OFFICIALS of the Fiscal Incentives Review Board (FIRB) pointed to the billions of pesos the government lost after giving tax breaks to Hanjin Heavy Industries and Construction Philippines Inc., which closed in 2019 after defaulting on loans.
In a statement, the FIRB Secretariat said that the subsidiary of the South Korean shipbuilding giant Hanjin Heavy Industries & Construction Co. Ltd. was granted seven years of income tax holiday (ITH) and a special corporate income tax rate (SCIT) rate of 5-percent gross income earned (GIE) upon the expiration of its ITH.
The FIRB Secretariat said that for 2015 alone, Hanjin Heavy received tax incentives amounting to P370 million based on the firm’s audited financial statement for that year. After deducting the tax holiday, Hanjin Heavy earned a net taxable income of P1.234 billion, according to the FIRB.
Apart from these perks, the company was granted tax and duty-free importations on raw materials and capital equipment.
On top of the tax incentives, Hanjin Heavy also received power subsidies for its operations at the Subic Bay Freeport Zone amounting to P5.17 billion from 2009 to 2018. The company enjoyed these perks even though it failed to maintain an estimated employment of 20,000 workers and invest another $2 billion in the planned Mindanao shipyard that was supposed to create 30,000 jobs. The Mindanao shipyard did not push through.
“This is the reason why we must impose stringent evaluation and impact analysis before the grant of tax incentives,” Finance Assistant Secretary Juvy C. Danofarata said.
DANOFRATA, who also heads the FIRB Secretariat, underscored the mandate of the FIRB to ensure that companies receiving tax privileges are able to deliver on performance commitments such as job creation. She also noted that the FIRB also ensures entities enjoying tax perks amply contribute to the economy.
“Given the failure of this shipyard in Subic, jobs were lost and productivity in the area declined,” Danofrata said. “The project cost the government so much money in foregone revenues that could have been granted to performing and more deserving business enterprises.”
Hanjin Heavy ceased operations after 13 years when it defaulted on a $1.3-billion outstanding loan, which includes $400 million due to Philippine banks and $900 million owed to South Korean lenders. It went into court receivership and laid off 10,000 workers. Only about 300 local workers were retained.
Just recently, however, the FIRB approved tax perks for the P17-billion redevelopment and operations of Hanjin Heavy’s shipyard in the Subic Bay freeport zone in Zambales. The tax perks were given the greenlight by Finance Secretary and FIRB Chairman Carlos G. Dominguez III.
The Department of Finance justified the incentives saying the rehabilitation of the Hanjin Heavy shipyard presents economic potential given its strategic location near the West Philippine Sea. It is also expected to create jobs in the adjacent communities, according to the DOF.
The new tax incentives granted to Hanjin Heavy include the following: Special Corporate Income Tax; value-added tax exemption from importation; VAT zero-rating on local purchases; and, duty exemption on importation. To note, the FIRB gives a 5-percent SCIT for 10 years only for export enterprises.
The project—dubbed “Agila” (eagle)—is funded by United States-based private equity firm Cerberus Capital Management, according to documents provided by the FIRB.
Image credits: Henry Empeño