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ADDENDUM TO THE REPORT ON IMPACT OF ASEAN FTA ON HSSI:

Can Member companies establish a similar business as ours? Following agreement on tariff reduction commitments under the ASEAN Free Trade Area (AFTA) in 1993 to below 0~5% level for substantially all trade in goods traded within the region, ASEAN turned its attention towards enhancing trade in services. ASEAN views trade in services as one of a number of key initiatives needed to achieve ASEAN economic integration. In 1995, ASEAN Member States signed the ASEAN Framework Agreement on Services (AFAS), mandating progressive negotiations on the liberalisation of trade in services. This was in recognition that intra-ASEAN economic cooperation will strengthen and enhance trade and investment among ASEAN Member States. In its most basic form, international trade refers to an economic exchange between residents and non-residents, either rms or persons, and imply gain or loss of foreign exchange. For trade in goods, the concept is relatively straightforward because the producers stay in one country and the goods travel across a border to the consumers in another country. For services, the situation is more complex because in many cases the supplier and the customer need to be in the same location. There are four possibilities of international provision of services: * the service moves across the border * the customer moves across the border to receive the service * the producer moves across the border to provide the service through commercial establishment * the producer moves across the border only temporarily to provide the service These four possibilities are known as Modes of Supply of services trade. They are referred to as Mode 1 (or the so-called Cross-Border Supply), Mode 2 (Consumption Abroad), Mode 3 (Commercial Presence), and Mode 4 (Movement of Natural Persons), respectively. Companies with similar business as ours, of ASEAN member countries, may establish through Mode 3 their Commercial Presence in the Philippines, once ASEAN Framework Agreement on Services (AFAS), has been ratified by the Congress in 2015 or earlier, to comply with AFAS objectives: a) to enhance cooperation in services amongst Member States in order to improve the efficiency and competitiveness, diversify production capacity and supply and distribution of services of their service suppliers within and outside ASEAN; b) to eliminate substantially restrictions to trade in services amongst ASEAN Member Countries (AMCs); and c) to liberalise trade in services by expanding the depth and scope of liberalisation beyond those undertaken by Member States under the GATS with the aim to realising a free trade area in services.

Moreover, another FTA, the ASEAN-China free trade pact on trade in services was entered into force on 1 July 2007. Both ASEAN member countries (including the Philippines) and China agreed to progressively liberalize trade in services with substantial sectoral coverage. China committed to open up new markets for the ASEAN countries in construction, environmental protection, transportation, sports, commerce, computer and related services, real estate services, other business services, construction and related engineering services, environmental services, recreational, cultural, and sporting services, and transport services. ASEAN committed to open up their markets to China in finance, telecommunication, education, tourism, construction and medical treatment, among others. Hence, HSSI may also opt to take advantage of the ASEANChina free trade pact on trade in services, by looking into engaging our services in China. The ultimate objective of these FTAs is to promote the free flow of goods within the trade area. This is done through the gradual reduction or eventual elimination of customs duties on a majority of goods traded within a free trade area (subject to a deferred and flexible schedule of implementation for certain member states. Provide our competitors with tugs duty free? Do incentives include non-payment of VAT on importations? With the implementation of FTAs, importers and exporters alike, whether stand-alone or part of a multinational group, can further study if their trade transactions qualify for the benefits of tariff or duty minimization under a particular FTA. Philippine importers can then focus on the benefits of sourcing imports from FTA member states in order to import at lower costs, while Philippine suppliers and exporters can focus on gaining a competitive advantage by directing sales to FTA member states. Upon importation, an importer must declare the dutiable value of the goods, upon which the appropriate customs duty rate is applied, to arrive at the duties payable. Based on the 2012 ASEAN Harmonized Tariff Nomenclature (AHTN), customs duty rates depend on the tariff classification of the goods and may range from 0% to as much as 5%. On the other hand, applying ASEAN-China free trade agreement, the tariff rates on products under the Sensitive Track were reduced to 20% in 2012 and shall be reduced down to 0%-5% by 1 January 2018. Among the Philippines Sensitive Products are vehicles other than railway. For China, these are ships and boats, among others. Therefore, HSSI may opt to take advantage of ASEAN-China free trade agreement in importing tugboats and other related equipment. Value-Added Tax is a form of sales tax. It is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. It is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services. Customs duties paid by an importer generally form part of the cost of the goods. They also form part of the landed cost, upon which the 12% VAT on importation is applied. As VAT is a tax on consumption, this is not included in the absolute coverage of tariffs aimed to be reduced by AFTA, the primary determinant would be on where the goods or services imported will be consumed. However, on September 5, 2012 and October 21, 2012, the Department of Finance (DOF) Bureau Customs (BOC), Bureau of Internal Revenue (BIR) and Department of Budget and Management (DBM) issued Joint Circular Nos. 6-2012 and 5-2012. The two Circulars spell out the guidelines to cover all claims for refund of input value added tax (VAT) attributable to zero-rated or effectively zero- rated transactions under Section 112 of Republic Act (RA) 8424, as amended.