After VAT, gov’t to tackle fiscal incentives

Once Congress ratifies the increase in the value-added tax (VAT) rate, the Arroyo administration said its next legislative focus would be on the rationalization of fiscal incentives that would limit fiscal exemptions to so-called footloose industries.

Initially, the Department of Finance (DOF) said fiscal incentives should be limited to such industries as business process outsourcing (BOP) such as call centers, electronic and semiconductor companies and other businesses where government incentives would be the deciding factor between staying or going.

Finance Secretary Cesar V. Purisima told reporters yesterday that the rationalization of fiscal incentives would be taken up in Congress next and the Arroyo administration intended to limit these incentives to businesses that would otherwise go somewhere else if no incentives were offered.

"Tax revenues have not been growing as fast as GDP and we need to find out why," he said. "We already know that we need to increase our revenues immediately by at least 2.5 percent of GDP simply to get out of our present situation."

Purisima said government revenues should rise to at least 15 percent of GDP to give the government a chance at putting its debt burden at manageable levels while still spending on development projects with the necessary economic multiplier effects.

Moving from the Department of Trade and Industry (DTI) which administers investment incentives, Purisima said he remained a believer of fiscal incentives to investors but only to industries that would otherwise locate elsewhere.

"For industries that are going to come here and stay anyway, incentives would not be the determining factor in investment decisions," he said. "The harmonization of fiscal incentives against the need to raise revenues would depend on the balance of these considerations."

According to Purisima, these so-called footloose industries should still enjoy certain degrees of fiscal incentives but he said the award of these incentives would be carefully selective.

The Department of Finance (DOF) originally estimated that the rationalization of fiscal incentives would generate at least P5 billion on the first year of implementation.

Purisima said the DOF’s proposal was to phase-out or abolish fiscal incentives that were inefficient, irrelevant and inconsistent with the rules of the World Trade Organization (WTO).

"We need to adopt a standardized fiscal incentives law and extend incentives only to exporters and few and focused list of industries," Purisima said.

Purisima said the DOF also wanted to establish a tax incentive accounting system in the short run and a tax expenditure budget in the medium term with a clear sunset provision for fiscal incentives in general.