DOF says FIRB to promote good governance, enhance grant of tax incentives to firms

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The Department of Finance (DOF) has described the Fiscal Incentives Review Board (FIRB) as a necessary good governance measure to advance the public interest in the granting of tax incentives to private corporations.

The FIRB is an existing interagency committee, chaired by the DOF, which currently grants tax subsidies to government-owned or -controlled corporations (GOCCs).

Under the proposed Corporate Income Tax and Incentives Rationalization Act (CITIRA), the FIRB’s coverage will be expanded to include approval of tax incentives for private businesses.

FIRB will also serve as the oversight body for the country’s 13 existing investment promotion agencies (IPAs) to ensure that registered business enterprises receiving tax breaks subsequently deliver the jobs and investment that they had promised when they sought such fiscal incentives from their respective IPAs.

This proposal is not unique and is in fact practiced in the region, said Finance Undersecretary Karl Kendrick Chua.

For instance, he said that Malaysia, known to have a world-class investment incentive system, has a similar institution called the National Committee on Investment (NCI) that approves all incentives granted by its 33 IPAs.

“The FIRB is designed to promote the Filipino people’s interests by ensuring two things: first, that incentives granted will lead to the creation of more jobs for Filipinos; and second, that opportunities to apply for incentives are made available to micro, small and medium enterprises (MSMEs), many of which are currently unaware that they can apply for such tax incentives,” Chua said.

He added that under the current system, there are 13 IPAs in the Philippines that are largely autonomous, each with its own mandate, menu of tax incentives, and authority to grant them largely without the approval or knowledge of the DOF.

“The system of having different packages of incentives and processes, as well as autonomous approval points, have created confusion among potential investors and reduced accountability in the grant of tax incentives,” said Chua. “To promote fairness in the tax system, CITIRA not only seeks to harmonize the package of tax incentives, but to also put more order, clarity, and accountability in the process of granting incentives through the FIRB.”

Said Chua: “As a good governance institution, the FIRB will promote three principles: transparency, accountability and participation. Following international best practices, the FIRB will ensure that the process in granting incentives is transparent and that Congress and the Filipino people may access information as to who receives incentives and how much the economy benefits from this.”

“This will help the FIRB ensure that businesses receiving incentives actually deliver the jobs and investment that they had committed to when they first applied for special treatment,” he said.

He added that, “Moving forward, the FIRB will also conduct regular monitoring and evaluation to assess the performance of businesses receiving incentives against their promises to the Filipino people. In case they fail to meet their employment, investment, and other targets, incentives may be withdrawn and put to better use.”

“The FIRB will also promote the participation of a broader range of businesses by ensuring that the single and generous package of incentives under CITIRA is clearly communicated to a wide range of potential investors, especially Filipino MSMEs.”

While 3,150 favored corporations now pay discounted corporate income tax (CIT) rates of 6-13 percent only, almost a million small and medium-sized enterprises (SMEs), which employ a majority of Filipino workers, pay the regular CIT rate of 30 percent, which is the highest in the region.

Chua noted that the FIRB is not a new idea: “Several proposals have been made in past Congresses, including the bills of Albay Rep. (Joey) Salceda in 1998 and Sen. (Ralph) Recto in 2001.”

“The FIRB being proposed now is similar to Malaysia’s National Committee on Investment, or NCI,” he said. “During a study visit two weeks ago, we discovered that the Philippines and Malaysia share a similar story in reforming the tax incentive system.”

Chua revealed that Malaysia has 33 IPAs across the country. “In the past, there was some confusion and delay in the grant of incentives because of so many IPAs. Thus, in order to streamline the application process, ensure better targeting, and enhance the link between incentives and national priorities, the Malaysian government established the NCI in the year 2000 and enhanced it in 2019. It now serves as a high-level committee in charge of approving tax incentives,” he said.

“Promoting good governance in granting incentives through an oversight body is not a new idea. Other countries have been doing that for decades now. The Philippines actually tried creating an oversight body two decades ago,” he said.

Rep. Salceda, who chairs the House committee on ways and means, was earlier quoted in the media as saying that the FIRB is the “people’s seat at the table” and that “no FIRB makes CITIRA meaningless.”

CITIRA, also known as Package 2 of the administration’s Comprehensive Tax Reform Program, was among the priority bills endorsed by President Duterte in his 4th State-of-the-Nation Address (SONA) last July 2019.

The President said the CITIRA bill will benefit MSMEs.