The Department of Finance (DOF) has underscored the need to institute reforms that would correct the “policy overload” in the country’s fiscal incentives system as a result of the proliferation of laws offering tax and duty exemption privileges to businesses in economic zones and in sectors listed in the government’s investment priorities list, which has led investors to double dip and avail themselves of perks in more than one law.
With 14 investment promotion agencies (IPAs) granting business incentives that do not complement each other, the system has turned into a complex set of rules in which investors resort to “forum-shopping” by comparing various laws governing these IPAs and choosing the best package for them, according to Finance Undersecretary Karl Kendrick Chua.
Chua said incentives complicate tax administration and encourage businesses to employ transfer pricing and profit-shifting schemes in which related companies subject to different tax regimes transfer profits to another entity enjoying tax holidays and shift expenses to an entity subject to tax so that they get to reduce their tax payments.
Chua said that besides the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA), 12 other ecozones are authorized to grant incentives, with no clear coordination among them and the tax administration authority.
Other countries mostly have only one or two IPAs, he noted.
“Our system has created a very unfair system wherein those paying the regular rate pays 30 percent of their net taxable income. But, those receiving the holidays and the special rates only pay one-third of that at around 6 to 13 percent of their effective tax rates,” Chua said.
Companies paying the regular 30 percent rate, Chua noted, are mostly small and medium enterprises (SMEs), while those enjoying fiscal incentives are big corporations.
“The present fiscal incentives system (in the country) has been suffering from policy overload such that there is now a proliferation of incentives laws granting tax and duty exemption privileges. This results in forum-shopping where investors compare various laws and choose the better package, or double-dipping where investors avail themselves of tax incentives in more than one law,” he said.
He likewise noted that the BOI formulates the Annual Investment Priorities Plan (IPP) and at the same time acts as an incentive granting body.
Chua said that among the 14 IPAs, the PEZA accounted for the bulk at more than P66 billion worth of income and customs duty tax perks given in 2015, followed by the BOI with P29 billion, and the 12 other ecozones accounting for P9.4 billion worth of incentives for a total of P104.40 billion for that year.
In terms of sector, the bulk of the incentives goes to electronic manufacturing, followed by BPO services, and logistics, Chua said.
He underscored the need to streamline the current institutional framework for granting tax incentives so that all IPAs follow a single menu of incentives rather than come out with their respective set of rules that do not complement each other.
The government, according to Chua, collects income taxes from large corporations and other private firms representing only 3.7 percent of the country’s Gross Domestic Product (GDP), or a collection rate of a low 12 percent because of 315 laws or provisions that grant businesses tax breaks and other perks.
Chua said that compared to other economies in the Association of Southeast Asian Nations (ASEAN), the Philippines imposes the highest corporate income tax (CIT) rate but is among those at the bottom in terms of collection efficiency.
The Philippines, he said, currently imposes a CIT rate of 30 percent but with a tax collection efficiency rate of only 12.3 percent, while Thailand’s CIT rate is only 20 percent but it collects almost triple–a 30.5 percent efficiency rate–that represents 6.1 percent of its GDP.
Vietnam’s CIT rate is 25 percent but it collects even more with a 29.2 percent tax efficiency rate representing 7.3 percent of GDP. Malaysia’s 24 percent CIT generates a 27.1 percent efficiency rate in terms of collecting taxes, which is 6.5 percent of GDP.
Following the enactment of the Tax Reform for Acceleration and Inclusion Act (TRAIN), which slashes personal income tax rates while raising additional revenues for infrastructure and social services, the DOF submitted to the House of Representatives this January this proposal to modernize fiscal incentives while lowering corporate income taxes. This proposal is Package 2 of the Duterte administration’s Comprehensive Tax Reform Program (CTRP).
Under Package Two, the DOF aims to lower the CIT rate to 25 percent, while rationalizing incentives for companies to make these “performance-based, targeted, time-bound, and transparent,” Chua said.
Through this proposal, the government would be able to ensure that incentives granted to businesses generate jobs, stimulate the economy in the countryside and promote research and development; contain sunset provisions so that tax perks do not last forever; and are reported so the government can determine the magnitude of their costs and benefits to the economy.
The DOF is targeting to submit this revenue-neutral proposal to the House of Representatives this January.