The mess over income tax holidays

Some weeks ago, Trade Undersecretary Elmer Hernandez was reported to have said that some companies are enjoying income tax holiday despite the fact that they are not eligible to get these perks. Hernandez blamed the BIR for the problem because they just allowed income tax holiday claims in their income tax returns even without proof from the BOI that the claimants were really eligible for the perks.

I talked to BIR Chief Jojo Buñag and he did say that there was such a problem in the past and that they are now actively trying to improve the way the BIR cross checks such claims with the BOI. In an e-mail responding to my query, Commissioner Buñag admitted that what they found out as a result of their efforts to clean up collection procedures "was the lack of coordination between the BIR on one hand and the BOI or PEZA on the other."

They were alerted to the problem, Buñag wrote, because of "the wide disparity of income tax holiday (ITH) claimed as reported by BIR and by BOI. In 2000, BIR reported P4.4 billion of ITH, BOI reported P2.5 billion. By 2004, the BIR reported P19.4 billion while BOI’s figure was P7.6 billion."

In defense of his agency, Buñag explained "it appears that BOI firms file their ITRs on April 15 but the BIR could not check because it had no master list of BOI-registered firms. Thus, the BIR refers these firms to BOI to validate their ITH claims; the BIR defers to the BOI.

"Supposedly, the validation should be done in 30 days. It does not happen that way because the BOI allows firms 2 1/2 years to file their ITH claims "with penalty". By the time, the ITRs get back to the BIR with or without the findings of the BOI, the period to assess has prescribed or is about to prescribe."

Hmmm. This sounds like a serious breakdown of communications between two government agencies that should have been working together. As a result, government lost tax revenues and the impression was made that the investment incentives program of government had been foolishly lavish. No wonder the Finance department, which gets the BIR figures and the BOI which, is working from a different set of data, couldn’t understand each other.

The wonder of it all is that the Senate conducted extensive public hearings on the matter and somehow missed this anomaly. Sen. Ralph Recto even delivered an impassioned sponsorship speech of a bill that would rationalize our investment incentives system/s. For all we know, all we need to do is streamlining bureaucratic procedures rather than new legislation that would take time to pass.

In the meantime, potential investors are wondering if they should even consider putting money in the Philippines in the light of the uncertainty over investment incentives. Just look what is happening now in Thailand after the junta government started to redefine what exactly the country’s laws provide by way of incentives to investors. Thailand is getting the same kind of negative reaction that we have been getting all these years from the investors already in the country or about to come in.

In our case, perhaps a rationalization of our incentives scheme is called for, if only to provide a consistent policy in the 146 or so laws granting investment incentives to various businesses. An omnibus law would be simpler to understand, on the part of investors and easier to implement, on the part of government. But if we must do this, let us do it as quickly as possible so as not to incur too much opportunity cost in the waiting. But those already enjoying benefits should not be stripped. The new law should be prospective.

It also does not help that even Secretary Teves talks in terms of favoring non-fiscal incentives to replace the fiscal incentives such as improvement of infrastructure, lowering of power rates, and reduction in the cost of doing business. While such "non fiscal incentives" are welcome, in fact expected as a primary condition for investors to come in, fiscal incentives cannot be avoided if we are to remain competitive in the region.

I received an e-mail from a reader who pointed out how a shift in government approach to incentives "will definitely send a chilling effect to the existing and prospective direct investors. The government should not change the rules just like that. There are a lot of existing and prospective investors who intend to put up businesses here (especially those registered with BOI on a pioneer status) due to the fiscal incentives that they can avail including this ITH which make their ROI attractive."

If the problem has to do with the failure of government agencies monitoring and regulating the application of such incentives, then the solution must necessarily have to do with fixing the way the bureaucracy works. A task force must be established quickly by the Departments of Finance and Trade and Industry to determine the taxpayers who fraudulently claimed ITH benefits they are not entitled to.

Thereafter, the BIR must move fast and resolutely to collect all taxes due before the period to make such tax assessments lapses. Stiff penalties which may include imprisonment for officials of those so-called ‘unscrupulous companies’ must be imposed to send a message that such an anomaly will not be tolerated.

I was telling Commissioner Buñag that they should devote more time and manpower to collecting these tax deficiencies because the potential yield is big. Given the limitations in BIR’s resources, it would not be as productive of manpower time and effort to run after smaller taxpayers if there are such big cats being allowed to get away scot free.

As my letter writer puts it, "the problem is so simple to arrest that it doesn’t take a technocrat to think of the proper solution. It’s like solving the problem of the house rodents by burning the whole house." While passing the investment incentives reform bill is probably needed too, we have to be careful that there are no unwarranted changing of policies and rules of the game. That can only confirm in the minds of potential investors that we do not have a stable policy regime.

I was telling Jojo it is difficult to believe that all these years, the BIR is taking the word of every taxpayer claiming entitlement to tax holiday without validating such claim with the BOI. It doesn’t make sense for BIR examiners to scare the daylights out of small taxpayers making a claim for a pencil but would allow multimillion peso claims of large businesses go without challenge.

Well, Jojo promised he will not allow such old practices to continue under his watch. The incentives for Jojo are great, in terms of being able to meet his rather high revenue collection targets. I am not sure if I got the number right from him but I remember him telling me that cleaning up the ITH mess should enable them to immediately collect some P30 billion in back taxes and penalties.

The BIR and the BOI must quickly produce results. Otherwise, they will prove the accusation of Sen. Recto of complicity between the bureaucrats and the big taxpayers. In his sponsorship speech, Sen. Recto said "we don’t think bureaucrats from the BOI and the BIR are people who are naïve enough to allow these shenanigans to get through under their noses unless some people deep within these bureaucracies are benefiting financially from it."

I share Sen. Recto’s lament that "bureaucrats have been telling us ordinary mortals that the government needs to collect more taxes ‘to finance development’ and we were foolish enough to agree to a higher VAT rate on all the things we buy with our slave wages. Little did we know that while these bureaucrats were taking away food from the mouths of our children, they gave away hundreds of billions of pesos worth of income tax holidays to favored friends and clients, including to ones not entitled to the fiscal perks in the first place."

I think tax incentives are basically good policy tools. But let us have clear policies and implementing guidelines. And yes, good implementation too.

Nun-ity

Norbert Goldie sent this one.

A priest was talking to a nun, and he saw that her belly was getting bigger, and he made a comment about it.

She replied to him that it was just a little gas.

A couple months later, he ran into her again. This time, her belly was really big.

She just patted her belly and said, "Just a little gas."

Two months went by, and he came across the nun again, she was pushing a baby carriage.

The priest bent down and looked into the carriage and said, "Cute little fart, isn’t he?"

Boo Chanco ‘s e-mail address is [email protected]