DOF hits ‘unnecessary’ tax breaks

Majority of the companies registered with investment promotion agencies (IPAs) have been enjoying tax breaks that were “unnecessary” and “redundant,” the Department of Finance said Monday.

Finance Undersecretary Karl Kendrick T. Chua cited a recent DOF cost-benefit analysis showing that only 43 percent of IPA-registered firms were “worthy of being granted incentives.”

The bigger share or 57 percent were “receiving incentives that are already unnecessary or redundant,” Chua said.

Citing data reported by IPAs under the Tax Incentives Management and Transparency Act (Timta Law), Chua said that 645 companies continued to receive tax perks even after 15 years of operations.

The country’s IPAs ideally grant fiscal incentives to investors’ new or expansion projects as a means to support them during their first few years of operations, or when they have yet to earn profit.

Chua added that in 2015, foregone revenues from tax perks given away to some companies reached P86 billion even as these firms paid out dividends totaling P83 billion that year.

“So our question is, why are we supporting certain firms if they are inherently profitable and they pay even more dividends than the incentives they receive? And these are dividends, which is just a fraction of profit because part of profit is the one you retain as earnings,” Chua noted.

In 2016, the government gave away P178.6 billion in fiscal incentives to 3,102 IPA-registered enterprises, Chua said.

Citing data from the Bureaus of Customs and of Internal Revenue, income tax holidays cost the government P74.5 billion in 2016, on top of P46.7 billion in special income tax rates as well as P57.4 billion in customs duties.

The DOF is pushing for the rationalization of the tax incentives being granted to investors alongside plans to reduce the corporate income tax rate of 30 percent, currently the highest in the Association of Southeast Asian Nations (Asean).

Last week, House Speaker Gloria Arroyo and Senate President Vicente Sotto III both expressed support for the second tax reform package, now pending in Congress.

Echoing President Duterte’s pronouncement during his third State of the Nation Address last month, Finance Secretary Carlos G. Dominguez III had said that they wanted the measure passed within this year.

Last Sunday, the think tank Action for Economic Reforms (AER) said that “the current fiscal incentive regime is overbroad, poorly targeted, and not strategic.”

“Small and medium enterprises (SMEs) employ more than 60 percent of the country’s workforce and constitute 99 percent of Philippine firms that pay the regular tax rate. In contrast, only 4,000 firms currently enjoy billions of pesos in tax incentives and almost half of these are under the Philippine Economic Zone Authority,” Jenina Joy Chavez, industrial policy coordinator at AER, pointed out in a separate statement.

“Four out of five enterprises in Peza are concentrated in three already prosperous regions—the National Capital Region, Calabarzon and Central Luzon. If passed, the reform will broaden the base of enterprises that can avail of incentives as well as address the inequities in the current system,” Chavez said.