The government gave away about P301 billion in revenues in 2015 alone as a result of tax incentives and other perks granted to only 2,844 firms, according to the Department of Finance (DOF).
In contrast, 800,000 other businesses, consisting mostly of micro, small and medium enterprises (MSMEs) pay the corporate income tax (CIT) rate of 30 percent, which remain the highest among the Association of Southeast Asian Nations (ASEAN) economies, Finance Undersecretary Karl Kendrick Chua told lawmakers during a congressional hearing.
Chua said that this amount of tax subsidies represent the generous incentives granted by 14 investment promotion agencies alone and do not account for the tax incentives under other investment and non-investment laws as mandated by some 300 special laws.
These laws that are outside the national tax code comprise 123 statutes that give out investment incentives and 192 others that provide non-investment incentives to registered enterprises and various sectors.
MSMEs employ around 63 percent of the country’s workforce.
According to Department of Trade and Industry (DTI) estimates, MSMEs account for 25 percent of the country’s total revenue from exports with 60 percent of exporters belonging to the MSME category. MSMEs are able to contribute in exports through subcontracting arrangement with large firms, or as suppliers to exporting companies.
Chua said the current inequitable corporate tax system places MSMEs at a disadvantage as they have to compete with bigger firms that, ironically, enjoy various tax holidays and other benefits when they can easily afford to pay the correct amount of taxes.
“A cost-benefit analysis done by the DOF using available data show that many incentives enjoyed by enterprises registered in IPAs are unnecessary as the country is losing than getting back more in terms of economic benefits such as jobs, exports and productivity,” Chua said. “We want investment incentives to stay but these should be based on performance, are targeted, transparent and not given out forever.”
The cost-benefit analysis (CBA) 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).
Chua said the CBA showed that on average, there is no difference between the performance of firms receiving incentives and those paying the regular CIT 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 his presentation during the initial hearing on Tuesday conducted by the ways and means committee of the House of Representatives on the bill that aims to institute reforms in the country’s corporate tax system.
Finance Secretary Carlos Dominguez IIII earlier said the swift approval of House Bill (HB) No. 7458, which provides for graduated cuts in the CIT rate and the modernization of investment incentives, would level the playing field for business and make corporate income taxation transparent, more accountable and more equitable for both large and small corporations.
“With the timely filing of the measure in the House, we are optimistic that this proposal, along with the remaining tax reform packages, would be approved by the Congress within the year,” Dominguez said.
Corporate tax reform comprises Package 2 of the Duterte administration’s Comprehensive Tax Reform Program (CTRP). The DOF is targeting to introduce this July 2018 the rest of the CTRP packages that mainly cover property and capital income taxation. Since the start of 2018, the DOF has submitted Package 2, as well as the reforms on alcohol excise and mining, while supporting the bill of Senator Manny Pacquiao on tobacco excise.
HB 7458 is authored by Deputy Speaker Raneo Abu, Deputy Majority Leader Aurelio Gonzales and Rep. Dakila Carlo Cua, who chairs the House ways and means committee.
The bill provides for a one-percentage point reduction in the current 30 percent CIT every year for domestic corporations, resident foreign corporations and non-resident foreign corporations starting 2019, provided that the cut would not reach lower than 20 percent, while modernizing fiscal incentives to make them performance-based, targeted, time-bound, and transparent.
Similar to the version proposed by DOF and DTI, the bill also aims to formulate a three-year Strategic Investments Priority Plan (SIPP) to ensure that only industries that provide positive spillover to the economy, based on rigorous cost-benefit analysis, are given incentives.
“HB 7458 also aims to either amend or repeal tax incentive provisions and processes contained in 114 special laws,” Chua said. “The long list of incentives managed by investment promotion agencies have “caused confusion among investors availing themselves of these tax perks,” Chua said.
Under the bill’s simplified and harmonized menu of incentives, he said businesses under the SIPP may be granted up to three years of income tax holiday (ITH), a reduced CIT rate of 15 percent up to 5 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.
Also, this bill includes a DOF proposal to expand the mandate of the Fiscal Incentives Review Board (FIRB) beyond government-owned and -controlled corporations (GOCCs) to include the approval of incentives to all registered enterprises as recommended by the various IPAs and the reconstitution of this body with the Secretary of Finance as chairperson and other government departments as members, including DTI and NEDA, Chua said.
In step with the goal of making investment incentives time-bound, the bill also contains a “sunset” or a phase-out provision for incentives granted to registered enterprises over two to five years, depending on the length of time these businesses have already benefited from such perks.
HB 7458 also includes the improvements proposed by the DOF in the reporting and monitoring requirements under the TIMTA to further promote accountability on the part of registered enterprises.
The bill likewise contains provisions that aim to strengthen the enforcement powers of the Bureau of Internal Revenue (BIR), particularly with regard to the prosecution of tax cases.