RESTRICTED
WORLD TRADE G/SCM/Q2/PHL/6
16September 1996
ORGANIZATION(96-3585)
Original: English Committee onSubsidies andCountervailing Measures
SUBSIDIES
Replies toQuestions from theUNITED STATES1Regarding theNew
andFullNotification ofthePHILIPPINES2
Thefollowing communication, dated 23August 1996, hasbeenreceived fromthePermanent
Mission ofthePhilippines.
_______________
1. Omnibus Investments Code
Could thePhilippines explain ingreater detail therelationship between theOICandtheBoard
ofInvestments. Arethere noBOIprogrammes thatareavailable toexporters thatareseparate from
theOICprogramme?
Answer:
TheBoard ofInvestments implements theOIC. There arenoBOIprogrammes available to
exporters thatareseparate fromtheOICprogramme. TheOICprogrammes include special lawswhich
mandate BOIregistration astobeexplained insubsequent answers.
2. Weareaware ofthefollowing programmes andmeasures inthePhilippines thatappear that
theymaymeetthenotification requirements referenced above. Could thePhilippines please explain
thebasis onwhich ithasdetermined thatthese programmes need notbenotified under GATT
Article XVI:1 and/or Article 25.2oftheAgreement onSubsidies andCountervailing Measures?
A. Export-Import Bank
Weunderstand thatanExport-Import Banking Programme oftheDevelopment Bank ofthe
Philippines wasinitiated primarily toaddress theneeds oftheexporting community andreduced interest
rates from13to11.5percentoncertain lending between August andSeptember 1994. Wefurther
understand thatexport-oriented activities thatarelabour-intensive andwhich willutilize local raw
materials areintended tobenefit fromthisprogramme.
1G/SCM/Q2/PHL/2.
2G/SCM/N/3/PHL.G/SCM/Q2/PHL/6
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Answer:
TheExport-Import Bank oftheDevelopment Bank ofthePhilippines didnotpushthrough,
buttheDBP alsooffers theExport Development Financing Programme (Retail Facility). Eligible
borrowers inthisprogramme include alldirect andindirect exporters andmanufacturers; allexport
traders; andtrade 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.
Thisprogramme wasnotnotified because thePhilippines isoftheviewthatitdoesnotconstitute
asubsidy inthesense ofArticle 1.1andArticle 2oftheAgreement.
B. Export Development Actof1994
Inaddition toexisting incentives provided bytheBoard ofInvestments, thefollowing incentives
areunderstood tobegranted toexporters under LawRANo.7844 (EDA): exemption fromadvance
payment oftaxesandduties onimported inputs priortoopening ofletters ofcredit; dutyfreeimportation
ofcapital equipment until1997; taxcredit forimported inputs andrawmaterials notavailable locally
primarily usedfortheproduction andpackaging ofexports until1999; forexporters ofnon-traditional
products whouseofsubstitute locally produced rawmaterials, capital equipment and/or spare parts,
taxcredits equivalent to25percentoftheduties thatwould havebeenpaidhadthese inputs been
imported; taxcredit foranyincrease inannual export revenue computed asfollows: (a)thefirst5per
centincrease inannual export revenue overtheprevious yearwould mean acredit of2.5percent;
(b)thesecond 5percentincrease would beentitled toacredit of5.0percent;(c)thethird5percent
increase would beentitled toacredit of7.5percent; and,inexcess of15percentwould beentitled
toacredit of10percent(Note: Weunderstand thatthissame actprovides fortheestablishment of
anEximbank which shallextend long-term pesoanddollar credit facilities atpreferential rates, within
oneyearfromwhen theLawRANo.7844 wentintoeffect (or,fromDecember 1994).
Answer:
While theEDA lawwaspassed in1994, anditsimplementing rules were formulated in
April 1995, onlythose provisions intheEDA which mirror those intheOICarebeing implemented.
Rules ontaxcredits -which makes theEDAdifferent fromtheOIC-continue tohaveproblems, despite
theissuance ofsupplemental rulesinMay1996. Assoonastheseadministrative concerns areovercome,
thePhilippines willprepare thenotification ontheEDA totheCommittee. However, fortransparency
purposes, wewilltrytoanswer thequestions regarding thislaw.G/SCM/Q2/PHL/6
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C. Bureau ofInternal Revenue Regulation 6-94
Weunderstand thatthisregulation exempts exporters fromadvance payment ofa2.5percent
withholding taxcreditable against finalincome taxdeclaration.
