THE COST of granting tax incentives to companies registered with investment promotion agencies (IPAs) outweighs their overall benefits to the economy, the Department of Finance (DoF) said on Tuesday.
The department presented a cost-benefit analysis of fiscal incentives given to firms during the third public hearing for the second tax reform package on corporate income tax and perks conducted by the House of Representatives Ways and Means Committee.
Finance Undersecretary Karl Kendrick T. Chua said that the economy on average gets only 60 centavos for every one peso of tax incentives granted based on 2015 data.
“So in average, there are many redundant and unnecessary incentives,” said Mr. Chua.
According to the DoF’s studies, the government had to spend over P257,000 to generate just one job in a registered investor.
Mr. Chua also said the government collects 32 centavos of additional taxes for every one peso worth of incentive granted.
Mr. Chua added that there was no significant difference in productivity between IPA-registered firms and companies that do not enjoy fiscal incentives.
“In general, registered firms — when compared to non-registered firms — have the same employment relative to size, same average wages, but pay top management higher, spend more on fixed assets, but do not spend higher on R&D (research and development), have the same level of exports relative to sales and no difference in productivity,” the DoF official said.
In the DoF’s analysis, non-manufacturing sectors like quarrying, housing and energy, as well as services have unnecessary incentives, as opposed to the agriculture and manufacturing sectors where benefits outweigh the costs.
Mr. Chua argued that incentives should also depend on applicants’ primary motivation for investing in the country.
“If the investor comes because there is a sure market, then we do not find the incentive necessary because the firm will make a profit anyway. If the investor comes with resource, land, or labor, or talent, then we do not think the incentive is necessary,” Mr. Chua said.
He also proposed that companies that are expanding should no longer be granted tax perks, citing DoF data showing that overall dividends paid to shareholders by IPA-registered firms exceeded the amount of the tax incentives given. “This suggests that many firms and industries are very profitable, but they enjoy incentives forever which we find unnecessary because they are profitable inherently,” he said.
However, the Board of Investments (BoI) and the Philippine Economic Zone Authority (PEZA) offered a different view.
Data provided by BoI bared a net tax revenue gain amounting to P2.02 per peso of incentive granted in 2015.
PEZA cited its own research showing that for every P1 incentive, companies registered with it generated P11.6 in export sales that same year.
Separate National Economic and Development Authority data meanwhile show that the government granted P91.3 billion worth of tax incentives to IPA-registered firms, which generated $18.4 billion in export earnings.
Mr. Chua said it would better to support industries through targeted, non-fiscal measures, than with blanket tax incentives. “We will support industries in a different manner. We’re more inclined to targeted subsidies for specific training programs rather than giving incentives forever without accountability,” he said.
Streamlined fiscal incentives are just one side of the coin for the second package of tax reforms, the other being a proposed cut in corporate income tax rates gradually to as low as 20% from the current 30%, which is the highest in Asia.
The measure, filed as House Bill No. 7458, will also replace the existing five percent gross income earned tax incentive with a 15% tax on net income, while capping this perk at five years.
The panel’s chair, Quirino Rep. Dakila Carlo E. Cua, said that he will heed the call of President Rodrigo R. Duterte to speed up approval of the bill as he wants the measure signed into law before the year ends.
Mr. Cua added that the committee should be “business as usual” despite a leadership change at the House and even possibly in his committee.
“Business as usual for the committee after the President charges this committee to prioritize and fast-track and support this bill. It is necessary to hold this hearing despite any considerations happening all around us,” said Mr. Cua.
Asked for a reaction on a possible change in chairmanship in the House ways and means committee, Mr. Cua replied: “I’m not concerned, but I recognized the possibility that there might be. We welcome whatever happens and we continue to support the President.”
He added that former president and now House Speaker Gloria M. Macapagal-Arroyo would be supportive of the measure, similar to her support in the Tax Reform for Acceleration and Inclusion law. “She understands the issues. Siguro na a-appreciate niya ‘yung value nitong economic reforms,” said Mr. Cua. — Elijah Joseph C. Tubayan