 1.a)to1.b)oftheRules andRegulations toImplement
theEDA of1994 (orIRR), theincentives shallonlybegranted upon fulfilment bytheexporter of
thefollowing requirements:
(a) annual accreditation from theBureau ofExport Trade Promotion (BETP) ofthe
Department ofTrade andIndustry oritsdeputized agencies;
(b) thesubmission ofasworn statement thattheexporter complies withtherequirements
oftheMinimum Wage andSocial Security System Laws; and
(c) payment ofcorresponding fees.
Forthese purposes, RuleIIISection 1(a)oftheIRRdefines "exporter" tomean anyperson,
natural orjuridical, licensed todobusiness inthePhilippines, engage directly orindirectly inthe
production, manufacture ortrade ofproducts orservices which earns atleastfiftypercent(50%) of
itsnormal operating revenues from thesaleofitsproducts orservices abroad forforeign currency.
Asprovided under RuleVIISection 2oftheIRR,incentives provided under RA7844includes:
(a) exemption from PD1853, ortheadvance payment ofcustoms duties;
(b) duty-free importation ofmachinery andequipment andaccompanying spare partsuntil
31December 1997;
(c) taxcredit forimported inputs andrawmaterials primarily usedforexport products
until31December 1999;
(d) taxcredit forincrease incurrent year'sexport revenues; and
(e) taxcredit foruseorimport-substitution ofnon-traditional products until
31December 1997.
Atanyrate,thePhilippines isoftheviewthattheEDA isconsistent withtheflexibility granted
todeveloping countries inArticle 27oftheAgreement.
2. EDA-Taxcredit forincrease incurrent yearexport revenue
Thisincentive isclearly contingent upon export performance. TheCommunity requests the
Philippines tocomment onwhether thisincentive fallswithin Article 3.1(a) oftheSubsidies Agreement.
Answer:
There areoutput-restraining taxes along thewayoftheproduction process which aredifficult
toquantify, andthetaxcredit provision intheEDA istheonlypractical waytocapture andeliminate
sucheffect. Nevertheless, asmentioned earlier, theAgreement permits thePhilippines toavailofthe
time-bound flexibility provided inArticle 27.G/SCM/Q2/PHL/5
Page7
3. EDA-Forexporters ofnon-traditional products whouseorsubstitute locally produced raw
materials, capital equipment and/or spare parts, taxcredits equivalent to25percentoftheduties that
would havebeenpaidhadthese inputs beenimported canbeobtained. TheCommunity requests the
Philippines tocomment onwhether thisincentive fallswithin Article 3.1(b) oftheSubsidies Agreement.
Answer:
Theindustrial promotion andincentive system inthePhilippines havehadtheunintended and
undesirable effect ofencouraging thedisproportionate useofimported overlocalinputs. Thisparticular
measure intheEDA isdesigned tominimize thisbiasandmove towards levelling theplaying field
fordomestic producers. Again, inanyevent, theAgreement permits thePhilippines toavailofthe
time-bound flexibility provided inArticle 27.
4. EDA-IntheinterimwhiletheEximbankisbeingestablished,thegovernmentfinancialinstitutions
including theDevelopment Bank ofthePhilippines, thePhilippine National Bank andtheLand Bank
ofthePhilippines shalldevelop within oneyear, long-term pesoanddollar credit facilities tobeused
forplantandequipment expansion purposes among others. TheCommunity requests moreinformation
ontheestablishment ofthese credit facilities, inparticular ontheeligibility criteria, theinterest rates
payable under thescheme andtheinterest ratesnormally payable inthePhilippines forsimilar credits
granted bythefinancial institutions outside ofthescope ofthescheme.
Answer:
TheExport-IndustryBankisbeingsetupbytheprivatesector,primarilycomposedofexporters,
andhasnogovernment financial assistance. Target dateforoperations isSeptember 1996.
Intheinterim, theExport Development Council, anaggregation ofprivate exporters with
representativesfromgovernment,providesshort-termfinancingforsmallandmediumexportersincluding
cottage industries. Thefacility isbeing offered through theDevelopment Bank ofthePhilippines,
thePhilippine National Bank andtheLand Bank ofthePhilippines withguarantee facilities from the
PHILGUARANTEE, theGuarantee Funds forSmall andMedium Enterprises andtheSmall Business
Guarantee Fund Corporation. Interest ratesaresetatprime rate.
TheExport-Import Bank oftheDevelopment Bank ofthePhilippines didnotpushthrough,
buttheDBPalsoofferstheExportDevelopmentFinancingProgram(RetailFacility).Eligibleborrowers
inthisprogramme include alldirect andindirect exporters andmanufacturers; allexport traders; and
trade andindustry associations.
With respect tointerest rates:
(a) funds generated internally bytheDBParelentoutusing thesuper prime ratewhich
isalower rate. This, however, isnotexclusive toclients oftheprogramme butis
alsomade available toother DBPfavoured clients;
(b) funds coming fromOfficial Development Assistance (orODA) andother externally-
generated funds forspecial lending (eg,fromtheWorld Bank) arelentoutusing the
respective terms ofthefunds source; and,
(c) forprime clients, availments ofForeign Currency Denominated loans andtheExport
BillsPurchase linefromaccredited financial institutions arecharged interest ratesbased
ontheprevailing SIBOR ratesonthedateoftheloanrelease plus2percent, oron
thefinancial institutions prime rate.G/SCM/Q2/PHL/5
Page8
(b) Omnibus Investments Code -incentives notnotified totheWTO
1. Exemption fromContractor 'stax
Under theprovisions ofthisscheme, theregistered enterprise shallbeexempt fromthepayment
ofcontractor 'stax,whether national orlocal. TheCommunity would likeclarification onwhythis
programme wasnotnotified totheWTO andrequests that,ifappropriate, thePhilippines supplies
anotification under Article 25inthestandard format.
Answer:
Thissubsidy wasrepealed in1995 bytheExpanded Value-Added TaxLaw(Republic Act
No.7716).
2. Exemption fromtaxes andduties onimported spare parts
Importation ofrequired supplies andspare parts forconsigned equipment orthose imported
taxanddutyfreebyaregistered enterprise withabonded manufacturing warehouse shallbeexempt
fromcustoms duties andnational internal taxes payable thereon, provided thatatleast70percent
ofproduction isexported andthatsuchpartsandsupplies arenotlocally available atreasonable prices,
insufficient quantity andcomparable quality. TheCommunity would likeclarification onwhythis
programme wasnotnotified totheWTO andrequests that,ifappropriate, thePhilippines supplies
anotification under Article 25inthestandard format.
Answer:
Thisprogramme isnotasubsidy because allgoods entering abonded manufacturing warehouse
areconsidered notyetintroduced intoPhilippine commerce. Thus, thereisnobasisfortheimposition
oftaxes andduties.