AROUND P481.7 billion in fiscal incentives were granted by the government in 2019 to “favored” firms, majority of which are in the manufacturing sector, the Finance department said on Monday.

While the amount is 7% lower than the P518.7 billion in tax perks given in 2018, the foregone revenues are expected to further drop as fiscal and non-fiscal incentives have been rationalized after the enactment of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law.

“Under CREATE, the grant and administration of incentives have been rationalized to ensure that the perks received by registered enterprises are benefiting the economy,” the Department of Finance (DoF) said in a statement.

The DoF-Domestic Finance Group report showed 58.8% or P283.45 billion were foregone revenues from incentives for value-added tax (VAT), while 31% or P149.28 billion were in the form of income tax perks.

The government also granted P47.59 billion worth of exemptions from customs duties and P1.38 billion in percentage tax incentives to cooperatives.

Based on the type of incentives, the income tax perks given in 2019 included P68.4 billion in income tax holiday, P66.4 billion in special income tax for companies registered with investment promotion agencies (IPAs), and P14.47 billion in fiscal perks for cooperatives.

The DoF study covered tax returns of 11,431 companies, of which 5,749 are firms registered with IPA while 5,682 were cooperatives.

There were 4,371 cooperatives and 3,083 IPA-registered firms that received income tax incentives.

Manufacturing firms received P321.3 billion or 66.7% of the total tax perks extended in 2019, followed by services sector with P114.8 billion, and power companies with P26.4 billion.

Tax perks to companies in other sectors such as agriculture reached P19.24 billion.

DoF has long argued that the government was giving away tax perks to companies “indiscriminately and indefinitely,” which resulted in massive revenue losses for the state.

President Rodrigo R. Duterte signed Republic Act No. 11534 or CREATE Act on March 26 which lowered the corporate income tax and modernized the country’s tax incentive system. Economic managers said the law now makes fiscal perks time-bound, performance-based and transparent.

The law’s immediate impact will be coming from the lower corporate income tax rate, not fiscal incentives, Finance Assistant Secretary Maria Teresa S. Habitan said in a Viber message.

CREATE slashed the corporate income tax to 25% from 30% starting July 2020, to be followed by a one-percentage-point cut annually from 2023 until it reaches 20% in 2027. An outright reduction to 20% was implemented for local small companies.

The DoF had estimated CREATE will result in P1 trillion worth of tax relief for the next 10 years. Tax savings enjoyed by firms are expected to be reinvested in order to create jobs.

The law also strengthened the oversight power of the Fiscal Incentives Review Board (FIRB) to monitor if the fiscal perks are given to deserving companies.

The law forms part of the comprehensive tax reform program of the Duterte administration. — Beatrice M. Laforga