Fiscal incentives biased for big companies–DOF

File photo of DOF Undersecretary Karl Kendrick Chua (Photo by Toto Lozano / Presidential Photo)

A COST-benefit analysis by the Department of Finance (DOF) revealed that micro, small and medium enterprises (MSMEs) are at a disadvantage as they have to compete for fiscal incentives with bigger firms that, ironically, enjoy various tax holidays, among others.

“A cost-benefit analysis done by the DOF using available data show that many incentives enjoyed by enterprises registered in IPAs [investment promotion agencies] are unnecessary as the country is losing than getting back more in terms of economic benefits, such as jobs, exports and productivity,” Finance Undersecretary Karl Kendrick T. Chua said. “We want investment incentives to stay but these should be based on performance, are targeted, transparent and not given out forever.”

Speaking during a ways and means committee hearing on Package 2 of Republic Act (RA) 10963 at the House of Representatives, Chua said the analysis showed that, on average, there is no difference between the performance of firms receiving incentives and those paying the regular corporate income tax (CIT) rate in terms of employment, exports, investments and productivity.

The analysis, he explained on Tuesday, was conducted using data from the Securities and Exchange Commission, the Philippine Statistics Authority and information provided under the Tax Incentives Management and Transparency Act (Timta).

“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,” he added.

According to the DOF, the government gave in 2015 around P301 billion in revenues as a result of tax incentives and other perks granted to only 2,844 firms.

In contrast, 800,000 other businesses, consisting mostly of MSMEs, paid the CIT rate of 30 percent, which remain the highest among the Association of Southeast Asian Nations (Asean) economies. MSMEs employ around 63 percent of the country’s work force.

Preliminary data from Timta showed the government gave away P75 billion in income tax and customs duties in 2016.

Chua said these tax subsidies represent the generous incentives granted by 14 IPAs 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 comprise 123 statutes that give out investment incentives, Chua said, adding that another 192 statutes provide non-investment incentives to registered enterprises and various sectors.

Chua’s statement comes as the DOF lobbies for the swift approval of House Bill 7458. Finance Secretary Carlos Dominguez III has said they believe a law along the HB 7458 lineage would level the playing field for business and make corporate income taxation transparent, more accountable and more equitable for both large and small corporations.

“HB 7458 also aims to either amend or repeal tax incentive provisions and processes contained in 114 special laws,” Chua said during Tuesday’s hearing. “The long list of incentives managed by investment promotion agencies has caused confusion among investors availing themselves of these tax perks.”

HB 7458 provides for a one-percentage-point reduction in the current CIT every year for domestic corporations, resident foreign corporations and nonresident 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.

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.

Under the bill’s simplified and harmonized menu of incentives, businesses under the SIPP may be granted up to three years of income tax holiday, a reduced corporate income tax rate of 15 percent up to five years inclusive of the income tax holiday, 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.

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Rea Cu is a graduate of Assumption College-Makati with a Bachelor's degree in Communications. She majored in Advertising and is currently the finance reporter of the BusinessMirror.

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