Answer:
Exporters areexempted from theregulation thatrequires theadvance quarterly payment of
the2.5percentwithholding tax,which isnotpractised inother countries. Itdoesnotexempt them
from paying theappropriate income taxattheendofevery taxyear. Theexemption from advance
payment therefore onlylevels theplaying fieldforPhilippine exporters vis-à-vis theircompetitors in
other countries.
D. DBP-Omnibus Export Financing Programme
Eligiblebeneficiariesofthisprogrammereportedlyareproductionand/ormanufacturingactivities
engaged inexport ventures. Eligible borrowers include: Central Bankcertified producers/manufacturers
directly engaged/planning toengage inexport ventures; indirect exporters/subcontractors; Filipino
citizen or60percentFilipino owned business where atleast50percentoftotalproduction isdevoted
toexport; endorsed byareputable traders industry association/business group.
Answer:
Thisquestion wasanswered inQuestion 2Aabove.
E. Export Credit Enhanced Leverage Facility (EXCEL)
Weunderstand thattheEXCEL programme isavailable tothose projects where: competition
isenhanced; thetechnology utilized willhelpreduce operating costs andimprove efficiency; atleast
20percentofproduction willbeforexport. Eligible borrowers include: viable private industrial
enterprises which require financing ofinvestments inproductive assets insubsectors which haveinherent
economic comparative advantage, needminimum ornoprotection, arecapable ofcompeting effectively
intheexport and/or domestic market.
Answer:
TheEXCEL programme istiedupwiththeWorld Bank Industrial Restructuring Programme.
Itexpired in1994. Andthere were noborrowers whoapplied forfunding under thisprogramme.
F. Central Bank Rediscounting
Itisourunderstanding thatthePhilippine Central Bank ("Bangko Sentral ngPilipinas")
administers apesorediscounting window. In1994, itopened aFOREX counterpart (i.e.,the"exporters
dollar facility", EDF). Theratesatwhich banks mayavail ofthefacilities against eligible loans are
market-based (i.e., T-bills andLIBID, respectively). However, webelieve there areceilings onthe
bankspreads atwhich funds canberelent --2percentforrediscounted pesoloans and1percent
under theEDF, afterapplicable taxes.
Answer:
These werenotnotified because the"limits" onthebanks 'spread under thepesorediscounting
andExporters Dollar Facility (EDF) donotconstitute asubsidy.G/SCM/Q2/PHL/6
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Theexisting mechanism ismarket-based. Theobserved narrow interest ratesmargin between
theratesunder theEDFandthose similar foreign-denominated loans granted bythelocalcommercial
banks could bematched easily bytheprivate banks should theydecide tocompete directly withthe
EDF. Thus, thelimitonthespread doesnotserve asamechanism tosecure material advantage in
thefieldofexport credit terms. Rather, itinfluences interest ratemovement byfostering market
competition.
Thecapof2percentonthebanks 'spread under thepesorediscount issimply aninformal agreement
between theCentral Bank andtheBankers Association ofthePhilippines.
G. OilExploration andDevelopment Act
Weunderstand thatLawPDNo.87permits anexemption forpetroleum exploration and
development contractors entering intoservice contracts withthegovernment fromalltaxesexcept income
tax;taxandduty-free importation ofmachinery andequipment, spare parts andmaterials required
forpetroleum operations; deduction forincome taxpurposes of"Filipino Participation Incentive
Allowance"; fulldeduction forincome taxpurposes ofintangible exploration costs; depreciation of
tangibleexplorationcosts(i.e.,capitalexpendituresandotherrecoverableassets)overaten-yearperiod.
Answer:
Presidential Decree No.87of1972 hasbeenamended byPD1857 granting incentives to
petroleum service contractors, which tookeffect in1983. Thelawisdesigned toattract foreign capital
andexpertise intheexploration ofoilandgasresources, andtorevitalise interest andencourage more
drilling inthePhilippines, withspecial reference todeepwater oilexploration. Ineednotsaythat
theissue ofenergy isclosely linked tonational security concerns, andthatthemain beneficiaries of
thislawhavebeenthevarious enterprises inNorthern America andEurope whowork withtheir
Philippine counterparts.
