Exporters’ local politics shield

The plan of the Tax Reform for Attracting Better and High-quality Opportunities (Trabaho) bill to remove the tax perks some companies presently enjoy has drawn adverse comments from former Philippine Economic Zone Authority (Peza) director general Lilia de Lima.

In a speech at the Makati Business Club, she urged lawmakers not to remove the 5-percent gross income earned (GIE) tax that companies in export zones pay in lieu of local and national taxes.

She considers the GIE tax as key to Peza’s success because it prevented meddlesome local government units (LGU) from using strong-arm tactics on export zone-based companies.

She said the tax is, in effect, a message to LGUs to back off and let businesses operate without interference.

A no-nonsense Peza chief executive for 21 years who saw the creation of more than a million jobs, De Lima has the gravitas to speak her mind on a proposed legislative measure that may unravel the accomplishments of export zones.

Her remarks may be considered an indirect, but biting, critique of the way some LGU officials have exercised their power to impose taxes or raise revenues in their territorial jurisdiction.

Under the Local Government Code (Republic Act 7160), LGUs can create their “own sources of revenue and to levy taxes, fees, and charges … consistent with the basic policy of local autonomy.”

Except for activities already covered or governed by national laws, this taxing authority is practically limitless.

The financial gains from the usual business licenses or permits, i.e., health, sanitation and fire safety, are penny ante, so the favorite targets of LGUs to raise more revenues are multinational companies or large business entities that are reputed to have deep pockets.

If not for the GIE tax, the companies in the export zones would have found themselves at the crosshairs of LGU officials who think their position entitles them to “share” in the profits of the businesses that operate within their areas of governance.

In 2008, South Korean giant company Hanjin Industries and Construction Corp. abandoned its plan to construct and operate a $2-billion shipyard project in Misamis Oriental in the wake of alleged bribery and extortion activities by some local officials. The revenue and employment opportunities this investment would have generated went down the drain.

With their hands tied by the GIE tax, LGUs have been unable to invoke (or threaten to use) their taxing authority to force Peza locators into, for example, engaging the services of their former law office, or employing their supporters regardless of their work capability, or making generous contributions to their favorite charities (read: they and their families).

This enabled export zone-based companies to do business in accordance with their business plans and without having to deal with intrusive LGU officials.

The bright boys of the Department of Finance (DOF) who conceived the idea of removing the tax privileges that drew thousands of export-oriented companies to set up shop in the Philippines despite the country’s poor “ease of doing business” rating should not ignore De Lima’s comments on the possible adverse effects of the “Trabaho” bill.

The DOF has to look beyond financial algorithms, tabletop analyses and economic theories of Western-educated authors before pressuring the Senate into following the lead of the House of Representatives in approving the bill without any amendments.

The speedy approval of the bill by the House does not come as a surprise because, as the late Speaker Ramon Mitra once said, congressmen will sign anything even if written on a toilet paper.

The ball, so to speak, is in the Senate’s court. It has to come up with a scheme that would maintain the benefits of the GIE tax without compromising the objective of the Trabaho bill to rationalize tax privileges that have been proven to be disadvantageous to the country.