DOF: Most fiscal perks from IPAs unnecessary

MANILA, Philippines — Many of the fiscal incentives granted by the government’s investment promotion agencies (IPA) are “unnecessary,” as some firms do not generate as much economic benefits as expected, the Department of Finance said yesterday.

“A cost-benefit analysis done by the DOF using available data show that many incentives enjoyed by enterprises registered in IPA are unnecessary as the country is losing more than it gets back in terms of economic benefits such as jobs, exports ,and productivity,” Finance Undersecretary Karl Kendrick Chua said during a congressional hearing on the Package 2 of the Comprehensive Tax Reform Program.

On average, Chua said there is no difference between the performance of firms receiving incentives and those paying the regular corporate income tax rate in terms of employment, exports, investments and productivity.

“In fact, many firms receiving incentives across industries pay out more dividends than the incentives they receive, which is a sign of profitability, making such incentives unnecessary,” Chua said.

In contrast, Chua said the current fiscal incentives scheme of the government put micro, small and medium enterprises (MSME) at a disadvantage despite the fact that they employ 63 percent of the country’s workforce and account for 25 percent of the country’s total revenue from exports.

Chua said 800,000 businesses, consisting mostly of MSME pay the regular corporate income tax rate of 30 percent, while only 2,844 firms enjoyed P301 billion worth of tax incentives and other tax perks in 2015.

The cost-benefit analysis undertaken by the DOF was conducted using data from the Securities and Exchange Commission, the Philippine Statistics Authority (PSA) and information provided under the Tax Incentives Management and Transparency Act (TIMTA).

According to Chua, what the government wants is to give incentives that are targeted, transparent, time-bound and based on performance, as proposed under Package 2 of the CTRP.

Package 2 of the CTRP seeks to reduce the corporate income tax rates in the country, while rationalizing the fiscal incentives system.

It also seeks to replace the five percent gross income earned tax granted to certain enterprises with a 15 percent rate on the net taxable income.

It also pushes for the harmonization of incentives through the Fiscal Incentives Review Board, and for the repeal of some 123 special laws on incentives to give way for an omnibus code called the Strategic Investment Priority Plan.

Under this omnibus code, businesses may be granted up to three years of income tax holiday (ITH), a reduced corporate income tax rate of 15 percent up to five years inclusive of the ITH, a 50 percent tax allowance for qualified capital expenditures, along with varied rates of tax deductions for research and development, training, labor expenses, infrastructure development, and reinvestment.

The package also aims to expand the mandate of the fiscal incentives review Board (FIRB) and introduce improvements to the Tax Incentives Management and Transparency Act.

Finance Secretary Carlos Dominguez earlier said the swift approval of the proposal would level the playing field for businesses and make corporate income taxation more transparent and more equitable for both large and small corporations.