Moreover, these incentives really gotothegovernment which owns thenatural resources.
Under normal circumstances, thegovernment issupposed tofinance theexploration costincluding
importation ofcapital equipment. Duetolackoffunds andduetotheriskinvolved, thegovernment
enters intoaservice contract whereby 40percentofthenetprofits, afterdeducting allexpenditure,
goestotheservice contractor. Inmostinstances, theequipment leaves thecountry afterthecompletion
oftheexploration.
H. Petroleum Exploration Concessionaires
WeunderstandthatLawNo.529permitstax-andduty-freeimportationofmachinery,equipment,
spare parts andmaterials required bypetroleum exploration concessionaires.
Answer:
Thismeasure isnolonger ineffect.
I. CoalDevelopment Act
Weunderstand thatunder LawPDNo.972,coalservice contractors canclaim exemption from
alltaxesexcept income tax;exemption fromduties andtaxesonimports ofmachinery, equipment, spare
parts andmaterials require foroperations; accelerated depreciation. Forcoalusers, taxandduty-free
importation ofcapital equipment, machinery andspare parts necessary fortheir coalconversionG/SCM/Q2/PHL/6
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programme; taxcredit ondomestic capital equipment; netoperating losscarryover andaccelerated
depreciation; exemption fromcapital gains tax.
Answer:
Thecoalmines arelocated inverydepressed areas andismeant toassist thedisadvantaged
regions ofthecountry. Allcoalproducers arequalified toavailoftheincentives.
J. Geothermal Exploration andDevelopment
LawPDNo.1442reportedly provides tax-andduty-free importation ofmachinery, equipment,
spare parts andmaterials required forgeothermal operations.
Answer:
These incentives arenecessary toencourage theexploitation ofnatural resources toserve the
over-growing energy requirements ofthePhilippines. These so-called incentives, infact,accrue to
agovernment entity -thePhilippine National OilCompany, which ischarged withdevelopment of
thecountry 'sgeothermal resources.
K. Mini-Hydroelectric Power Incentives Act
Weunderstand thatLawRANo.7156 permits tax-andduty-free importation ofmachinery,
equipment andmaterials; taxcredit ondomestic capital equipment; exemption fromvalue-added tax;
income taxholiday; special privilege taxrateof2percentofgross receipts fromthesaleofelectric
power andfromtransactions incident tothegeneration, transmission andsaleofelectric power; and
special realty taxrates onequipment andmachinery.
Answer:
Thismeasure wasnotnotified asameasure falling under Article 1.1andArticle 2ofthe
Agreement because itisintended forregional development, inparticular toaddress thecritical power
shortage inthecountryside. Furthermore, thePhilippines isoftheviewthatthismeasure hasnotrade
effect.
L. Small Scale Mining Act
LawRANo.7076reportedly exempts small scaleminers fromoccupation fees,rental andreal
property taxes.
Answer:
ThePhilippines isoftheviewthattheprovisions referred tobytheUSinRepublic ActNo.7076
ortheSmall Scale Mining Actarenotasubsidy. Infact,thelawisdesigned toprovide ameans for
poverty alleviation inthecountryside andlivelihood forsmall-scale miners. Thismeasure alsohas
notrade effect.
Thelawwasimplementedon14July1992anditsefficacydependsonthecreationofaProvincial
Mining Regulatory Board, which istasked toidentify small scale mining areas andtheeffective
management oftheseareasforsmall scalemining. Small scaleminers arerequired toformcooperatives
andshould beregistered assuch. Theyarerequired topayalltaxes, royalties orgovernment production
share asarenowormaybeprovided bylaw.G/SCM/Q2/PHL/6
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Incaseasitedeclared andsetaside asapeople 's-scale mining areaiscovered byanexisting
mining right, theclaimowner andthesmall-scale miners therein areencouraged toenterintoavoluntary
andacceptable contractual agreement withrespect tothesmall-scale utilization ofthemineral values
from theareaunder claim.
Thegrant ofexemption fromoccupation fees,rental andrealproperty taxes isapplicable only
totheclaimowner asowner oftheareadeclared asasmall scale mining areaonlywhen there isno
agreement reached between theclaimowner andthesmall scale miners.
M. Philippine Mining Actof1995
Under LawRANo.7942, taxanddutyexemptions arereportedly provided under theOmnibus
Investments Code (thecontractor maychoose between theincome taxholiday under theOmnibus
Investments Code, ortheincome tax-carry forward oflosses under themining act),asareexemptions
fromlocal government taxes forpollution control.
