Revenue leakages from income-tax holidays and other incentives with no time limit—around P300 billion annually—will be plugged via the second package of the Comprehensive Tax Reform Program (CTRP).
According to Finance Undersecretary Karl Kendrick T. Chua, income-tax holidays and special rates account for P86.25 billion of revenue losses for the government based on 2015 data. Customs duty exemptions, on the other hand, account for P18.4 billion. Exemptions from payment of value-added tax (VAT) on imports led to P159.82 billion in foregone revenues, with another P36.96 billion lost to local VAT.
The lost revenues from incentives totaling P301.22 billion annually do not yet include exemptions from the payment of local business taxes and the estimates on tax leakages.
In terms of income-tax incentives, the government gave away P61.33 billion to companies in 2011, which went up to P88.17 billion in 2014.
Customs duty exemptions have gone down from P82.97 billion in 2011 to P38.04 billion in 2014, owing to the various free-trade agreements signed by the Philippines with other countries.
“So, on average, we gave away up to 1.5 percent of our GDP in income tax and customs duties exemptions,” Chua said.
Chua pointed out that the enactment of the Tax Incentives Management and Transparency Act (Timta) in 2016 has allowed the Department of Finance (DOF) to track incentives systematically.
In 2015 Timta data showed that income- tax holidays accounted for P53.77 billion in foregone revenues, special rates at P32.48 billion and import-duty incentives P18.14 billion, for a total of P104.40 billion in tax incentives given away by the government.
All these incentives would have accounted for almost 5 percent of national government revenues and 0.78 percent of GDP, according to Chua.
“So in general, we are giving almost 0.8 percent of GDP so far on tax incentives from these income-tax holidays and custom duty exemptions. Together with the VAT, it is P301 billion, or 2 percent of GDP. These are only the investment incentives,” he added.
The DOF is now preparing to introduce to Congress the Duterte administration’s Package 2 of the CTRP, which focuses on reducing corporate income tax (CIT) rates while rationalizing fiscal incentives, following the enactment of the Tax Reform for Acceleration and Inclusion Act.
Under Package 2, the DOF aims to lower the CIT rate to 25 percent from the current 30 percent, while rationalizing incentives for companies to make these performance-based, targeted, time-bound and transparent.
Through the second package, 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 month.
Chua added that collections from income taxes from large corporations and other private firms represent only 3.7 percent of the country’s GDP, or a collection rate of a low 12 percent because of 360 laws that grant businesses tax breaks and other perks.
Image credits: Roy Domingo