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It’s bad
enough that the nation’s tax net has not been thoroughly
spread around, causing tax leakages. It’s also as bad
that the government is giving away what it should have
in the form of fiscal incentives for business
enterprises.
This is
what’s exactly going on. Those fiscal incentives, in the
form of income-tax holiday [ITH], duty-free importation
of capital equipment, tax credits, preferential tariffs
and accelerated depreciation and net-operating loss
carryover, have been hurting the national economy as
lost revenues arising from them continue to mount
without any sign of immediate abatement.
Consider
the following:
The
government has lost more than P1.4 trillion in revenues
from 2001 to 2006 from those fiscal incentives. The
figure is about to rise, as more lost revenues are to be
reported by the agencies that enforce the
fiscal-incentive system.
Strangely, the impact of those fiscal incentives leaves
much to be desired. Investments have been slow in
coming, giving rise to the impression that the
uncollected revenues have become forgone revenues.
The
fiscal-incentive system is confusing, too. The
Congressional Planning and Budget Department (CPBD)
says: “The existing incentive system consists of more
than 120 separate incentive plans in various laws and
statutes. [It is] being administered by 10 Investment
Promotion Agencies [IPAs] and at least 20 other
government agencies. This structure naturally creates
confusion and administrative difficulties, which makes
the system prone to abuse. . . .
“From
1990 to 2000, research groups estimate that the total
tax incentives availed [of] by industries vary only
between 0.8 percent and 1.6 percent of GDP annually, but
in 2003, the ratio jumped to more than 7 percent—or
equivalent to P304 billion—which is even greater than
the total budget deficit of the country in that year.”
Fiscal
incentives are tax breaks and subsidies given to
promising enterprises and priority sectors to promote
their development and competitiveness. The government
provides tax relief to encourage investments in specific
sectors and compensate for market failures and
distortions. Fiscal incentives are usually time-bound to
avoid the situation where firms become dependent on
those incentives for their viability and survival.
According to the CPBD, the country’s overall incentive
package can be classified into three: investment-related
incentives embodied in Executive Order 266 and other
laws; non-investment related incentives granted under
special laws; and value-added tax (VAT) incentives under
VAT-exemption laws.
On the
impact of those fiscal incentives, the CPBD says: “In
terms of the total assets and exports generated, the
country’s incentives system performed reasonably well as
total value generated in both criteria outscored the
total value of incentives availed [of] by industries by
at least eight-and-a-half times. This figure is based on
two studies conducted by the Department of Finance [DOF]
and the Bureau of Investments of the Department of Trade
and Industry.
“But on
one extra criterion in the DOF’s report—based on the
estimated government revenue per peso of [income-tax
holiday or ITH] availed of—only four out of the 16
industry sectors produced encouraging results. The
average estimated revenue per P1 of ITH availed of for
all sectors is just P0.13. This shows that the
opportunity cost of administering the incentives system
exceeds its estimated monetary benefits, thus rendering
the country’s incentive structure costly and
inefficient.”
Studies
have pointed out that the fiscal-incentive system has
been biased to large, capital-intensive industries, as
those exemptions favor the use of capital equipment over
labor. Also, the incentives system has been ineffective
in enhancing productivity and improving competitiveness.
In what
appeared to be the final critique, the incentives system
was found to have significant overlaps, which allow
enterprises to avail themselves of dual incentives under
different schemes. Such incidence was reported among
firms in export processing, which availed themselves of
income-tax holidays through the Board of Investments and
from the free-port schemes of the same.
Also, no
law stops those firms outside the economic zones and
whose tax privileges are about to expire to relocate to
economic zones to continue those incentives.
In the
light of its ineffective and confusing nature, the
rightful option appears to be the complete overhauling
and rationalization of the entire fiscal-incentive
system. The policy consideration, therefore, is to
simplify the fiscal-incentive system for better
administration and management. Congress has to step in
to institute the required policy direction.
Quite
strange, too, the bills on such rationalization have
remained pending in the two chambers of Congress. As
usual and expected, Congress has other options.
Meanwhile, those availing themselves of the fiscal
incentives continue to enjoy unrestrained benefits. |