Answer:
Thisisoneofthelawswhich mandate BOIregistration. Likewise, weareoftheviewthat
themeasures under thePhilippine Mining Actof1995 donotconstitute asubsidy.
These assistance weregranted inconsideration ofthelarge amount ofinvestments necessary
tobring amine intoproduction. However, assoonascommercial production starts, alltaxes shall
bepaid. Moreover, evenduring thecost-recovery period thecontractor willhavetopayalllocal
government taxes. Thealternative incentive ofNOLCO isinlinewiththeusual taxprovisions inthe
TaxCode ofother countries.
N. Local Water Districts
LawRANo.7109reportedlyprovidesexemptionfromincometax,excepttaxesoninterestincome
fromdeposits andoninvestments thathavenodirect relation withwater service operations; exemption
fromfranchise tax;taxandduty-free importation ofmachinery, equipment andmaterials foroperations;
exemption fromrealproperty taxes onproperty usedforwater supply generation anddistribution.
Answer:
Thelawisintended toaddress theproblem ofproviding safeandadequate water tothe
population, particularly inthecountryside. Ithasnotrade effect. Itmayalsobesaidthatthelaw
effectively allows government todelegate thefinancial costofproviding safeandadequate water, a
basic social service, totheprivate sector.
O. Bases Conversion andDevelopment Actof1992
Under thisprogramme (LawRANo.7227), companies aresaidtobeprovided exemption from
taxes andduties onimportations ofrawmaterials andcapital equipment brought intotheSubic and
Clark special economic zones andexemption fromnational andlocaltaxesofbusinesses andenterprises
within thezones; inlieuthereof, enterprises pay5percentofgross income.
Answer:
Thebases concerned arethose which theUnited States leftbehind tothePhilippine Government
in1991. They were converted inindustrial estates inorder toprovide continued livelihood totheG/SCM/Q2/PHL/6
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population inthese bases (which incidentally arethesame onesaffected bythevolcanic activity of
Mt.Pinatubo). Theprogramme concerned wasnotnotified because thebases weretreated asspecial
customs territories notsubject tonational andlocaltaxation.
P. Philippine Economic Zone Authority
These zones reportedly provide exemption fromalltaxes, national andlocal (inlieuthereof,
5percentofthegross income ispaid).
Answer:
Again, thePEZA facilities areintended toprovide theimpetus forregional development, being
located indepressed butpotential high-growth areas.
Q. Comprehensive Agrarian Reform Law
Reported exemption oflandtransfers from taxes andfees,including capital gains taxand
registration fees(Law RANo.6657).
Answer:
Theobjective oftheComprehensive Agrarian Reform Lawistheemancipation ofthepeasants,
andisnotatallasubsidy. Thebeneficiaries willneedtopayforthelandtheyacquire. Theonly
exceptions arethecapital gains taxandtheregistration feesbecause these would require further cash
outlays fortheburdened farmers andfrom landowners deprived oftheirland.
R. Magna Carta forCountryside andBarangay Business Enterprises
Under LawNo.6810, eligible companies cansupposedly claim exemption fromallnational
taxes (except capital gains taxes), import duties andother taxes onimported articles; exemption from
local taxes, licenses andbuilding permit feesandother business taxes (except realproperty tax).
Answer:
Thislaw,which isalsoknown asKalakalan 20,waspromulgated toferret outintotheopen
thesizeable underground economy, andtobeabletoestablish amore realistic taxbase. However,
forsome reason, theunderground economy chose toremain intheunderground. Inanyevent, the
period foravailment ofincentives hasalready expired.
S. Phividec Industrial Estate Enterprises
Reported taxanddutyexemption forimported capital equipment, rawmaterials andsupplies
andexemption fromlocal taxes (Law PDNo.538).
Answer:
Although thelawstillexists, thePhividec programme wasnotnotified because ithasbeen
phased inwiththeOICoftheBoard ofInvestments there being nomore lands available tooffer to
theprivate sector. Enterprises inthePhividec arenotexempt fromtheValue Added Tax.Furthermore,
thetaxanddutyexemptions under Phividec arenotautomatically granted astheyneedtobeapproved
bytheDepartment ofFinance.