Management of tax incentives
STARTING this year, all business entities that avail of tax incentives from the government have to file a separate report on those benefits with the office that granted them.
This is a requirement of the Tax Incentives Management and Transparency Act (or Republic Act No. 10708) that President Aquino signed into law last Dec. 8.
The law aims to “promote fiscal accountability and transparency in the grant and management of tax incentives” by the government to business entities. Through a prescribed reporting system, the government will create a database on these incentives to enable it to monitor, review and analyze their impact on the country.
From this analysis, the government can determine whether the tax breaks are meeting the objectives for which they were granted, or are being used to deprive the government of its rightful share in the profits of the beneficiaries of the incentives.
During the congressional deliberations, the lawmakers learned that no single government agency has the facts and figures on the business entities that have been granted financial incentives by law, presidential decree or other means.
Neither is there information about the amount of taxes the government forgoes or loses from income holidays, or whether the expected results from the incentives, e.g., additional employment or supplemental businesses, have been achieved.
The law names the 15 Investment Promotion Agencies (IPAs) or government offices authorized to grant tax and non-tax incentives to encourage investments.
These agencies include, among others, the Board of Investments, Philippine Economic Zone Authority, Bases Conversion and Development Authority, Subic Bay Metropolitan Authority, Clark Development Authority and John Hay Management Corporation.
The tax incentives come in the form of income tax holidays, exemptions, deductions, credits or exclusions from tax base.
The business entities that enjoy these incentives must file their tax returns and pay their tax liabilities within the periods prescribed by the Tax Code using the electronic system for filing and payment of taxes in the Bureau of Internal Revenue (BIR).
In addition, they have to file with the IPAs that granted them incentives a “complete annual tax incentives report of their income-based tax incentives, value-added tax and duty exemptions, deductions, credits or exclusion from the tax base” within 30 days from the deadline for the filing of income tax returns and payment of taxes.
After receipt of the latter report, the IPAs shall collate them and submit their respective annual tax incentive reports to the BIR.
To make sure the business entities concerned file accurate reports, the BIR and Bureau of Customs (BOC) shall then submit to the Department of Finance (DOF) the (a) tax and duty incentives stated in the tax returns and import entries, and (b) actual tax and duty incentives as evaluated and determined by the BIR and BOC.
The information from these reports will be kept by the DOF in a single database. These data will eventually find their way to the Department of Budget and Management to assist it in the preparation of the national budget, and the Joint Congressional Oversight Committee composed of lawmakers of both houses of Congress who supervise the government’s revenue raising and spending activities.
When Congress deliberates on the national budget, the lawmakers can, after reviewing the data submitted by DOF and the revenue needs of the government, decide whether to maintain, discontinue, reduce or modify these incentives.
It is reasonable to expect that, when Congress takes up the 2017 national budget, the IPAs concerned will be invited to justify the incentives they’ve given to the business entities under their wings.
Initially, the business community expressed serious misgivings about the law when it was filed as a bill in Congress. It was looked at as a subtle scheme to withdraw the incentives that some companies relied upon when they invested in their businesses.
It created the impression that Congress wants to change the rules of the game in the middle of the contest. Understandably, it sent jitters to the companies that factored in the incentives in their investment decisions.
More so the foreign companies that entered into contract with certain government offices that had to resort to international arbitration to compel the latter to comply with their contractual obligations.
To allay this apprehension, the law clearly states that it should not “be construed to diminish or limit, in whatever manner, the amount of incentives that IPAs may grant pursuant to their charters and existing laws; or to prevent, deter, or delay the promotion and regulation of investments, processing of applications for registrations, and evaluation of entitlement of incentives by IPAs.”
Meaning, the authority of IPAs to grant incentives under their respective charters shall remain unimpaired, the incentives they have already granted shall continue to be effective, and the processing of applications to enjoy the benefits of these incentives shall not be adversely affected.
What may look like a fly in the ointment for the affected business entities is the requirement to file a separate tax incentives report to their IPAs, but that’s really not a problem because existing computer technology allows the preparation of that report together with other routine financial reports.
Failure to comply with the reportorial requirement would result in a fine of P100,000 for the first offense and P500,000 for the second offense. In case of a third violation, the registration of the errant business entity will be cancelled.
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