CURRENT TRADE CONCERNS
Elpidio V. Peria
22 June 2016
The recently-passed Republic Act 10771, or the Green Jobs Act, which was published online in the Official Gazette last April 29, 2016, while beneficial to the country as a whole as it promotes a cleaner environment, may be considered loosely as WTO-illegal, meaning, it may not be allowed under the rules of the World Trade Organization or WTO, of which the Philippines is a founding member since 1994. What may happen is that the benefits given under the Act, the incentives provided therein, may be subjected to certain disciplines under some agreements under the WTO, and one thing we looked closely into is the WTO’s Agreement on Subsidies and Countervailing Measures, thus, it behooves on the implementing agencies of the Green Jobs Act to design the incentives that will be provided under the law, in such a manner that it will not cause unfair discrimination over similar goods and services coming into the country from other members of the WTO.
The Green Jobs Act, in its essence, gives incentives to companies that create green jobs which is defined in the law as “employment that contributes to preserving or restoring the quality of the environment, be it in the agriculture, industry or services sector. Specifically, but not exclusively, this include jobs that help to protect ecosystems and biodiversity, reduce energy, materials and water consumption through high efficiency strategies, decarbonize the economy, and minimize or altogether avoid generation of all forms of waste and pollution. Green jobs are decent jobs that are productive, respect the rights of workers, deliver a fair income, provide security in the workplace and social protection for families, and promote social dialogue.”
In its section 5, the law gives the following incentives:
(a) Special deduction from the taxable income equivalent to fifty percent (50%) of the total expenses for skills training and research development expenses which is over and above the allowable ordinary and necessary business deductions for said expenses under the National Internal Revenue Code of 1997, as amended; and
(b) Tax and duty free importation of capital equipment: Provided, That the capital equipment is actually, directly and exclusively used in the promotion of green jobs of the business enterprise.
This deduction on taxable income falls squarely within the definition of a subsidy under Article 1.1 (a)(1)(ii) of the WTO’s Agreement on Subsidies and Countervailing Measures, which is “government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits)”.
As such subsidy, this incentive while not considered as something that is prohibited under the said WTO Agreement, is actually actionable, meaning, any WTO member to which the Philippines is a trading partner, can request for “consultations” under the procedures of the Agreement and in this process of “consultations”, the affected WTO member may ask that such subsidy either be reduced or through other means, subjected to what is called “countervailing measures”, where the affected WTO member country may impose additional duties on the Philippine good or services that is produced under this law. The purpose of these additional duties is to make sure that the Philippine good or services will not distort the market for the same good or service that is produced in the WTO member country.
An example of this may be an industrial good, like an electronics component produced by a Filipino company that acquired incentives under this law and this is exported to, say, the EU, and a competitor country who may happen to be a WTO member that also exports a similar product to the EU may find that the incentive given under the law unduly makes the Philippine-produced electronics component artificially cheaper in the EU market compared to similar products from said competitor country. What that competitor country, example, Thailand, may do, is request consultations under the WTO Agreement on Subsidies and Countervailing Measures so that the Philippines may remove such subsidies for such products.
Or how about, an agricultural product, like, for example, banana, produced through organic farming methods and this is exported, say, to Japan. If a competitor country, like, Ecuador, or Colombia finds that they are displaced in the Japanese market and finds that the Filipino company that produced this have availed of incentives under this Act, then, these countries will request for consultations under the said WTO Agreement.
The other incentive provided by the Green Jobs Act, relating to the tax and duty-free importation of equipment, may also be considered actionable, under the same category in the WTO Agreement on Subsidies and Countervailing Measures.
However, these two forms of incentives under the law, if they are given contingent to export performance, meaning, these training and research development expenses and importations are encouraged so that the companies that availed of the incentives will be able to export more, then it becomes a prohibited subsidy under the WTO Agreement on Subsidies and Countervailing Measures.
What then, should the implementing agencies do, to avoid this violation of the WTO Agreement ?
For those subsidies that are actionable, this will all depend on the competitor country of the Philippine product that may be harmed in terms of their market share in the export market, this is something that the agencies cannot do much at this stage since it will also depend on whether that export market is one where the Philippines has a dominant position, so the first task of a Filipino company is to grow that market, among other things.
As to those incentives that may be considered a prohibited subsidy, following Article 3 of the said WTO Agreement, they should be designed such that they should not be made contingent upon export performance and that these incentives should not prioritize the use of domestic goods over imported goods. The latter criteria may result in the Philippines importing a lot more of these raw materials to produce the good but that is what the WTO prefers.
There are other WTO agreements that will need to be taken into account of by the implementing agencies of the Green Jobs Act, like the Agreement on Technical Barriers to Trade, which deals with policy instruments that lay down certain environmental requirements, like product and production specifications, voluntary and mandatory, characteristics and performance level, labeling and conformity assessment or the original General Agreement on Tariffs and Trade which deals with price and market mechanisms e.g. environmental taxes, trading schemes that internalize environmental costs, e.g. for greenhouse gas emissions. With these myriad WTO agreements that will need to be taken into account in the implementation of the Act, the tasks of these agencies will not be easy.